[Federal Register Volume 87, Number 53 (Friday, March 18, 2022)]
[Proposed Rules]
[Pages 15496-15696]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-01975]



[[Page 15495]]

Vol. 87

Friday,

No. 53

March 18, 2022

Part II





Securities and Exchange Commission





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17 CFR Parts 232, 240, 242, et al.





Amendments Regarding the Definition of ``Exchange'' and Alternative 
Trading Systems (ATSs) That Trade U.S. Treasury and Agency Securities, 
National Market System (NMS) Stocks, and Other Securities; Proposed 
Rule

  Federal Register / Vol. 87 , No. 53 / Friday, March 18, 2022 / 
Proposed Rules  

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 232, 240, 242, and 249

[Release No. 34-94062; File No. S7-02-22]
RIN 3235-AM45


Amendments Regarding the Definition of ``Exchange'' and 
Alternative Trading Systems (ATSs) That Trade U.S. Treasury and Agency 
Securities, National Market System (NMS) Stocks, and Other Securities

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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SUMMARY: The Securities and Exchange Commission (``Commission'') is 
proposing to amend Rule 3b-16 under Securities Exchange Act of 1934 
(``Exchange Act''), which defines certain terms used in the statutory 
definition of ``exchange'' under Section 3(a)(1) of the Exchange Act to 
include systems that offer the use of non-firm trading interest and 
communication protocols to bring together buyers and sellers of 
securities. In addition, the Commission is re-proposing amendments to 
its regulations under the Exchange Act that were initially proposed in 
September 2020 for ATSs to take into consideration systems that may 
fall within the definition of exchange because of the proposed 
amendments and operate as an ATS. The Commission is re-proposing, with 
certain revisions, amendments to its regulations for ATSs that trade 
government securities as defined under Section 3(a)(42) of the Exchange 
Act (``government securities'') or repurchase and reverse repurchase 
agreements on government securities (``Government Securities ATSs''). 
The Commission is also proposing to amend Form ATS-N for NMS Stock 
ATSs, which would require existing NMS Stock ATSs to amend their 
existing disclosures. In addition, the Commission is proposing to amend 
the fair access rule for ATSs. The Commission is also proposing to 
require electronic filing of and to modernize Form ATS-R and Form ATS, 
which would require existing Form ATS filers to amend their existing 
disclosures. Further, the Commission is re-proposing amendments to its 
regulations regarding systems compliance and integrity to apply to ATSs 
that meet certain volume thresholds in U.S. Treasury Securities or in a 
debt security issued or guaranteed by a U.S. executive agency, or 
government-sponsored enterprise (``Agency Securities'').

DATES: Comments should be received on or before April 18, 2022.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's internet comment form (https://www.sec.gov/regulatory-actions/how-to-submit-comments); or
     Send an email to [email protected]. Please include 
File Number S7-02-22 on the subject line.

Paper Comments

     Send paper comments to Secretary, Securities and Exchange 
Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number S7-02-22. This file number 
should be included on the subject line if email is used. To help the 
Commission process and review your comments more efficiently, please 
use only one method. The Commission will post all comments on the 
Commission's internet website (https://www.sec.gov/rules/proposed.shtml). Comments are also available for website viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE, 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. Operating conditions may limit access to the 
Commission's public reference room. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly.
    Studies, memoranda, or other substantive items may be added by the 
Commission or staff to the comment file during this rulemaking. A 
notification of the inclusion in the comment file of any materials will 
be made available on the Commission's website. To ensure direct 
electronic receipt of such notifications, sign up through the ``Stay 
Connected'' option at www.sec.gov to receive notifications by email.

FOR FURTHER INFORMATION CONTACT: Regulation ATS: Tyler Raimo, Assistant 
Director, at (202) 551-6227; Matthew Cursio, Special Counsel, at (202) 
551-5748; David Garcia, Special Counsel, at (202) 551-5681; Megan 
Mitchell, Special Counsel, at (202) 551-4887; Amir Katz, Special 
Counsel, at (202) 551-7653; and Joanne Kim, Attorney Advisor, at (202) 
551-4393, and for Regulation SCI: David Liu, Special Counsel, at (312) 
353-6265 and Sara Hawkins, Special Counsel, at (202) 551-5523, Office 
of Market Supervision, Division of Trading and Markets, Securities and 
Exchange Commission, 100 F Street NE, Washington, DC 20549.

SUPPLEMENTARY INFORMATION: The Commission is proposing amendments to 
the following rules under the Exchange Act: (1) 17 CFR 232.101 (Rule 
101 of Regulation S-T); (2) 17 CFR 240.3b-16 (Rule 3b-16); (3) 17 CFR 
242.300 (Rule 300 of Regulation ATS); \1\ (4) 17 CFR 242.301 (Rule 301 
of Regulation ATS); (5) 17 CFR 242.302 (Rule 302 of Regulation ATS); 
(6) 17 CFR 242.304 (Rule 304 of Regulation ATS); \2\ and (7) 17 CFR 
242.1000 (Rule 1000 of Regulation SCI).\3\
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    \1\ ``Regulation ATS'' consists of 17 CFR 242.300 through 
242.304 (Rules 300 through 304 under the Exchange Act). See also 
Regulation ATS Adopting Release, infra note 31.
    \2\ The Commission adopted Rule 304 on July 18, 2018. See 
Securities Exchange Act Release No. 83663 (July 18, 2018), 83 FR 
38768 (August 7, 2018) (``NMS Stock ATS Adopting Release'').
    \3\ The Commission adopted 12 CFR 242.1000 through 242.1007 
(Regulation SCI) on November 19, 2014. See Securities Exchange Act 
Release No. 73639 (November 19, 2014), 79 FR 72252 (December 5, 
2014) (``Regulation SCI Adopting Release'').
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I. Introduction

    In September 2020, the Commission issued a proposal to amend 
Regulation ATS and Regulation SCI for Government Securities ATSs 
(``2020 Proposal'').\4\ The Commission recognized the critical role of 
government securities in the U.S. and global economy, the significant 
volume in government securities transacted on systems currently 
operating as ATSs, and these ATSs' growing importance to investors and 
overall securities market structure. Notwithstanding their importance 
for government securities, the investor protection and fair and orderly 
market principles of Regulation ATS have limited application to 
Government Securities ATSs.\5\ For

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example, an ATS that limits its securities activities to government 
securities or reverse repurchase agreements on government securities 
(``repos'') and registers as a broker-dealer or is a bank (i.e., a 
Currently Exempted Government Securities ATS) is exempt from exchange 
registration and is not required to comply with Regulation ATS. 
Further, ATSs that trade both government securities and non-government 
securities (e.g., corporate bonds) are subject to Regulation ATS but 
are not required to comply with many of its investor protection and 
fair and orderly markets provisions, including public transparency 
rules and the obligation to provide fair access to investors if the ATS 
has significant trading volume. In addition, ATSs that trade government 
securities are not subject to the systems integrity provisions of 
Regulation SCI.
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    \4\ See Securities Exchange Act Release No. 90019 (September 28, 
2020), 85 FR 87106 (December 31, 2020).
    \5\ For the purposes of this re-proposal, the term ``Government 
Securities ATS'' refers to an ATS that trades government securities 
or repos and includes ATSs that would be subject to Regulation ATS 
after the effective date of any final rule. This term includes three 
categories of ATSs. First, a ``Currently Exempted Government 
Securities ATS'' means an ATS that trades government securities or 
repos, is operating as of the effective date of any final rule, and 
was formerly not required to comply with Regulation ATS under 17 CFR 
240.3a1-1(a)(3) (Exchange Act Rule 3a1-1(a)(3)) exemption prior to 
the effective date of any final rule. Second, a ``Current Government 
Securities ATS'' means an ATS that trades government securities or 
repos and is operating pursuant to an initial operation report on 
Form ATS on file with the Commission as of the effective date of any 
final rule. Finally, when referring to regulatory requirements after 
the effective date of any final rule, the term ``Government 
Securities ATS'' also includes a Communication Protocol System that 
trades U.S. Government securities or repos on U.S. Government 
securities and that chooses to operate as an ATS after the effective 
date of any final rule. A ``Communication Protocol System'' would 
include a system that offers protocols and the use of non-firm 
trading interest to bring together buyers and sellers of securities. 
The re-proposal also uses the term ``Legacy Government Securities 
ATS,'' which includes all ATSs that trade government securities or 
repos and are operating as of the effective date of any final rule, 
regardless of whether the ATSs are operating pursuant to an initial 
operation report on Form ATS on file with the Commission (i.e., all 
Current Government Securities ATSs and Currently Exempted Government 
Securities ATSs).
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    To promote operational transparency, investor protection, system 
integrity, fair and orderly markets, and regulatory oversight for 
Government Securities ATSs, the Commission proposed in the 2020 
Proposal to: Eliminate the exemption from compliance with Regulation 
ATS for Currently Exempted Government Securities ATSs; require all 
Government Securities ATSs to publicly file Form ATS-G, on which they 
would disclose information about their operations and potential 
conflicts of interest; provide a process for the Commission to review 
Form ATS-G disclosures for clarity, completeness, and potential 
violations of law and, if necessary, declare ineffective Form ATS-G 
filings; and require an ATS that has significant volume for U.S. 
Treasury Securities or Agency Securities to: (1) Establish reasonable 
standards for access to the ATS and apply those standards to all 
prospective and current subscribers in a fair and non-discriminatory 
manner pursuant Rule 301(b)(5) of Regulation ATS (``Fair Access 
Rule''); and (2) comply with the operational capability, security, 
business continuity planning, incident reporting, and related 
requirements under Regulation SCI.\6\ The Commission issued a concept 
release (``Concept Release'') in addition to the 2020 Proposal on the 
regulation of fixed income electronic trading platforms.\7\ The Concept 
Release requested comments on a wide range of topics, including the 
different regulatory treatment among fixed income electronic trading 
platforms that use diverse trading protocols or business models and 
various aspects of government securities, corporate bonds, and 
municipal securities trading, including their operations, services, 
fees, market data, and participants.
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    \6\ The Commission also had proposed to amend Regulation ATS to: 
Require that Form ATS and Form ATS-R be filed with the Commission 
electronically through the Electronic Data Gathering, Analysis and 
Retrieval (EDGAR) system and modernize both forms; eliminate 
confidential treatment of the types of securities that an ATS trades 
as disclosed on the ATS's Form ATS and Form ATS-R; update and 
correct Form ATS-N; change the reasons for which the Commission 
could extend the initial Form ATS-N review period; require NMS Stock 
ATSs to post on their websites the most recently disseminated Form 
ATS-N, except for any amendment that the Commission has declared 
ineffective or that has been withdrawn; and remove the exclusion 
from compliance with the Fair Access Rule and Rule 301(b)(6) under 
Regulation ATS for an ATS that matches non-displayed customer orders 
using prices disseminated by an effective transaction reporting 
plan.
    \7\ See 2020 Proposal, supra note 4.
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    The Commission received comments in response to the 2020 Proposal 
and Concept Release.\8\ Commenters expressed broad support for the 2020 
Proposal. In general, commenters supported the proposed requirements to 
remove the exemption for Currently Exempted Government Securities ATSs 
and to require public disclosures on Form ATS-G.\9\ However, some 
commenters expressed concern regarding aspects of the 2020 Proposal, 
including the proposed enhanced disclosure requirements and 
effectiveness regime \10\ and the proposal to require Government 
Securities ATSs that meet certain volume thresholds to register as 
national securities exchanges.\11\ In addition, commenters who opined 
on the Fair Access Rule and Regulation SCI had differing views about 
whether and how to apply them to Government Securities ATSs.\12\
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    \8\ These comment letters are available at https://www.sec.gov/comments/s7-12-20/s71220.htm and discussed throughout this proposal.
    \9\ See, e.g., letter from Marcia E. Asquith, Executive Vice 
President & Corporate Secretary, Financial Industry Regulatory 
Authority, Inc., dated March 1, 2021 (``FINRA Letter'') at 2; letter 
from Rob Toomey, Managing Director & Associate General Counsel, 
Securities Industry and Financial Markets Association, Chris 
Killian, Managing Director, Securitization and Credit, Securities 
Industry and Financial Markets Association, and Leslie Norwood, 
Managing Director, Associate General Counsel, Securities Industry 
and Financial Markets Association, dated March 1, 2021 (``SIFMA 
Letter'') at 2; letter from Elisabeth Kirby, Head of U.S. Market 
Structure, Tradeweb Markets Inc., dated March 1, 2021 (``Tradeweb 
Letter'') at 2; letter from Jennifer W. Han, Chief Counsel & Head of 
Regulatory Affairs, Managed Funds Association, dated March 1, 2021 
(``MFA Letter'') at 2-3; and Tyler Gellasch, Executive Director, 
Healthy Markets Association, dated March 22, 2021 (``Healthy Markets 
Letter'') at 7.
    \10\ See letter from Robert Laorno, General Counsel, ICE Bonds 
Securities Corporation, dated March 8, 2021 (``ICE Bonds Letter I'') 
at 5.
    \11\ See letter from Kathleen M. Cronin, Senior Managing 
Director, General Counsel and Corporate Secretary, CME Group Inc., 
dated February 26, 2021 (``BrokerTec Letter'') at 3-4.
    \12\ See, e.g., SIFMA Letter at 5 (supporting the proposed 
volume thresholds); Americans for Financial Reform Education Fund, 
dated March 1, 2021 (``AFREF Letter'') at 3 (supporting the proposed 
threshold with respect to Regulation SCI and stating that they 
believe the proposed threshold for the Fair Access Rule is too low); 
Healthy Markets Letter at 10-11 (recommending a lower threshold for 
Regulation SCI); letter from Gregory Babyak, Global Head of 
Regulatory Affairs, Bloomberg L.P., dated March 1, 2021 (``Bloomberg 
Letter'') at 5-6 (stating that the proposed thresholds are too 
high); ICE Bonds Letter I at 5 (suggesting a 20 percent threshold 
for application of Regulation SCI); Tradeweb Letter at 3, 11 
(recommending a ``more material'' threshold for applying Regulation 
SCI). See also infra Sections III.B.4 and III.C.
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    In addition, the Commission received substantial comment on the 
Concept Release, in particular concerning the regulatory framework for 
fixed income electronic trading platforms. Many commenters recognized 
that certain electronic trading platforms for fixed income securities 
are not regulated as registered exchanges or ATSs despite performing 
the same market function as those regulated markets.\13\ Several 
commenters expressed support for the Commission to expand the scope of 
its exchange regulation to encompass more fixed income platforms,\14\ 
while several other commenters believed that such action is not 
necessary or appropriate.\15\
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    \13\ See, e.g., letter from Stephen John Berger, Managing 
Director, Global Head of Government and Regulatory Policy, Citadel, 
dated March 1, 2021 (``Citadel Letter''); letter from Joanna 
Mallers, Secretary, FIA Principal Traders Group, dated March 1, 2021 
(``FIA PTG Letter'') at 2; letter from Robert Laorno, General 
Counsel, ICE Bonds Securities Corporation, dated March 15, 2021 
(``ICE Bonds Letter II'') at 2-4; FINRA Letter at 6; MFA Letter at 
8; Tradeweb Letter at 4.
    \14\ See, e.g., Citadel Letter; FIA PTG Letter; ICE Bonds Letter 
II.
    \15\ See, e.g., letter from Sarah A. Bessin, Associate General 
Counsel, Investment Company Institute and Nhan Nguyen, Counsel, 
Investment Company Institute, dated March 1, 2021 (``ICI Letter'') 
at 2, 7; letter from Scott Pintoff, General Counsel, MarketAxess, 
dated March 1, 2021 (``MarketAxess Letter'') at 2-4; Bloomberg 
Letter at 17-20.
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    Advances in technology and innovation since Regulation ATS was 
adopted in 1998 \16\ have changed the methods by which securities 
markets bring together buyers and sellers of

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securities. As discussed further below, innovations in trading 
protocols have increased efficiencies and access to discover liquidity 
and prices, search for a counterparty, and agree upon the terms of a 
trade. Instead of using exchange markets that offer only the use of 
firm orders and provide matching algorithms, market participants are 
able to connect to numerous Communication Protocol Systems, which offer 
the use of protocols and non-firm trading interest to bring together 
buyers and sellers of securities. Communication Protocol Systems today 
perform similar market place functions of bringing together buyers and 
sellers as registered exchanges and ATSs and have become an 
increasingly preferred choice of trading venue, particularly for fixed 
income securities. However, as a function of how Exchange Act Rule 3b-
16 currently defines the terms in Section 3(a)(1) of the Exchange Act, 
Communication Protocol Systems do not fall within the definition of 
exchange. As a result, Communication Protocol Systems are not subject 
to the same regulatory requirements as registered exchanges and ATSs 
and the investors using them do not receive the investor protection, 
fair and orderly markets, transparency, and oversight benefits stemming 
from exchange regulation. Further, by Communication Protocol Systems 
falling outside the definition of exchange, a disparity has developed 
among similar markets that bring together buyers and sellers of 
securities, in which some are regulated as exchanges and others are 
not. This regulatory disparity can create a competitive imbalance and a 
lack of investor protections.\17\
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    \16\ See Regulation ATS Adopting Release, infra note 31.
    \17\ See infra Section VIII.C.3.a.
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    Given the changing conditions among markets to bring together 
buyers and sellers of securities, and taking into consideration comment 
letters submitted in response to the 2020 Proposal and the Concept 
Release, the Commission is proposing to amend Exchange Act Rule 3b-16 
regarding what ``shall be considered to constitute, maintain, or 
provide `a market place or facilities for bringing together purchasers 
and sellers of securities or for otherwise performing with respect to 
securities the functions commonly performed by a stock exchange' as 
those terms are used'' in the statutory definition of ``exchange'' 
under Exchange Act Section 3(a)(1).\18\ The proposed amendments to 
Exchange Act Rule 3b-16(a) would include Communication Protocol Systems 
that make available for trading any type of security, including, among 
others, government securities, corporate bonds, municipal securities, 
NMS stocks, equity securities that are not NMS stocks, private 
restricted securities, repurchase agreements and reverse repurchase 
agreements, foreign sovereign debt, and options. Including 
Communication Protocol Systems within the definition of ``exchange'' 
would appropriately regulate a market place that brings together buyers 
and sellers of securities, extend the benefits of the exchange 
regulatory framework to investors that use such systems, and reduce 
regulatory disparities among like markets.
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    \18\ 17 CFR 240.3b-16(a).
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    In addition, because the Commission is proposing to amend Exchange 
Act Rule 3b-16 to include Communication Protocol Systems within the 
definition of exchange and taking into consideration comments received 
in response to the 2020 Proposal and the Concept Release, the 
Commission is re-proposing and revising previously proposed amendments 
to Regulation ATS and Regulation SCI for Government Securities ATSs 
that include the following: \19\ (1) Re-proposing to eliminate the 
exemption from compliance with Regulation ATS for an ATS that trades 
only government securities or repos and is operated by a broker-dealer 
or is a bank; (2) re-proposing, with certain revisions, to require a 
Government Securities ATS that has significant volume for U.S. Treasury 
Securities or Agency Securities to comply with the Fair Access Rule 
under Regulation ATS and Regulation SCI; \20\ (3) re-proposing to apply 
the enhanced disclosure and filing requirements of Rule 304 of 
Regulation ATS, which are currently applicable to NMS Stock ATSs, to 
all Government Securities ATSs; (4) proposing to require Government 
Securities ATSs to file Form ATS-N, as revised, instead of previously 
proposed Form ATS-G; \21\ (5) proposing several changes to Form ATS-N 
that would be applicable to both Government Securities ATSs and NMS 
Stock ATSs, including questions about the ATS's interaction with 
related markets, liquidity providers, and activities the ATS undertakes 
to surveil and monitor its market; (6) proposing amendments to Form 
ATS-N that would require existing NMS Stock ATSs to file an amendment 
to their existing disclosures on Form ATS-N; (7) proposing to add a new 
type of amendment to Form ATS-N to report changes to fee disclosures; 
(8) proposing to amend the Form ATS-N review and effectiveness process 
to permit the Commission to extend the review period for Form ATS-N 
amendments; \22\ (9) proposing to make certain changes to the Fair 
Access Rule that would apply to all ATSs that are subject to the rule; 
\23\ and (10) re-proposing electronic filing of Form ATS-R and Form ATS 
and proposing certain changes to the categories of securities reported 
on Form ATS-R.\24\
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    \19\ U.S. Treasury Securities and Agency Securities are not 
classes of securities for purposes of Exchange Act Rule 3a1-1(b).
    \20\ The Commission is re-proposing to amend Regulation ATS to 
require that Form ATS and Form ATS-R be filed with the Commission 
electronically through EDGAR and to modernize both forms; eliminate 
confidential treatment of the types of securities that an ATS trades 
as disclosed on the ATS's Form ATS and Form ATS-R; and remove the 
exclusion from compliance with the Fair Access Rule and Rule 
301(b)(6) under Regulation ATS for an ATS that matches non-displayed 
customer orders using prices disseminated by an effective 
transaction reporting plan. Covered ATSs would not be required to 
post on their websites the most recently disseminated Form ATS-N, 
but would be required to provide pursuant to Rule 304(b)(3)(i) a 
direct URL hyperlink to the Commission's website that contains the 
documents made public by the Commission under Rule 304(b)(2).
    \21\ In the 2020 Proposal, the Commission proposed that 
Government Securities ATSs file proposed Form ATS-G. Given the 
significant overlap between proposed Form ATS-G and existing Form 
ATS-N, the Commission is now proposing that Government Securities 
ATSs file Form ATS-N, which is currently filed by NMS Stock ATSs, 
and proposing to revise Form ATS-N to apply disclosures for 
Government Securities ATSs that would fall under the proposed 
definition of ``exchange.'' See Appendix A for the proposed 
revisions to Form ATS-N. The Commission believes that this would 
limit the number of unique forms and simplify filing requirements.
    \22\ The Commission is also re-proposing to change the reasons 
for which the Commission could extend the initial Form ATS-N review 
period. See infra Section IV.A.
    \23\ See infra Section V.A.
    \24\ See infra Section V.B.
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II. Proposed Amendments Regarding the Definition of Exchange

A. Exchange Regulatory Framework

    Exchange Act Section 3(a)(1) states that the term ``exchange'' 
means any organization, association, or group of persons, whether 
incorporated or unincorporated, which constitutes, maintains, or 
provides a market place or facilities for bringing together purchasers 
and sellers of securities or for otherwise performing with respect to 
securities the functions commonly performed by a stock exchange as that 
term is generally understood, and includes the market place and the 
market facilities maintained by such exchange.\25\
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    \25\ See 15 U.S.C. 78c(a)(1).
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    Section 5 of the Exchange Act \26\ requires an organization, 
association, or

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group of persons that meets the definition of ``exchange'' under 
Section 3(a)(1) of the Exchange Act,\27\ unless otherwise exempt, to 
register with the Commission as a national securities exchange pursuant 
to Section 6 of the Exchange Act.\28\ As discussed further below, 
registered national securities exchanges are self-regulatory 
organizations (``SROs''),\29\ and must comply with regulatory 
requirements applicable to both national securities exchanges and 
SROs.\30\
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    \26\ 15 U.S.C. 78e.
    \27\ See infra note 31.
    \28\ 15 U.S.C. 78f. A ``national securities exchange'' is an 
exchange registered as such under Section 6 of the Exchange Act.
    \29\ Section 3(a)(26) of the Exchange Act defines a self-
regulatory organization as any national securities exchange, 
registered securities association, registered clearing agency, or 
(with limitations) the Municipal Securities Rulemaking Board 
(``MSRB''). See 15 U.S.C. 78c(a)(26). See also Securities Exchange 
Act Release No. 76474 (November 18, 2015), 80 FR 80998, 81025 
(December 28, 2015) (``NMS Stock ATS Proposing Release'') at 81000-
01 nn.20-26 and accompanying text (discussing certain differences 
between certain obligations and benefits applicable to national 
securities exchanges and those applicable to ATSs).
    \30\ See, e.g., 15 U.S.C. 78f and 78s.
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    In the Exchange Act, Congress provided a broad definition of the 
term ``exchange,'' permitting the Commission to apply the definition 
flexibly as the securities markets evolve over time.\31\ In 1998, the 
Commission adopted Regulation ATS.\32\ At that time, the Commission 
recognized that advances in technology had increasingly blurred the 
line between exchange and broker-dealer activities \33\ and that ATSs 
that existed then were used by market participants as functional 
equivalents of exchanges.\34\ To more accurately describe the range of 
markets that performed exchange functions at that time, the Commission 
concurrently adopted Exchange Act Rule 3b-16 to define terms \35\ used 
in the statutory definition of ``exchange'' under Exchange Act Section 
3(a)(1).
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    \31\ See Securities Exchange Act Release No. 40760 (December 8, 
1998), 63 FR 70844, 70850 and 70898 (December 22, 1998) 
(``Regulation ATS Adopting Release''). See also 15 U.S.C. 78e and 
78f. The Commission noted that it was recognized at the time the 
Exchange Act was enacted that a regulatory structure for securities 
exchanges would ``be of little value tomorrow if it is not flexible 
enough to meet new conditions immediately as they arise and demand 
attention in the public interest.'' See Regulation ATS Adopting 
Release at 70898, n.520 (citing Commission, Report of the Special 
Study of the Securities Markets of the Securities and Exchange 
Commission, H.R. Doc. No. 95, 88th Cong., 1st Sess. Pt. 1 (1963) at 
6 and S. Rep. No. 792, 73rd Cong., 2d Sess. (1934) at 5 (noting that 
``exchanges cannot be regulated efficiently under a rigid statutory 
program,'' and that ``considerable latitude is allowed for the 
exercise of administrative discretion in the regulation of both'')).
    \32\ See Regulation ATS Adopting Release, supra note 31, at 
70850.
    \33\ See id. at 70847.
    \34\ See id.
    \35\ The Commission adopted Exchange Act Rule 3b-16 under 
Section 3(b) of the Exchange Act (power to define terms). 15 U.S.C. 
78c(b).
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    In Exchange Act Rule 3b-16(a), the Commission defined these terms, 
in light of the markets that existed at that time, to include any 
organization, association, or group of persons that: (1) Brings 
together the orders for securities of multiple buyers and sellers; and 
(2) uses established, non-discretionary methods (whether by providing a 
trading facility or by setting rules) under which such orders interact 
with each other, and the buyers and sellers entering such orders agree 
to the terms of a trade.\36\ Rule 3b-16(b) explicitly excluded certain 
systems that the Commission believed were not exchanges.\37\ 
Accordingly, a system is not included in the Commission's 
interpretation of ``exchange'' if: (1) The system fails to meet the 
two-part test in paragraph (a) of Rule 3b-16; (2) the system falls 
within one of the exclusions in paragraph (b) of Rule 3b-16; or (3) the 
Commission otherwise conditionally or unconditionally exempts \38\ the 
system from the definition.
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    \36\ See 17 CFR 240.3b-16(a).
    \37\ See Regulation ATS Adopting Release, supra note 31, at 
70852. Specifically, Rule 3b-16(b) excludes from the definition of 
exchange systems that perform only traditional broker-dealer 
activities, including: Systems that route orders to a national 
securities exchange, a market operated by a national securities 
association, a broker-dealer for execution, or systems that allow 
persons to enter orders for execution against the bids and offers of 
a single dealer if certain additional conditions are met.
    \38\ See 17 CFR 240.3b-16(e).
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    When the Commission adopted Exchange Act Rule 3b-16, the Commission 
also adopted Exchange Act Rule 3a1-1(a) to exempt ATSs from the 
definition of ``exchange'' under Section 3(a)(1) of the Exchange Act. 
Exchange Act Rule 3a1-1(a)(2) \39\ exempts from the Exchange Act 
Section 3(a)(1) definition of ``exchange'' an organization, 
association, or group of persons that complies with Regulation ATS,\40\ 
which requires, among other things, meeting the definition of an ATS 
and registering as a broker-dealer.\41\ Rule 300(a) of Regulation ATS 
defines an ATS as any organization, association, person, group of 
persons, or system: (1) That constitutes, maintains, or provides a 
market place or facilities for bringing together purchasers and sellers 
of securities or for otherwise performing with respect to securities 
the functions commonly performed by a stock exchange within the meaning 
of Rule 3b-16; and (2) that does not: (i) Set rules governing the 
conduct of subscribers other than the conduct of such subscribers' 
trading on such organization, association, person, group of persons, or 
system; or (ii) discipline subscribers other than by exclusion from 
trading.\42\ Governing the conduct of or disciplining subscribers are 
functions performed by an SRO that the Commission believed should be 
regulated as such.\43\ Accordingly, pursuant to Rule 300(a), a trading 
system that performs SRO functions or functions common to national 
securities exchanges, such as establishing listing standards, is 
precluded from the definition of ATS and would be required to register 
as a national securities exchange, be operated by a national securities 
association, or seek another exemption.\44\
---------------------------------------------------------------------------

    \39\ See 17 CFR 240.3a1-1(a)(2).
    \40\ See id. Rule 3a1-1 also provides two other exemptions from 
the definition of ``exchange'' for any ATS operated by a national 
securities association and any ATS not required to comply with 
Regulation ATS pursuant to Rule 301(a) of Regulation ATS. See 17 CFR 
240.3a1-1(a)(1) and (3).
    Rule 3a1-1(b) provides an exception to the Rule 3a1-1(a) 
exemptions pursuant to which the Commission may require a trading 
system that is a substantial market to register as a national 
securities exchange, if the Commission finds doing so is necessary 
or appropriate in the public interest or consistent with the 
protection of investors. See 17 CFR 240.3a1-1(b). See also 
Regulation ATS Adopting Release, supra note 31, at 70857-58.
    \41\ See 17 CFR 242.300(a); 17 CFR 242.301(a); and 17 CFR 
242.301(b)(1). In addition to the other requirements of Regulation 
ATS, to qualify for the Rule 3a1-1(a) exemption, an organization, 
association, or group of persons must otherwise meet the definition 
of ``exchange.''
    \42\ See 17 CFR 242.300(a).
    \43\ See Regulation ATS Adopting Release, supra note 31, at 
70859.
    \44\ See id.
---------------------------------------------------------------------------

    As a result of the exemption, an ATS that complies with Regulation 
ATS is not required by Section 5 of the Exchange Act to register as a 
national securities exchange, is not an SRO, and, therefore, is not 
required to comply with regulatory requirements applicable to national 
securities exchanges and SROs.\45\ An ATS that fails to comply with the 
requirements of Regulation ATS would no longer qualify for the 
exemption provided under Rule 3a1-1(a)(2), and thus, risks operating as 
an unregistered exchange in violation of Section 5 of the Exchange 
Act.\46\
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    \45\ See generally Sections 5, 6, and 19 of the Exchange Act, 15 
U.S.C. 78e, 78f, and 78s.
    \46\ See 15 U.S.C. 78e.

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[[Page 15500]]

B. Adopting the Definition of Exchange for Evolving Market Places

1. Orders-Focused Markets Under Current Rule 3b-16
    When the Commission adopted Exchange Act Rule 3b-16(a), the 
Commission sought to more accurately describe the range of markets that 
performed exchange functions as those were understood at that time.\47\ 
In the Regulation ATS Adopting Release, the Commission observed that 
ATSs at that time provided services more akin to exchange functions 
than broker-dealer functions, such as matching counterparties' orders, 
executing trades, operating limit order books, and facilitating active 
price discovery.\48\
---------------------------------------------------------------------------

    \47\ See Regulation ATS Adopting Release, supra note 31, at 
70900.
    \48\ See id. at 70848.
---------------------------------------------------------------------------

    In the Regulation ATS Adopting Release, the Commission identified 
two elements of Exchange Act Rule 3b-16 that most accurately reflected 
the functions and uses of exchange markets at that time. These elements 
were the bringing together of orders of multiple buyers and sellers of 
securities and that trading takes place according to established, non-
discretionary rules or procedures.\49\ When considering what 
constituted an exchange at that time, the Commission focused on the 
expectations of the participants regarding how an execution would occur 
without the discretion of the operator. Because orders instruct a 
trading system to carry out the intention of participants in accordance 
with programmed trading procedures, orders, along with established, 
non-discretionary methods, contribute to how trading system 
participants could understand and expect to receive an execution.\50\ 
In addition, the Commission stated that ``an essential indication of 
the non-discretionary status of rules and procedures is that those 
rules and procedures are communicated to the systems users'' and 
``[t]hus, participants have an expectation regarding the manner of 
execution--that is, if an order is entered, it will be executed in 
accordance with those procedures and not at the discretion of a 
counterparty or intermediary.'' \51\
---------------------------------------------------------------------------

    \49\ See id. at 70900.
    \50\ For example, the Commission stated in the Regulation ATS 
Adopting Release that ``an alternative trading system that posts 
firm orders to buy and sell a security does raise a certain 
expectation of execution at those quoted prices'' and that ``[t]he 
expectation is based on the life of the outstanding orders in the 
system, rather than continuous two sided quotations published by 
specialist and market makers.'' See id. at 70899, n.532.
    \51\ See id. at 70900.
---------------------------------------------------------------------------

    Further, at the time Exchange Act Rule 3b-16(a) was adopted, most 
ATSs operating met the criteria of the rule in that they offered the 
use of orders and algorithms that matched orders.\52\ ATSs at that time 
allowed broker-dealers to place and execute orders on the system and 
the systems functioned as limit order books where orders are executed 
according to time, price, and size priority.\53\ Accordingly, orders 
and established, non-discretionary methods undergirded Exchange Act 
Rule 3b-16 to reflect functions of exchange markets at that time. When 
discussing orders in the Regulation ATS Adopting Release, however, the 
Commission stated that systems that displayed bona fide, non-firm 
trading interest \54\ or did not establish rules or operate a trading 
facility \55\ would not fall within Rule 3b-16(a).
---------------------------------------------------------------------------

    \52\ See id. at 70899-900, n.536.
    \53\ See id. at 70899, n.525.
    \54\ See id. at 70850. In the Regulation ATS Adopting Release, 
the Commission stated, ``[g]enerally, however, a system that 
displays bona fide, non-firm indications of interest--including, but 
not limited to indications of interest to buy or sell a particular 
security without either prices or quantities associated with those 
indications--will not be displaying ``orders'' and, therefore, not 
fall within Rule 3b-16.'' See id.
    \55\ See id. The Commission also stated that ``[u]nless a system 
also establishes rules or operates a trading facility under which 
subscribers can agree to the terms of their trades, the system will 
not be included within Rule 3b-16, even if it brings together 
`orders.' '' See id.
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2. Prevalence of Systems Offering Non-Firm Trading Interest and 
Structured Protocols
    Advances in technology have facilitated innovations and more 
efficient or diverse methods to bring together buyers and sellers of 
securities.\56\ In the Commission's experience, Communication Protocol 
Systems, which can use various technologies and connectivity, generally 
offer the use of non-firm trading interest and establish protocols to 
prompt and guide buyers and sellers to communicate, negotiate, and 
agree to the terms of the trade without relying solely on the use of 
orders. Below is a non-exhaustive list of some Communication Protocol 
Systems.
---------------------------------------------------------------------------

    \56\ See id. at 70848.
---------------------------------------------------------------------------

    One example of a Communication Protocol System is a ``Request-for-
Quote'' (``RFQ'') system. RFQ systems are designed to allow market 
participants to obtain quotes for a particular security by sending 
messages to one or multiple potential respondents on the system 
simultaneously. RFQ systems may be ``disclosed,'' in which case the 
participants with established relationships interact only with each 
other, or anonymous, in which case the parties may not have established 
relationships. The system provider requires a participant to enter 
information in a message, which may include the name of the initiator, 
Committee on Uniform Securities ldentificalion Procedures (CUSIP) 
number, side, and size. The system provider also provides protocols for 
participants to communicate with each other and negotiate a price or 
size of a trade. For example, participants receiving an RFQ message can 
choose to interact with the initiator by responding within a time 
period designated by the system provider with a priced quote. These 
methods can serve the same function as auctions where the respondents 
compete to offer the best price. The initiator can then select among 
the quote responses that it wishes to interact with through the system 
by either accepting one of multiple responses or rejecting all 
responses within a period of time set by the system provider. The match 
of the request and response results in an agreement to the terms of the 
trade between a buyer and a seller, which then proceeds to post-trade 
processing.\57\ An RFQ list protocol (``RFQ List''), which is a form of 
RFQ protocol used commonly to trade U.S. Treasury Securities, may 
include a collection of RFQ inquiries that are submitted as a group but 
priced as individual items.\58\ The RFQ List (defined by each system 
provider but generally more than two listed items) may be executed in 
its entirety, in pieces, or not at all. A liquidity provider that is 
responding to the list request may apply a ``good for'' time that is 
associated with the executable prices provided.
---------------------------------------------------------------------------

    \57\ Communication Protocol Systems also may offer a workup 
functionality or blotter scraping functionality to gather non-firm 
trading interest and facilitate the negotiation and execution of 
trades. In a workup, a system may have a private phase, where the 
two original contra-parties submitting orders can negotiate, and a 
public phase where all subscribers can submit orders at the workup 
price.
    \58\ An RFQ List may be referred to as a Bid Wanted in 
Competition (``BWIC'') or Offer Wanted in Competition (``OWIC'') in 
the corporate bond market. Both serve a similar purpose to the RFQ 
List in allowing the submitter to solicit bids and offers on a 
number of securities at one time.
---------------------------------------------------------------------------

    A Communication Protocol System could also include a system that 
electronically displays continuous firm or non-firm trading interest, 
or ``stream axes,'' in a security or type of security to participants 
on the system. Axes typically represent an indication of

[[Page 15501]]

interest to sell or buy a bond (but can include firm quotes), and can 
either serve as a starting point for negotiation between participants 
or be executed immediately. Systems that stream axes take many forms. 
Some system providers provide connectivity and protocols for 
participants to electronically communicate and negotiate the terms of a 
trade. Other system providers offer participants more automated 
processes, whereby participants auto-execute against a streamed quote 
and agree upon the terms of a trade without negotiation. Typically, the 
system is programmed with permission options to allow participants to 
decide who can or cannot receive their axes. In such a case, the 
trading interest exchanged between the parties is typically firm and 
functions as orders.
    Conditional order systems may be Communication Protocol Systems 
that offer the use of trading interest that may not be executable until 
after a user takes subsequent action. For example, a system provider 
may require conditional orders to contain a symbol, side, and size and 
provide protocols for participants to send and receive invitation 
messages to trade. The system would be designed for conditional orders 
to match with other trading interest, which can either be a firm order 
or another non-firm conditional order.\59\ Upon a match, the system may 
send a firm-up invitation messages to both participants. The system 
protocols may permit a participant using a conditional order to either 
decline the firm-up invite, accept the firm-up invite, or counter the 
response to firm up.\60\ During the time that the parties' trading 
interest is matched until the invitation to firm-up expires, is 
canceled, is executed, or is declined, the system protocols may require 
that the non-firm trading interest be committed and the shares cannot 
trade elsewhere.\61\ Using the system protocols, the matched parties 
can modify the attributes of the non-firm trading interest (i.e., 
price, size) before accepting the firm-up invitation. To the extent 
either a seller or buyer changes the attributes, an execution will only 
occur if each contra-party's corresponding attributes will still be 
met. If both matching parties accept the firm-up invite, the parties 
would agree upon the terms of the trade and an execution would occur.
---------------------------------------------------------------------------

    \59\ Based on Commission staff experience, some NMS Stock ATSs 
disclose protocols to allow conditional orders to interact with the 
ATS's limit order book, thereby increasing the interaction among 
potential buyers and sellers and access to liquidity.
    \60\ An order resting on an ATS limit order book that can 
interact with a conditional order does not receive a firm-up invite 
and therefore does not send firm-up responses.
    \61\ Many conditional order and RFQ systems monitor their 
participants' firm-up rates and may limit or deny the use of the 
system by a participant if the participant's firm-up rate falls 
below a certain percentage. While the system provider typically 
monitors these firm-up rates to help ensure that participants do not 
abuse the system, such monitoring and actions taken against 
participants for not firming-up may incentivize participants to not 
back away. Thus, conditional orders or RFQs can be firm in practice 
and in this way may meet the definition of order under current 
Regulation ATS. See 17 CFR 242.300(e) (``any firm indication of a 
willingness to buy or sell a security'').
---------------------------------------------------------------------------

    Other systems have developed to bring together buyers and sellers 
of securities through the use of bilateral negotiation protocols and 
non-firm trading interest. Negotiation systems focus on providing a 
forum for buyers and sellers to see displayed non-firm trading 
interest, access liquidity, find a counterparty, and negotiate a trade 
through the use of their communication technology. The system may allow 
participants to select certain pre-approved participants and then 
exchange messages for purposes of agreeing to the terms of a trade. 
Negotiation systems may have fewer parameters for communicating trading 
interest than RFQ protocols; for example, negotiation systems provide 
features that are designed to prompt participants to interact with each 
other and provide parameters around that interaction, such as time for 
responses or requirements on the content of the message. A system may 
``scrape'' or obtain the symbol of trading interest that a participant 
is seeking from the participant's order management or execution 
management system and use that to alert other participants on its 
system about potential contra-side interest in seeking to initiate a 
negotiation. The market participants using negotiation systems may 
complete a transaction outside of the system.
    As trading in securities has become more electronic, Communication 
Protocol Systems perform the function of a market place and have become 
a preferred method for market participants to discover prices, find a 
counterparty, and execute a trade, particularly for government 
securities and other fixed income markets. One commenter on the 2020 
Proposal and Concept Release, for example, stated that multilateral 
trading venues using RFQ protocols are some of the most significant 
multilateral trading venues operating in fixed income markets regulated 
by the Commission, including the U.S. Treasury market.\62\ This 
commenter stated that RFQ trading venues dominate the dealer-to-
customer segment of the U.S. Treasury market and in the aggregate 
account for approximately 50 percent of total electronic trading volume 
on multilateral U.S. Treasury trading venues.\63\ Another large 
electronic trading venue for fixed income products estimated that its 
average daily volume using an RFQ protocol increased from $223 million 
in the second quarter of 2017 to $1.17 billion in the second quarter of 
2021.\64\ Systems offering conditional order protocols have increased 
over the past several years, particularly for trading NMS stocks. 
Today, 26 NMS Stock ATSs have disclosed on their public Form ATS-N that 
they send or receive messages indicating trading interest, such as 
conditional orders.
---------------------------------------------------------------------------

    \62\ See Citadel Letter at 1-2.
    \63\ See id. This commenter noted that multilateral RFQ trading 
venues are formally registered in other asset classes and 
jurisdictions, and that there are ``well-established precedents'' to 
delineate the scope of multilateral trading venues subject to 
regulation.
    \64\ Tradeweb Investor Presentation, July 2021, available at: 
https://investors.tradeweb.com/static-files/e63caabf-d71d-46c0-9589-353fb8b93388.
---------------------------------------------------------------------------

    Communication Protocol Systems, like registered exchanges and ATSs, 
offer their participants several benefits, including reducing 
counterparty search costs, bringing together diverse market 
participants, and making it efficient and simple to find a counterparty 
and agree upon the terms of a trade. These systems improve price 
discovery from the voice protocols that were used more widely in the 
fixed income market in the past by offering participants systems and 
protocols that are specifically designed to allow participants to 
contact, and receive responses from, multiple potential counterparties 
at one time, as opposed to the more time-consuming process of calling 
each potential counterparty individually. RFQ protocols, for example, 
allow an initiator to share and attempt to trade its entire trading 
interest all at once. In contrast, under a limit order book model, for 
example, the seeker of liquidity may find it can only execute its 
trading interest in a piecemeal fashion. RFQs also allow initiators to 
more easily demonstrate that they attempted to achieve best execution 
by showing that the initiator sent requests for quotes to multiple 
dealers for a security. In addition, participants may find conditional 
orders attractive when seeking to trade at size or to avoid information 
leakage.
    While Communication Protocol Systems may bring together buyers and 
sellers for all types of securities and allow participants to negotiate 
a trade,

[[Page 15502]]

they are particularly useful to market participants to trade less 
liquid securities, find counterparties for large size trades, and 
minimize information leakage and adverse impact of large size trades. 
For example, market participants can use Communication Protocol Systems 
to post and see non-firm trading interest on several trading venues 
simultaneously, thereby increasing their ability to find a counterparty 
and reduce search costs. When resting non-firm trading interest on a 
trading venue, market participants can use non-firm trading interest as 
a tool to avoid the risk of double-execution.\65\ Participants that use 
conditional orders, for example, may place the same trading interest at 
various trading centers in search of liquidity because it would allow 
them to accept or decline responses if they receive more than one. 
Participants may find locating a counterparty on a limit order book 
system for less liquid securities more difficult and choose instead to 
use a Communication Protocol System, such as an RFQ system, because 
such system allows the initiating participant to use non-firm trading 
interest to solicit quotes from multiple market participants for less 
liquid securities and negotiate a size or price for such securities.
---------------------------------------------------------------------------

    \65\ For example, a market participant that rests the same non-
firm trading interest on two trading venues has the ability to back 
away from one if both are lifted (i.e., preliminarily matched). In 
such case, the market participant is able to complete one trade and 
cancel or back away from the other.
---------------------------------------------------------------------------

3. Lack of Investor Protections and Disparate Regulation Among Market 
Places
    Given the changes in methods for bringing buyers and sellers 
together over the past couple of decades, the contrast between market 
place functions of exchanges that offer the use of orders and trading 
facilities and systems that offer the use of trading interest and 
protocols has become increasingly blurred. Both types of systems share 
the same business objectives and engage in similar market activities; 
however, one type of system is subject to the exchange regulatory 
framework while the other is not.\66\ Today, Communication Protocol 
Systems perform similar market place functions as registered exchanges 
and ATSs and have become venues for investors to discover prices, find 
a counterparty, and agree upon the terms of a trade. Because 
Communication Protocol Systems do not fall within the definition of 
``exchange'' and are thus not required to register as national 
securities exchanges, they are not required to comply with the same 
Federal securities laws and regulations applicable to registered 
exchanges \67\ or ATSs.\68\ Market participants use Communication 
Protocol Systems for certain advantages that these market places offer 
for trading securities; however, when doing so, market participants 
cannot avail themselves of the same investor protections, fair and 
orderly market principles, and Commission oversight that apply to 
today's registered exchanges or ATSs.\69\ This regulatory gap also 
creates disparities that affect competitive balances among like market 
places for securities.\70\ Consistent with the statutory definition of 
``exchange'' in Exchange Act Section 3(a)(1), and as discussed above, 
today Communication Protocol Systems provide a ``market place'' for 
bringing together purchasers and sellers of securities.\71\ The current 
proposal will use the flexibility granted to the Commission by Congress 
to update Exchange Act Rule 3b-16 to address these developments in the 
markets for securities, the corresponding lack of investor protections, 
and disparate regulation among these markets.\72\
---------------------------------------------------------------------------

    \66\ See U.S. Securities and Exchange Commission Fixed Income 
Market Structure Advisory Committee (``FIMSAC''), Recommendation for 
the SEC to Review the Framework for the Oversight of Electronic 
Trading Platforms for Corporate and Municipal Bonds (July 16, 2018), 
available at https://www.sec.gov/spotlight/fixed-income-advisory-committee/fimsac-electronic-trading-platforms-recommendation.pdf 
(expressing concern about regulatory harmonization among fixed 
income trading platforms, recognizing that some firms were regulated 
as ATSs, while some were regulated as broker-dealers or not 
regulated at all).
    \67\ See infra Section II.D.1.
    \68\ See infra Section II.D.2.
    \69\ See infra Section II.D.
    \70\ See infra Section VIII.C.3.a.
    \71\ See supra Section II.A.
    \72\ The Commission is not proposing to amend Exchange Act Rule 
3b-16(b), which excludes from the definition of ``exchange'' systems 
that perform only traditional broker-dealer activities, including: 
Systems that route orders to a national securities exchange, a 
market operated by a national securities association, a broker-
dealer for execution, or systems that allow persons to enter orders 
for execution against the bids and offers of a single dealer if 
certain additional conditions are met. These systems would continue 
to not fall within the definition of ``exchange.'' As discussed 
below, and consistent with the Commission's views expressed in the 
Regulation ATS Adopting Release, a broker-dealer's exercise of 
discretion and judgment over its customers' orders or trading 
interest does not make the broker-dealer an exchange. See Regulation 
ATS Adopting Release, supra note 31, at 70851. See also infra 
Section II.C.3. The Commission is proposing to add an exclusion to 
Rule 3b-16(a) for systems that allow issuers to sell their own 
securities to investors. See infra Section II.C.2. Further, as 
explained below, the Commission is not proposing to include within 
the definition of ``exchange'' a system that unilaterally displays 
trading interest without offering a trading facility or 
communication protocols to bring together buyers and sellers. Also, 
systems that provide general connectivity for persons to communicate 
without protocols, such as utilities or electronic web chat 
providers, would not fall within the definition of exchange. See id.
---------------------------------------------------------------------------

    Including Communication Protocol Systems within the definition of 
``exchange'' would provide market participants that use these market 
places with the investor protections, fair and orderly market 
principles, and Commission oversight provided by the exchange 
regulatory framework.\73\ A Communication Protocol System that chooses 
to register as an exchange would be an SRO and be subject to the 
requirements of Section 6 of the Exchange Act, as discussed further 
below.\74\ However, the Commission expects that many Communication 
Protocol Systems would choose instead to comply with the conditions of 
the Regulation ATS exemption, which includes registering as a broker-
dealer.\75\ As discussed further below, Communication Protocol Systems 
complying with Regulation ATS would also be subject to the Regulation 
ATS investor protection provisions, including the requirement to 
establish written safeguards and procedures to protect confidential 
subscriber trading information \76\ and operational transparency 
requirements of Form ATS-N for ATSs that trade NMS stocks or government 
securities or repos.\77\ They would also be subject to fair and orderly 
markets provisions under the Fair Access Rule.\78\ Registering as a 
broker-dealer would subject a Communication Protocol System to 
Commission and Financial Industry Regulatory Authority (``FINRA'') 
oversight.\79\ As a FINRA member, the Communication Protocol System 
would be subject to FINRA's investor protection and examination and 
market surveillance programs and would be required to comply with 
FINRA's trade reporting rules.
---------------------------------------------------------------------------

    \73\ See infra Section II.D.
    \74\ See infra Section II.D.1.
    \75\ See infra Section II.D.2.
    \76\ See infra note 170 and accompanying text.
    \77\ See infra notes 139-142 and accompanying text. A 
Communication Protocol System that operates as an ATS but trades 
securities other than NMS stocks or government securities would file 
Form ATS.
    \78\ See infra notes 154-155 and accompanying text.
    \79\ See infra notes 131-133 and accompanying text.
---------------------------------------------------------------------------

    The proposal to include Communication Protocol Systems within the 
definition of exchange would promote competition by reducing cost 
disparities and creating a more level competitive landscape.\80\ 
Several commenters in response to the Concept

[[Page 15503]]

Release expressed concerns regarding the disparity in regulatory 
treatment between exchanges, ATSs, and other fixed income 
platforms.\81\ In addition, FIMSAC expressed concern about the lack of 
regulatory harmonization among fixed income electronic trading 
platforms, recognizing that some firms are regulated as ATSs, while 
others are regulated as broker-dealers or not at all, and stated that 
these distinctions in regulatory oversight complicate efforts to 
improve the efficiency and resiliency of the fixed income electronic 
trading markets.\82\ In response to the Concept Release, one commenter 
stated that the current regulatory framework puts ATSs at a competitive 
disadvantage to non-ATS trading platforms, which are not subject to the 
same regulatory obligations designed to protect investors and the 
integrity of the fixed income markets.\83\ Another commenter stated its 
belief that disparate regulatory treatment across trading platforms 
impacts market efficiency and competition and introduces potential 
resiliency risks.\84\ Another commenter stated that electronic 
platforms for bringing together buyers and sellers of fixed income 
securities for the purpose of effecting transactions should generally 
be regulated the same regardless of how they are structured 
internally.\85\ The Commission recognizes that the regulatory costs 
associated with registering and operating as a registered exchange are 
higher than the regulatory costs associated with registering as a 
broker-dealer and complying with Regulation ATS. However, Communication 
Protocol Systems operating outside the exchange regulatory framework 
are subject to neither national securities exchange nor ATS regulatory 
costs and therefore have an advantage when competing against other 
markets that also bring together buyers and sellers of securities.\86\ 
As discussed further in Section VIII, a trading system that performs an 
exchange market function but is not subject to the exchange regulatory 
regime could receive a competitive advantage because such systems are 
not subject to the compliance costs to which regulated exchanges are 
subject.
---------------------------------------------------------------------------

    \80\ See infra Section VIII.C.3.a.
    \81\ See, e.g., ICE Bonds Letter II at 2-4; Citadel Letter at 2; 
MFA Letter at 6 (suggesting that to ensure that similarly situated 
entities are treated similarly in the trading of government 
securities, the Commission should review the appropriateness of 
similar regulation on multiple-to-multiple trading venues with 
significant volume); MarketAxess Letter at 1 (stating that there 
should be a common regulatory framework for all multilateral fixed 
income electronic trading platforms that requires minimum standards 
of conduct and oversight in areas such as trade reporting, 
resiliency, cyber-security, operational reporting, financial 
standards, examination, surveillance, and confidentiality).
    \82\ See supra note 66. The FIMSAC concerns were highlighted by 
the Commission in the Concept Release.
    \83\ See ICE Bonds Letter II at 4 (stating that the benefits of 
subjecting non-ATS trading platforms to the same regulatory 
obligations as current ATSs will be substantial).
    \84\ See FIA PTG Letter at 2. See also Citadel Letter at 2 
(stating that excluding multilateral RFQ platforms from the current 
regulatory framework creates an unlevel regulatory field).
    \85\ See letter from Michael Decker, Senior Vice President for 
Public Policy, Bond Dealers of America, dated March 1, 2021 (``BDA 
Letter'') at 2. See also FINRA Letter at 6-10 (noting inconsistent 
regulatory treatment among electronic and hybrid fixed income 
trading platforms, as well as potential regulatory gaps, flowing in 
part from the definitions and guidance adopted in 1998 in Regulation 
ATS). The commenter stated its belief that it would be beneficial 
for the Commission to provide guidance that specifically addresses 
the characteristics of RFQ trading systems and evaluate whether they 
meet the ``exchange'' definition for purposes of Regulation ATS.
    \86\ See infra Section VIII.C.3.a.i.
---------------------------------------------------------------------------

    Amending Exchange Act Rule 3b-16(a) to include non-firm trading 
interest would eliminate the possibility that systems may offer the use 
of non-firm trading interest that, in practice, functions as firm 
orders, so as to avoid exchange registration or complying with 
Regulation ATS. In the Regulation ATS Adopting Release, the Commission 
expressed concern that system providers may label trading interest that 
is firm in practice as non-firm.\87\ The providers of such systems may 
take the position that their systems arguably do not use ``orders'' and 
thus do not fall within the criteria of Rule 3b-16. For example, 
systems that offer the use of non-firm trading interest may monitor 
participants' firm-up rates in response to a quote they received and 
may penalize a participant with a low firm-up rate either economically 
or by limiting its ability to use features of its system. Such 
activities could cause participants on the systems to believe that 
trading interest that they submit or receive is effectively firm and 
affect their behavior on the system. The difference between what is a 
firm order and what is not requires careful scrutiny of the design of 
the system, the trading interest offered, and what actually takes place 
among buyers and sellers interacting on the systems. The Commission 
believes, however, that the use of firm or non-firm trading interest by 
a system should no longer be a factor in determining whether a system 
performs the function of a market place because both firm and non-firm 
trading interest can be used by a system with the same purpose and 
effect to bring together buyers and sellers of securities.\88\
---------------------------------------------------------------------------

    \87\ See Regulation ATS Adopting Release, supra note 31, at 
70850.
    \88\ See supra Section II.B.2.
---------------------------------------------------------------------------

    Finally, for clarity, Exchange Act Rule 3b-16(a) would continue to 
encompass systems that make available for trading any type of security. 
The definition of ``exchange'' under Section 3(a)(1) of the Exchange 
Act and current Exchange Act Rule 3b-16(a) applies to all securities, 
including government securities, corporate bonds, municipal securities, 
NMS stocks, equity securities that are not NMS stocks, private 
restricted securities, repurchase agreements and reverse repurchase 
agreements, foreign sovereign debt, and options, and does not exempt or 
exclude any security or type of securities. The Commission believes 
that it is important for any system that falls within the criteria of 
Rule 3b-16(a) to be subject to the exchange regulatory framework, 
notwithstanding how thinly traded or novel a security may be, and 
participants on such systems should be able to avail themselves of the 
same benefits that participants on registered exchanges or ATSs 
receive. Accordingly, the proposed amendments to Rule 3b-16(a) do not 
change the Commission's interpretation of the statutory definition of 
``exchange''--that is, it applies to all securities.
    The Commission received several comments in response to the Concept 
Release expressing reservations about revising Exchange Act Rule 3b-16 
to include certain fixed income markets within the definition of 
exchange. One commenter stated that doing so would insert unnecessary 
intermediation between dealers and their customers and threaten to 
distort the market structure by creating a one-size-fits-all approach 
that is biased against the trading of less-liquid instruments, damaging 
liquidity formation.\89\ Another commenter expressed concern about the 
Commission creating additional regulatory obligations in the fixed 
income space and believed the Commission should undertake a more in-
depth review of fixed income trading, engage in discussion with the 
industry, and outline the problems that any proposed regulations are 
intended to solve before moving forward with any such regulatory 
proposal.\90\ Likewise, another commenter stated its belief that the 
Commission should not impose

[[Page 15504]]

Regulation ATS and the current exchange framework on existing and 
emerging electronic trading protocols and functionalities that do not 
meet the existing definition of an ATS or an exchange \91\ because such 
rules are better suited for regulating systems and trading practices in 
the equity markets.\92\ In addition, one commenter stated that there 
are a variety of trading protocols that have developed within the fixed 
income market--such as those that are primarily order-driven (such as 
retail-focused order books) and others that are driven by price 
requests (such as RFQs)--and that the market continues to innovate.\93\ 
This commenter stated its belief that the Commission should take into 
account these distinctions and apply a lighter regulatory approach in 
order to avoid stifling innovation.\94\
---------------------------------------------------------------------------

    \89\ See Bloomberg Letter at 17-20. This commenter specifically 
cited RFQs as a new protocol that has helped in discovering less 
liquid instruments.
    \90\ See SIFMA Letter at 11. The commenter stated its belief 
that systems that merely act as informational conduits should remain 
outside the scope of Regulation ATS.
    \91\ See ICI Letter at 2, 7. This commenter stated that, for 
example, tools that facilitate trade-related communications between 
market participants should not be subject to rules that are better-
suited for order book protocols.
    \92\ See id. at 8.
    \93\ See MarketAxess Letter at 2-4.
    \94\ See id.
---------------------------------------------------------------------------

    The Commission notes that these comments focused on the fixed 
income market exclusively. However, these comments have aided in the 
formulation of this proposal for revising the Commission interpretation 
of the definition of ``exchange,'' and the Commission looks forward to 
receiving more comments to aid in its deliberations. As a preliminary 
response to the comment letters summarized in this section, the 
Commission does not believe that the proposed amendments to Exchange 
Act Rule 3b-16 would create a one-size-fits-all model, imposing 
unnecessary intermediation between dealers and their customers,\95\ or 
import concepts from the equity markets onto emerging electronic 
trading protocols that would damage the market structure in the fixed 
income markets.\96\ Form ATS and Form ATS-N do not impose or favor any 
specific market structure or manner of trading, and the Commission is 
proposing to amend Form ATS-N to accommodate the operations of 
Communication Protocol Systems. Further, the Commission preliminarily 
does not believe that regulating fixed income systems, or systems for 
other asset classes of securities, under the exchange regulatory 
framework, particularly Regulation ATS, would stifle innovation or be 
biased against less-liquid instruments using an RFQ protocol. 
Regulation ATS is designed to be flexible enough to accommodate the 
evolving technology of ATSs and allow for systems to continue to 
innovate without the regulatory obligations of registered exchanges, 
which are SROs.\97\ In the years since its adoption in 1998, many 
systems that chose to operate under the Regulation ATS exemption have 
had varied business models, including offering RFQ protocols as part of 
their overall ATS services, for trading different types of securities, 
including, among others, government securities, corporate bonds, 
municipal securities, NMS stocks, equity securities that are not NMS 
stocks, private restricted securities, repurchase agreements and 
reverse repurchase agreements, foreign sovereign debt, and options.
---------------------------------------------------------------------------

    \95\ See Bloomberg Letter at 17-20.
    \96\ See ICI Letter at 8.
    \97\ See Regulation ATS Adopting Release, supra note 31, at 
70846.
---------------------------------------------------------------------------

    The Commission seeks public comment on all aspects its proposal to 
amend Exchange Act Rule 3b-16(a), the Communication Protocol Systems 
that would fall within the definition of ``exchange,'' and the existing 
exchange regulatory requirements that would apply to a Communication 
Protocol System.

C. Proposed Amendments to Exchange Act Rule 3b-16

    Today, Exchange Act Rule 3b-16 provides that an organization, 
association, or group of persons meets the definition of ``exchange'' 
if it doesn't meet one of the exceptions of the rule and it: (1) Brings 
together the orders for securities of multiple buyers and sellers; and 
(2) uses established, non-discretionary methods (whether by providing a 
trading facility or by setting rules) under which such orders interact 
with each other, and the buyers and sellers entering such orders agree 
to the terms of the trade.
    The Commission is proposing to amend Exchange Act Rule 3b-16 to, 
among other things, include non-firm indications of a willingness to 
buy or sell a security, in addition to orders, within the 
interpretation, define ``trading interest,'' add ``communication 
protocols'' as an established method that an organization, association, 
or group of persons can provide to bring together buyers and sellers of 
securities, simplify and align the rule text with the statutory 
definition of exchange under Section 3(a)(1) of the Exchange Act, and 
add an exclusion under Exchange Act Rule 3b-16(b). Accordingly, the 
Commission is proposing to amend Exchange Act Rule 3b-16 to provide 
that an organization, association, or group of persons would be 
considered to constitute, maintain, or provide an exchange if it is not 
subject to an exception under Rule 3b-16(b) and it: (1) Brings together 
buyers and sellers of securities using trading interest; and (2) makes 
available established, non-discretionary methods (whether by providing 
a trading facility or communication protocols, or by setting rules) 
under which buyers and sellers can interact and agree to the terms of a 
trade.
1. Trading Interest; Brings Together Buyers and Sellers
    The Commission is proposing to add a definition of the term 
``trading interest'' to Exchange Act Rule 3b-16 and amend the rule to 
replace ``orders'' with ``trading interest.'' The definition of trading 
interest would allow for clear and consistent application of the 
revised functional test for ``exchange'' under Rule 3b-16.
    Under the proposal, Exchange Act Rule 3b-16(a) would continue to 
apply to systems that use orders, as that term is currently defined and 
applied in Rule 3b-16(c), to bring together buyers and sellers because 
the term ``orders'' would be included in the definition of ``trading 
interest.'' ``Trading interest,'' as proposed, would include 
``orders,'' as the term is defined under Rule 3b-16(c), or any non-firm 
indication of a willingness to buy or sell a security that identifies 
at least the security and either quantity, direction (buy or sell), or 
price.\98\ Based on Commission staff experience, generally, trading 
systems have offered non-firm trading interest that included the symbol 
and one of the following: Quantity, direction, or price. For example, a 
message that is sent to system participants for an NMS stock that only 
identifies the NMS stock symbol and quantity that the participant seeks 
to trade would be considered trading interest. A message sent by a 
participant of a corporate bond system to five potential counterparties 
that only identifies the CUSIP for a bond and an instruction to buy 
would be considered trading interest, as proposed, because it contains 
the symbol and direction. If the same initiating participant only 
provided the symbol and requested a two-sided quote in response, the 
response would constitute trading interest as it would identify the 
symbol

[[Page 15505]]

and a price. Indeed, Commission staff has observed that ATSs that offer 
a negotiation functionality to bring together buyers and sellers offer 
the use of non-firm trading interest that includes the symbol and one 
of the following: Quantity, direction, or price. In addition, there are 
instances where systems offer the use of non-firm trading interest, 
such as an indication of interest, that includes the symbol and 
direction but does not explicitly include a quantity or price, which 
can be inferred from the facts and circumstances accompanying the 
trading interest.\99\ The Commission believes that a system that offers 
the use of a message that identifies the security and either the 
quantity, direction, or price would provide sufficient information to 
bring together buyers and sellers of securities because it allows a 
market participant to communicate its intent to trade and a reasonable 
person receiving the information to decide whether to trade or engage 
in further communications with the sender.\100\
---------------------------------------------------------------------------

    \98\ In conjunction with adding the defined term ``trading 
interest'' to Rule 3b-16, the Commission is proposing to add the 
definition of ``trading interest'' to Rule 300 of Regulation ATS. 
See proposed Rule 300(q). In addition, to encompass persons who 
transact in trading interest, and not only orders, the Commission is 
also proposing to change the definition of ``Subscriber'' in Rule 
300(b) to include any person submitting, disseminating, or 
displaying ``trading interest.'' See Rule 300(b), as proposed to be 
revised.
    \99\ See Regulation ATS Adopting Release, supra note 31, at 
70850.
    \100\ A system that uses trading interest to bring together 
buyers and sellers would not meet the definition of ``exchange,'' 
however, unless it also met all the elements of Rule 3b-16(a), 
including the element ``makes available established, non-
discretionary methods (whether by providing a trading facility or 
communication protocols, or by setting rules) under which buyers and 
sellers can interact and agree to the terms of a trade.''
---------------------------------------------------------------------------

    On the other hand, the Commission preliminarily believes that a 
message that only indicates the security to be traded without more 
information would not be trading interest and a system that only offers 
the use of such messages would be unlikely to bring together buyers and 
sellers and does not warrant the regulatory oversight accompanying 
classification as an exchange. Nevertheless, if a system is designed to 
permit an initiating participant to submit a message that only contains 
a symbol, yet a responding participant can submit a message that 
contains a symbol and either quantity, direction, or price that the 
initiator can accept, the message by the responding participant and 
acceptance by the initiator would be trading interest because each of 
these contain the symbol and at least direction, size, or price. As 
proposed, the revised criteria of Exchange Act Rule 3b-16(a) that 
include ``trading interest,'' as defined herein, would capture the vast 
majority of systems that bring together buyers and sellers to agree to 
the terms of a trade despite not including systems where solely the 
security is identified. If adopted, however, the Commission would 
continue to monitor market developments to ascertain whether such 
systems may warrant further regulation in the future.
    The Commission is also proposing to amend Rule 3b-16(a)(1) to 
change the reference to a system that ``brings together the orders'' to 
``brings together buyers and sellers of securities using trading 
interest.'' Systems that use non-firm trading interest allow 
participants to communicate their trading intentions, either on a 
bilateral or multilateral basis, to negotiate a trade. Unlike orders, 
non-firm trading interest typically does not interact with other non-
firm trading interest without further action by the potential 
counterparties. Rather, the potential counterparties submitting non-
firm trading interest interact with each other through the use of 
communication protocols. To provide for the use of both firm order 
interaction and participants' interaction through non-firm trading 
interest, the Commission is proposing to amend Rule 3b-16(a) to replace 
``brings together orders'' with ``brings together buyers and sellers of 
securities using trading interest.'' The phrase ``brings together 
buyers and sellers of securities using trading interest'' still 
captures systems that use orders. The Commission is not proposing to 
change the meaning of ``to bring together'' as defined in the 
Regulation ATS Adopting Release \101\ nor is the Commission proposing 
to exclude from Rule 3b-16(a) systems that use orders to bring together 
buyers and sellers of securities--such systems would still be subject 
to Rule 3b-16.
---------------------------------------------------------------------------

    \101\ See id. at 70849.
---------------------------------------------------------------------------

    The Commission is proposing to amend Exchange Act Rule 3b-16(a)(2) 
to simplify the rule text and align the rule text with the proposed 
changes to Rule 3b-16(a)(1). Specifically, the Commission is proposing 
to replace ``under which such orders interact with each other and the 
buyers and sellers entering such orders agree to the terms of a trade'' 
with ``under which buyers and sellers can interact and agree to the 
terms of a trade.'' As explained above, because the Commission is 
proposing to amend Rule 3b-16(a) to include trading interest, and is no 
longer limiting the application of the rule to orders, the focus on 
``interaction'' should be between buyers and sellers rather than 
orders. For similar reasons, the Commission is proposing to delete from 
the rule text the phrase ``the buyers and sellers entering such 
orders.'' This proposed change is designed to simplify the rule text 
and remove the reference to orders because the proposed amendments to 
Rule 3b-16(a) also include non-firm trading interest in addition to 
orders.
2. Multiple; Exclusion for Issuer Systems
    The Commission is proposing to remove the reference to securities 
of ``multiple'' buyers and sellers from Exchange Act Rule 3b-16(a)(1) 
and is proposing to codify in Rule 3b-16(b)(3) an example the 
Commission provided in the Regulation ATS Adopting Release for systems 
that allow issuers to sell their own securities to investors. These 
proposed changes are not intended to change the existing scope of Rule 
3b-16(a) but only to clarify its application.
    The term ``multiple'' was added to Rule 3b-16(a) to help reinforce 
that single counterparty systems were not included in the definition of 
``exchange.'' \102\ These systems primarily included systems used by 
issuers to sell their own securities and systems used by market makers 
registered with an SRO, which are currently specifically excluded from 
Rule 3b-16(a) under Rule 3b-16(b)(2). The Commission believes that the 
term ``multiple'' could be misconstrued to mean that RFQ systems, for 
example, do not meet the criteria of Rule 3b-16(a) because a 
transaction request typically involves one buyer and multiple sellers 
or one seller and multiple buyers.\103\
---------------------------------------------------------------------------

    \102\ See id.
    \103\ One commenter on the 2020 Proposal and Concept Release 
stated its belief that RFQ platforms do not meet the criteria of 
Rule 3b-16 because such platforms do not offer ``multiple-to-
multiple'' order interaction among participants and that the RFQ 
platforms instead facilitate trading between an individual market 
participant (requester) and potential liquidity providers 
(responders). See ICI Letter at 2, 7.
---------------------------------------------------------------------------

    Under current Rule 3b-16(a), whether a system meets the 
``multiple'' prong depends on whether the system, when viewed in its 
entirety, includes more than one buyer and more than one seller and is 
not determined on a transaction-by-transaction basis. A system, such as 
an RFQ system, that is designed to provide the ability of more than one 
buyer to request quotes from more than one seller in securities at the 
same or different times would meet the ``multiple'' prong of Rule 3b-
16(a) because such systems do not include a single counterparty.\104\ 
Because RFQ systems have more than one buyer and more than one seller, 
such systems do not have a single counterparty and thus

[[Page 15506]]

would meet the standard of ``multiple buyers and sellers'' under Rule 
3b-16(a)(1). Nevertheless, removing the term ``multiple'' would 
mitigate confusion and the potential to misconstrue the application of 
Rule 3b-16(a) to systems with non-firm trading interest, including RFQ 
systems, and aligns the rule with the statutory definition of 
``exchange.'' \105\
---------------------------------------------------------------------------

    \104\ The mere interpositioning of a designated counterparty to 
provide for the anonymity of counterparties to a trade or for 
settlement purposes after the purchasing and selling counterparties 
to a trade have been matched would not, by itself, mean the system 
does not have multiple buyers and sellers. See Regulation ATS 
Adopting Release, supra note 31, at 70849.
    \105\ The use of plural terms in ``buyers and sellers'' in Rule 
3b-16(a) and ``purchasers and sellers'' (emphasis added) in the 
statutory definition of ``exchange'' makes sufficiently clear that 
an exchange need only have more than one buyer and more than one 
seller participating on the system to meet this prong.
---------------------------------------------------------------------------

    The Commission is proposing to amend Rule 3b-16(b) to add an 
exclusion from Rule 3b-16(a) for systems that allow an issuer to sell 
its securities to investors. The Commission stated in the Regulation 
ATS Adopting Release that systems for issuers to sell their own 
securities would not fall within Rule 3b-16(a) because such systems 
have a single counterparty that is selling its securities.\106\ The 
Commission continues to believe that such systems do not meet the 
criteria of Rule 3b-16(a) because the systems do not bring together 
multiple buyers and multiple sellers. Given the proposal to remove the 
term ``multiple'' from Rule 3b-16(a)(1), adding the exclusion for 
issuer systems would clarify that such systems do not fall within the 
criteria of Rule 3b-16(a).
---------------------------------------------------------------------------

    \106\ See supra note 102 and accompanying text.
---------------------------------------------------------------------------

3. Established Methods; Communication Protocols
    The Commission is proposing to amend Rule 3b-16(a)(2) to replace 
``uses established, non-discretionary methods'' with the phrase ``makes 
available established, non-discretionary methods.'' The proposed change 
to use the word ``makes available'' rather than ``uses'' is designed to 
capture established, non-discretionary methods that an organization, 
association, or group of persons may provide, whether directly or 
indirectly, for buyers and sellers to interact and agree upon terms of 
a trade. In contrast to the term ``uses,'' the Commission believes the 
term ``makes available'' would be applicable to Communication Protocol 
Systems because such systems take a more passive role in providing to 
their participants the means and protocols to interact, negotiate, and 
come to an agreement.
    The term ``makes available'' is also intended to make clear that, 
in the event that a party other than the organization, association, or 
group of persons performs a function of the exchange, the function 
performed by that party would still be captured for purposes of 
determining the scope of the exchange under Exchange Act Rule 3b-16. In 
the Regulation ATS Adopting Release, the Commission stated that it will 
attribute the activities of a trading facility to a system if that 
facility is offered by the system directly or indirectly (such as where 
a system arranges for a third party or parties to offer the trading 
facility).\107\ The Commission has further recognized how a system may 
consist of various functionalities, mechanisms, or protocols that 
operate collectively to bring together the orders for securities of 
multiple buyers and sellers using non-discretionary methods under the 
criteria of Rule 3b-16(a), and how, in some circumstances, these 
various functionalities, mechanisms, or protocols may be offered or 
performed by another business unit of the registered broker-dealer or 
government securities broker or government securities dealer that 
operates the ATS (``broker-dealer operator'') or by a separate 
entity.\108\ These principles equally apply to an organization, 
association, or group of persons that arranges with another party to 
provide, for example, a trading facility or communication protocols, or 
parts thereof, to bring together buyers and sellers and perform a 
function of a system under Rule 3b-16. Using the term ``makes 
available'' will help ensure that the investor protection and fair and 
orderly markets provisions of the exchange regulatory framework apply 
to all the activities that consist of the system that meets the 
criteria of Rule 3b-16(a), notwithstanding whether those activities are 
performed by a party other than the organization that is providing the 
market place.\109\
---------------------------------------------------------------------------

    \107\ See Regulation ATS Adopting Release, supra note 31, at 
70852.
    \108\ See NMS Stock ATS Adopting Release, supra note 2, at 38844 
(citing Regulation ATS Adopting Release, 63 FR 70852).
    \109\ Depending on the activities of the persons involved with 
the market place, a group of persons, who may each perform a part of 
the 3b-16 system, can together provide, constitute, or maintain a 
market place or facilities for bringing together purchasers and 
sellers of securities and together meet the definition of exchange. 
In such a case, the group of persons would have the regulatory 
responsibility for the exchange.
---------------------------------------------------------------------------

    The Commission is not proposing to delete the term ``non-
discretionary'' from Rule 3b-16(a)(2). The term ``non-discretionary'' 
was added to Rule 3b-16(a)(2) to modify ``methods'' to distinguish the 
activities of an exchange from the activities of a broker-dealer.\110\ 
As discussed in the Regulation ATS Adopting Release, broker-dealers 
exercise control, judgement, or discretion over their customers' orders 
or trading interests \111\ while an exchange operates pursuant to 
programmed procedures or set rules and does not exercise discretion 
over orders or trading interest entered into the system.\112\ The 
Commission continues to believe that the distinction between an 
exchange and a broker-dealer explained in the Regulation ATS Adopting 
Release is appropriate and the Commission is not proposing to amend 
Exchange Act Rule 3b-16(a) to include activities of broker-dealers 
within the definition of ``exchange.'' \113\
---------------------------------------------------------------------------

    \110\ See Regulation ATS Adopting Release, supra note 31, at 
70863.
    \111\ See id. at 70851.
    \112\ See id. at 70850.
    \113\ If a system meets the criteria of Exchange Act Rule 3b-
16(a) but includes in that system the ability of the system operator 
to apply its discretion for handling trading interest, these 
activities employing discretion by the system operator would be 
included in the system that meets the criteria of Rule 3b-16(a) and 
be subject to Federal securities laws and rules applicable to a 
registered exchange or ATS (including, for example, requirements to 
provide disclosures about the system operator's activities on Form 
ATS or ATS-N and, if the ATS is subject to the Fair Access Rule, 
include in its written standards why the activities of the system 
operator that result in the different treatment of subscribers are 
fair and not unreasonably discriminatory).
---------------------------------------------------------------------------

    The term ``non-discretionary'' should not be misconstrued to mean 
that a system does not meet the definition of exchange if it permits 
buyers or sellers using the system to exercise discretion with regard 
to the use of the system. Under current Rule 3b-16(a)(2), the phrase 
``uses established, non-discretionary methods'' applies to the 
organization, association, or group of persons that provides the 
means--the trading facility or rules--under which orders interact. 
Thus, an organization that meets the definition of ``exchange'' does 
not exercise any discretion in the matching of buyers and sellers or 
their orders and buyers and sellers participating on an exchange can 
use their own discretion in finding and selecting a counterparty.\114\ 
The phrase

[[Page 15507]]

``established, non-discretionary methods'' continues to convey that the 
system provider is providing the trading facility or communication 
protocols or setting rules and is not applying its discretion in 
matching counterparties on the system.\115\
---------------------------------------------------------------------------

    \114\ One commenter on the 2020 Proposal and Concept Release 
stated their belief that ``unlike an ATS on which trading takes 
place on a non-discretionary basis, trading discretion is a defining 
feature of these protocols; a requesting participant can choose the 
number and identity of participants that will receive the RFQ, while 
participants who receive an RFQ can choose whether to respond.'' See 
ICI Letter at 7. See also Bloomberg Letter at 23 (describing that an 
RFQ ``consists of discretionary directed order communication network 
messaging'' and stating its belief that such messaging is not an ATS 
function because RFQs lack a non-discretionary commitment to trade) 
and MarketAxess Letter at n.2 (stating its belief that an RFQ 
trading requestor's trading discretion puts the protocol outside the 
requirement that the platform use ``established, non-discretionary 
methods under which such orders interact with each other''). The 
``established, non-discretionary methods'' element of Rule 3b-
16(a)(2) pertains to the discretion applied by the system provider 
to bring together buyers and sellers and not discretion that 
participants may apply. For example, a system provider that matches 
buyers and sellers using its judgement or discretion would not be 
using established, non-discretionary methods. As the Commission 
stated in the Regulation ATS Adopting Release, where customers of a 
broker-dealer exercise control over their own orders in a trading 
system operated by the broker-dealer, that broker-dealer is unlikely 
to be viewed as using discretionary methods in handling the order. 
See Regulation ATS Adopting Release, supra note 31, at 70851.
    \115\ See id. (describing that, for example, the Commission does 
not believe that block trading desks, which generally retain some 
discretion in determining how to execute a customer's order, and 
frequently commit capital to satisfy their customers' needs, use 
established, non-discretionary methods).
---------------------------------------------------------------------------

    The Commission is proposing to amend Rule 3b-16(a)(2) to add 
``communication protocols'' as an established method that an 
organization, association, or group of persons can provide to bring 
together buyers and sellers of securities. Systems that bring together 
buyers and sellers of securities may function as exchange market places 
of securities without orders or a trading facility for orders to 
interact. In the Commission's experience, communication protocols, 
which can be applied to various technologies and connectivity, 
generally use non-firm trading interest as opposed to orders to prompt 
and guide buyers and sellers to communicate, negotiate, and agree to 
the terms of the trade. For example, if an entity makes available a 
chat feature, which requires certain information to be included in a 
chat message (e.g., price, quantity) and sets parameters and structure 
designed for participants to communicate about buying or selling 
securities, the system would have established communication protocols.
    While Communication Protocol Systems may not match counterparties' 
trading interest, buyers and sellers using these can be brought 
together to interact, either on a bilateral or multilateral basis, and 
agree upon the terms of the trade. Protocols that a system offers may 
take many forms and could include: Setting minimum criteria for what 
messages must contain; setting time periods under which buyers and 
sellers must respond to messages; restricting the number of persons a 
message can be sent to; limiting the types of securities about which 
buyers and sellers can communicate; setting minimums on the size of the 
trading interest to be negotiated; or organizing the presentation of 
trading interest, whether firm or non-firm, to participants. These 
examples are not exhaustive, and the determination of whether the 
system meets Rule 3b-16(a)(2) would depend on the particular facts and 
circumstances of each system. Nevertheless, as proposed, the Commission 
would take an expansive view of what would constitute ``communication 
protocols'' under this prong of Rule 3b-16(a).\116\
---------------------------------------------------------------------------

    \116\ One commenter suggested a litmus test to assist the 
Commission in determining whether a fixed-income trading platform 
for corporate bonds and municipal securities meets the criteria that 
warrant registration as an exchange or ATS. According to the 
commenter, the most relevant criteria were: Whether the system 
provides multilateral trading, whether the technology provider has 
any influence on picking the counterparties, whether the system 
enables any sharing of real-time information across multiple 
counterparties, whether the system provider has any access to real-
time information, and whether the transactions happen on the 
technology platform. See letter from Vijay Kedia, President and CEO, 
FlexTrade Systems, dated March 1, 2021 (``FlexTrade Systems 
Letter'') at 2. As discussed above, the Commission believes that 
conditions have changed whereby systems that offer the use trading 
interest and protocols to bring together buyers and sellers of 
securities perform an exchange market place function similar to 
systems that offer the use of orders and trading facilities. As 
proposed, a Communication Protocol System can still meet the 
criteria of Exchange Act Rule 3b-16 even if it has no role in 
matching counterparties nor displays trading interest. In addition, 
neither the current rule nor the proposed amendments require that, 
for a system to be an exchange, an execution occur on the system; 
rather, that the buyers and sellers agree to the terms of the trade 
on the system is sufficient. See Regulation ATS Adopting Release, 
supra note 31, at 70852 (stating ``whether or not the actual 
execution of the order takes place on the system is not a 
determining factor of whether the system falls under Rule 3b-16''). 
Also, applying some of the criteria that the commenter suggested 
(whether system provider have any access to real-time information; 
whether the transactions happen on the technology platform) could 
result in the exclusion of certain RFQ platforms from the definition 
of exchange.
---------------------------------------------------------------------------

    The Commission preliminarily believes that certain systems would 
not fall within the criteria of Exchange Act Rule 3b-16(a), as proposed 
to be amended, because the organization, association, or group of 
persons would not be considered to be providing a trading facility or 
communication protocol and therefore would not be considered to be 
making available established, non-discretionary methods under Rule 3b-
16(a)(2).\117\ The Commission continues to believe that systems that 
passively display trading interest, such as systems referred to in the 
industry as bulletin boards, but do not provide means for buyers and 
sellers to contact each other and agree to the terms of the trade on 
the system would not be encompassed by Rule 3b-16(a) as proposed to be 
amended.\118\ For example, the Commission does not believe that a 
system that unilaterally displays trading interest without offering a 
trading facility or communication protocols to bring together buyers 
and sellers would be considered to be making available established, 
non-discretionary methods.\119\ In the Regulation ATS Adopting Release, 
the Commission stated that ``[u]nless a system also establishes rules 
and operates a trading facility under which subscribers can agree to 
the terms of their trades, the system will not be included within Rule 
3b-16 even if it brings together `orders.' '' \120\ These systems may 
display trading interest to potential buyers and sellers, but the 
system provider is not making available established methods for buyers 
and sellers to interact and agree upon terms of a trade. If adopted, 
however, the Commission would continue to monitor market developments 
to ascertain whether such systems may warrant further regulation in the 
future.
---------------------------------------------------------------------------

    \117\ To the extent that a system is currently operating 
consistently with the circumstances described in a staff no-action 
letter, a system that falls within the scope of Rule 3b-16(a) and 
seeks to rely on the ATS exemption would need to register as a 
broker-dealer to comply with the broker-dealer registration 
requirement under Regulation ATS, regardless of any prior staff 
statement. Upon the adoption of any final rule, some letters and 
other staff statements, or portions thereof, may be moot, 
superseded, or otherwise inconsistent with the final rule and, 
therefore, would be withdrawn or modified.
    \118\ See Regulation ATS Adopting Release, supra note 31, at 
70850. See also FINRA Letter at 9-10 (requesting the Commission 
provide additional guidance on the regulatory classification of 
bulletin boards).
    \119\ See SIFMA Letter at 11 (stating that systems that merely 
act as informational conduits should remain outside the scope of 
Regulation ATS); FlexTrade Systems Letter at 2-4 (stating that 
software vendors that provide functionality for displaying prices do 
not meet the definition of an exchange).
    \120\ See Regulation ATS Adopting Release, supra note 31, at 
70850.
---------------------------------------------------------------------------

    Similarly, a system that displays trading interest and provides 
only connectivity among participants without providing a trading 
facility to match orders or providing protocols for participants to 
communicate and interact would not meet the criteria of Rule 3b-16(a) 
because such system would not be considered to be making available 
established, non-discretionary methods. For example, systems that only 
provide general connectivity for persons to communicate without 
protocols, such as utilities or electronic web chat providers, would 
not fall within the communication protocols prong of the proposed rule 
because such providers are not specifically designed

[[Page 15508]]

to bring together buyers and seller of securities or provide procedures 
or parameters for buyers and sellers for securities to interact. To the 
extent that such systems are designed for securities and provide 
communication protocols for buyers and sellers to interact and agree to 
the terms of a trade, such systems would fall within the criteria of 
Exchange Act Rule 3b-16(a) as proposed to be revised.

D. Exchange Registration or ATS Exemption for Communication Protocol 
Systems Under the Proposed Rules

    The proposed amendments to Exchange Act Rule 3b-16(a) would scope 
Communication Protocol Systems into the definition of ``exchange,'' in 
which case, the systems may decide between registering as a national 
securities exchange or registering as a broker-dealer and complying 
with Regulation ATS. The Commission believes that many Communication 
Protocol Systems would likely choose to be regulated as an ATS because 
of the lighter regulatory requirements imposed on them, as compared to 
the regulatory requirements of registered exchanges, which are SROs. 
Unlike a national securities exchange, an ATS can trade any type of 
security and its users are not limited to broker-dealers. In addition, 
an ATS is not an SRO, is not subject to Section 6 of the Exchange Act, 
and does not require Commission approval for its activities. Complying 
with Regulation ATS would therefore allow Communication Protocol 
Systems more flexibility in the operation of their business than 
registering as an exchange.\121\
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    \121\ ATSs have more flexibility in the operation of their 
business than exchanges insofar as ATSs are not subject to Section 6 
of the Exchange Act and are not required to comply with the 
statutory standards with respect to unfair discrimination, burdens 
on competition, and the equitable allocation of reasonable fees.
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    Further, many Communication Protocol Systems make available for 
trading fixed income securities that are only traded over-the-counter 
and are not typically registered and approved for listing on an 
exchange.\122\ Unless a national securities exchange receives an 
exemption to trade unregistered debt securities,\123\ it may only list 
and trade registered debt securities, whereas Communication Protocol 
Systems need not receive such an exemption to trade unregistered debt 
securities. Notwithstanding, the Commission discusses the regulatory 
requirements for both regulatory alternatives below. The Commission is 
not proposing to make changes to the regulatory structure for exchanges 
or the requirements for national securities exchanges. The proposed 
changes to the regulatory requirements under Regulation ATS are 
discussed in more detail below.\124\
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    \122\ Section 12(a) of the Exchange Act makes it unlawful for 
any member, broker, or dealer to effect any transaction in any 
security (other than an exempted security) on a national securities 
exchange unless a registration statement has been filed with the 
Commission and is in effect as to such security for such exchange in 
accordance with the provisions of the Exchange Act and the rules and 
regulations thereunder. 15 U.S.C. 78l(a). Section 12(b) of the 
Exchange Act, 15 U.S.C. 78l(b), contains procedures for the 
registration of securities on a national securities exchange. 
Section 12(a) does not apply to an exchange that the Commission has 
exempted from registration as a national securities exchange. See, 
e.g., Securities Exchange Act Release No. 28899 (February 20, 1991), 
56 FR 8377 (February 29, 1991). See also Regulation ATS Adopting 
Release, supra note 31, at 70886.
    \123\ See, e.g., Securities Exchange Act Release No. 54767 
(November 16, 2006), 71 FR 67680 (November 22, 2006) (SR-NYSE-2004-
69) (issuing exemption permitting NYSE to trade unregistered debt 
securities on its bonds platform, now known as NYSE Bonds).
    \124\ See infra Section III.B.2 (discussing proposed changes to 
Rule 301(b)(1) of Regulation ATS), Section IV (discussing proposed 
changes to Rule 304 and Form ATS-N), Section V.A (discussing 
proposed changes to Rule 301(b)(5) and 301(b)(6)), and Section V.C 
(discussing proposed changes to Rule 301(b)(2)(vii)).
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1. National Securities Exchange Registration
    A Communication Protocol System that chooses to register as a 
national securities exchange would be required to do so pursuant to 
Sections 5 and 6 of the Exchange Act. A national securities exchange is 
an SRO and must set standards of conduct for its members, administer 
examinations for compliance with these standards, coordinate with other 
SROs with respect to the dissemination of consolidated market data, and 
generally take responsibility for enforcing its own rules and the 
provisions of the Exchange Act and the rules and regulations 
thereunder. Before a national securities exchange may commence 
operations, the Commission must approve its application for 
registration filed on Form 1.\125\ Section 6(b) of the Exchange Act 
requires, among other things, that the national securities exchange be 
so organized and have the capacity to carry out the purposes of the 
Exchange Act and to comply and enforce compliance by its members, and 
persons associated with its members, with the Federal securities laws 
and the rules of the exchange.\126\ Pursuant to Section 6 of the 
Exchange Act, national securities exchanges must establish rules that 
generally: (1) Are designed to prevent fraud and manipulation, promote 
just and equitable principles of trade, and protect investors and the 
public interest; (2) provide for the equitable allocation of reasonable 
fees; (3) do not permit unfair discrimination; (4) do not impose any 
unnecessary or inappropriate burden on competition; and (5) with 
limited exceptions, allow any broker-dealer to become a member.\127\
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    \125\ See 15 U.S.C. 78f.
    \126\ See Section 6(b)(1) of the Exchange Act, 15 U.S.C. 
78f(b)(1). The Commission must also find that the national 
securities exchange has rules that meet certain criteria. See 
generally Exchange Act Section 6(b)(2) through (10), 15 U.S.C. 
78f(b)(2) through (10).
    \127\ See Section 6(b) of the Exchange Act.
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    After approval of its application for registration, a national 
securities exchange must file with the Commission any proposed changes 
to its rules.\128\ The initial application on Form 1, amendments 
thereto, and filings for proposed rule changes, in combination, 
publicly disclose important information about national securities 
exchanges, such as trading services and fees. The Commission's order 
approving the application is also public. The Commission oversees the 
exchanges under the Exchange Act through, among other things, its 
examination authority under Section 17, its enforcement authority under 
Sections 19(h)(1) and 21C, its authority to approve and disapprove 
rules under Section 19(b), and its rulemaking authority under various 
Exchange Act provisions. Under the Exchange Act, securities traded on a 
national securities exchange must be registered with the Commission and 
approved for listing on an exchange. National securities exchanges can 
only have broker-dealer members. As an SRO, a national securities 
exchange enjoys certain unique benefits, such as limited immunity from 
private liability with respect to its regulatory functions and the 
ability to receive consolidated revenue under the national market 
system plans for equity market data (i.e., Consolidated Tape 
Association (CTA)/Consolidated Quotation (CQ) and Unlisted Trading 
Privilege (UTP)),\129\ among others.
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    \128\ See generally Section 19(b) of the Exchange Act, 15 U.S.C. 
78s(b).
    \129\ Details and the history of each plan can be found at 
https://www.ctaplan.com/plans; and https://www.utpplan.com.
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2. Regulation ATS Exemption; Broker-Dealer Registration
    A Communication Protocol System may choose to operate as an ATS 
pursuant to Regulation ATS, which exempts an ATS from the definition of 
``exchange'' on the condition that the ATS is in compliance with the 
requirements of Regulation ATS. An ATS that fails to comply with the 
requirements of Regulation ATS would

[[Page 15509]]

no longer qualify for the ATS exemption and thus risks operating as an 
unregistered exchange in violation of Section 5 of the Exchange Act.
    To operate under the exemption, an ATS must register as a broker-
dealer under Exchange Act Section 15 or as a government securities 
broker or government securities dealer under Exchange Act Section 
15C(a)(1)(A),\130\ and comply with the filing and conduct obligations 
associated with being a registered broker-dealer, including membership 
in an SRO, such as FINRA,\131\ and compliance with the SRO's 
rules.\132\ Requiring Communication Protocol Systems to register as 
broker-dealers and be a member of an SRO would ensure that they are 
subject to SRO examination and market surveillance, trade reporting 
obligations, and certain investor protection rules. Broker-dealer 
registration provides important investor protections under the Federal 
securities laws and FINRA rules, such as: (1) Various disclosure and 
supervision obligations; (2) anti-money laundering obligations 
(including suspicious activity reporting); (3) FINRA over-the-counter 
(OTC) trade reporting requirements, including requirements to maintain 
membership in, or maintain an effective clearing arrangement with a 
participant of, a clearing agency registered under the Exchange Act; 
and (4) Commission examinations and FINRA examinations and surveillance 
of members and markets that its members operate.
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    \130\ The Commission is proposing to amend Rule 301(b)(1) to 
allow an ATS to register as a government securities broker or 
government securities dealer under Exchange Act Section 
15C(a)(1)(A). See infra notes 272-278 and accompanying text.
    \131\ See Section 15(b)(8) of the Exchange Act; 15 U.S.C. 
78o(b)(8).
    \132\ See Regulation ATS Adopting Release, supra note 31, at 
70903.
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    In addition, ATSs are subject to certain reporting and disclosure 
requirements, as applicable. ATSs other than NMS Stock ATSs or, as 
proposed, Government Securities ATSs, would be required, pursuant to 
Rule 301(b)(2) of Regulation ATS, to file an initial operation report 
with the Commission on Form ATS \133\ at least 20 days before 
commencing operations or, in the case of Newly Designated ATSs,\134\ no 
later than 30 calendar days after the effective date of any final 
rule.\135\ Form ATS provides the Commission with the opportunity to 
identify problems that might impact investors before the system begins 
to operate.\136\ Unlike a Form 1 filed by a national securities 
exchange, a Form ATS is not approved by the Commission.\137\ Also 
unlike a Form 1 application, a Form ATS is deemed confidential when 
filed.\138\ Requiring Communication Protocol Systems to file Form ATS 
and amendments thereto will help the Commission monitor and oversee 
such ATSs' operations.
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    \133\ Form ATS and the Form ATS Instructions are available at 
https://www.sec.gov/about/forms/formats.pdf. Form ATS would require, 
among other things, that the ATS (other than a Government Securities 
ATS or NMS Stock ATS) provide information about: Classes of 
subscribers and differences in access to the services offered by the 
ATS to different groups or classes of subscribers; securities the 
ATS expects to trade; any entity other than the ATS involved in its 
operations; the manner in which the system operates; how subscribers 
access the trading system; procedures governing entry of trading 
interest and execution; and trade reporting, clearance and 
settlement of trades on the ATS. See infra Section V.B (describing 
proposed changes to Form ATS). Regulation ATS provides that a report 
on Form ATS or Form ATS-R shall be considered filed upon receipt by 
the Division of Trading and Markets, at the Commission's principal 
office in Washington, DC (i.e., in paper form), and that information 
filed by an ATS on Form ATS is deemed confidential when filed. See 
17 CFR 242.301(b)(2)(vii). See also infra Section V.C.
    \134\ ``Newly Designated ATSs'' would be defined as ATSs 
operating as of the effective date of any final rule that meet the 
criteria under Rule 3b-16(a) as of the effective date of any final 
rule but did not meet the criteria under Rule 3b-16(a) in effect 
prior to the effective date of any final rule. See Rule 300(r).
    \135\ See infra note 180 and accompanying text. The Commission 
is also proposing changes to Rule 301(b)(2)(i) to clarify that the 
requirement to file Form ATS does not apply to Covered ATSs or 
Covered Newly Designated ATSs. See proposed Rule 301(b)(2)(i). See 
also proposed Rule 300(s) (defining ``Covered Newly Designated 
ATS'').
    \136\ See Regulation ATS Adopting Release, supra note 31, at 
70864.
    \137\ Form ATS provides the Commission with notice about an 
ATS's operations prior to commencing operations. An ATS is also 
required to notify the Commission of any changes in its operations 
by filing an amendment to its initial operation report. There are 
three types of amendments to an initial operation report. First, if 
any material change is made to its operations, the ATS must file an 
amendment on Form ATS at least 20 calendar days before implementing 
such change. See 17 CFR 242.301(b)(2)(ii). A ``material change,'' 
includes, but is not limited to, any change to the operating 
platform, the types of securities traded, or the types of 
subscribers. In addition, the Commission has stated that ATSs 
implicitly make materiality decisions in determining when to notify 
their subscribers of changes. See Regulation ATS Adopting Release, 
supra note 31, at 70864. Second, if any information contained in the 
initial operation report becomes inaccurate for any reason and has 
not been previously reported to the Commission as an amendment on 
Form ATS, the ATS must file an amendment on Form ATS correcting the 
information within 30 calendar days after the end of the calendar 
quarter in which the system has operated. See 17 CFR 
242.301(b)(2)(iii). Third, an ATS must promptly file an amendment on 
Form ATS correcting information that it previously reported on Form 
ATS after discovery that any information was inaccurate when filed. 
See 17 CFR 242.301(b)(2)(iv). An ATS is required to promptly file a 
cessation of operations on Form ATS. See 17 CFR 242.301(b)(2)(v).
    \138\ See 17 CFR 242.301(b)(2)(vii); Form ATS at 3, General 
Instructions A.7.
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    NMS Stock ATSs and, as proposed, Government Securities ATSs, would 
be subject to enhanced filing and disclosure requirements under Rule 
304 of Regulation ATS. NMS Stock ATSs or Government Securities ATSs 
would, in lieu of Form ATS, be required to file public Form ATS-N in 
EDGAR, in which they must disclose detailed information about the 
manner in which their trading systems operate and the potential for 
conflicts of interest and information leakage.\139\ Form ATS-N is 
subject to a Commission review and effectiveness process.\140\ An NMS 
Stock ATS or Government Securities ATS would not be permitted to 
operate pursuant to the Rule 3a1-1(a)(2) exemption until its Form ATS-N 
has become effective.\141\ In addition, the ATS would be required to 
file amendments on Form ATS-N to provide notice of changes to its 
operations and broker-dealer and affiliate relationships.\142\ Form 
ATS-N and the Commission review and effectiveness process, which is 
described in detail below,\143\ would provide operational transparency 
and regulatory oversight of Communication Protocol Systems that are NMS 
Stock ATSs or Government Securities ATSs.
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    \139\ See proposed changes to 17 CFR 242.304.
    \140\ See infra Section IV.A.
    \141\ See Rule 304(a)(1)(i).
    \142\ See infra Section IV.A.
    \143\ See infra Section IV.
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    In addition, all ATSs are required to periodically, by paper 
submission, report certain information about transactions in the ATS 
and information about certain activities on Form ATS-R within 30 
calendar days after the end of each calendar quarter in which the 
market has operated, pursuant to Rule 301(b)(9).\144\ Form ATS-R 
requires quarterly volume information for specified categories of 
securities, as well as a list of all securities traded in the ATS 
during the quarter and a list of all subscribers that were participants 
during the quarter,\145\ and for ATSs subject to the Fair Access Rule 
to provide certain additional

[[Page 15510]]

information.\146\ Like Form ATS, Rule 301(b)(2)(vii) and the 
instructions to Form ATS-R provide that Form ATS-R is deemed 
confidential when filed.\147\ The information reported on Form ATS-R by 
Communication Protocol Systems would permit the Commission to monitor 
the trading on these ATSs for compliance with the Exchange Act and 
applicable rules thereunder and enforce the Fair Access Rule.\148\
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    \144\ See 17 CFR 242.301(b)(9)(i). Form ATS-R and the Form ATS-R 
Instructions are available at https://www.sec.gov/about/forms/formats-r.pdf. See also Section V.B (describing proposed changes to 
Form ATS-R).
    \145\ See Form ATS-R at 4, Items 1 and 2 (describing the 
requirements for Exhibit A and Exhibit B of Form ATS-R). ATSs must 
also complete and file Form ATS-R within 10 calendar days after 
ceasing to operate. See 17 CFR 242.301(b)(9)(ii); Form ATS-R at 2, 
General Instructions A.2 to Form ATS-R.
    \146\ Form ATS-R also requires an ATS that is subject to the 
fair access obligations under Rule 301(b)(5) of Regulation ATS to 
provide a list of all persons granted, denied, or limited access to 
the ATS during the period covered by the ATS-R and designate for 
each person each of the following: Whether the person was granted, 
denied, or limited access; the date the ATS took such action; the 
effective date of such action; and the nature of any denial or 
limitation of access. See Form ATS-R at 6, Item 7 (explaining 
requirements for Exhibit C).
    \147\ See 17 CFR 242.301(b)(2)(vii); Form ATS-R at 2, General 
Instruction A.7.
    \148\ See Regulation ATS Adopting Release, supra note 31, at 
70874 and 70878.
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    NMS Stock ATSs must comply with certain order display and execution 
access obligations \149\ under Rule 301(b)(3) if the ATS displays 
subscriber orders in an NMS stock to any person (other than an employee 
of the ATS) and meets certain volume requirements.\150\ These order 
display and execution access obligations were adopted by the Commission 
with the expectation they would promote additional market integration 
and further discourage two-tier markets when trading in an NMS stock on 
an ATS reaches a certain level.\151\ In addition, an NMS Stock ATS must 
not charge any fee to broker-dealers that access the ATS through a 
national securities exchange or national securities association that is 
inconsistent with the equivalent access to the NMS Stock ATS that is 
required under Rule 301(b)(3)(iii).\152\ This requirement is designed 
to promote equal access to ATSs.
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    \149\ An ATS that displays orders and meets the volume 
requirements must provide to a national securities exchange or 
national securities association the prices and sizes of the orders 
at the highest buy price and the lowest sell price for such NMS 
stock, displayed to more than one person in the ATS, for inclusion 
in the quotation data made available by the national securities 
exchange or national securities association pursuant to Rule 602 
under Regulation NMS. See 17 CFR 242.301(b)(3)(ii). With respect to 
any such displayed order, the ATS must provide to any broker-dealer 
that has access to the national securities exchange or national 
securities association to which the ATS provides the prices and 
sizes of displayed orders pursuant to Rule 301(b)(3)(ii), the 
ability to effect a transaction with such orders that is equivalent 
to the ability of such broker-dealer to effect a transaction with 
other orders displayed on the exchange or by the association; and at 
the price of the highest priced buy order or lowest priced sell 
order displayed for the lesser of the cumulative size of such priced 
orders entered therein at such price, or the size of the execution 
sought by such broker-dealer. See 17 CFR 242.301(b)(3)(iii).
    \150\ An ATS that displays subscriber orders in an NMS stock 
must comply with Rule 301(b)(3) if, during at least four of the 
preceding six calendar months, it had an average daily trading 
volume of 5% or more of the aggregate average daily share volume for 
that NMS stock, as reported by an effective transaction reporting 
plan. See 17 CFR 242.301(b)(3)(i).
    \151\ See Regulation ATS Adopting Release, supra note 31, at 
70867.
    \152\ See 17 CFR 242.301(b)(4). In addition, if the national 
securities exchange or national securities association to which an 
ATS provides the prices and sizes of orders under Rules 
301(b)(3)(ii) and (iii) establishes rules designed to assure 
consistency with standards for access to quotations displayed on 
such national securities exchange, or the market operated by such 
national securities association, the ATS shall not charge any fee to 
members that is contrary to, that is not disclosed in the manner 
required by, or that is inconsistent with any standard of equivalent 
access established by such rules. See id.
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    As discussed in more detail below,\153\ ATSs are required to comply 
with the Fair Access Rule \154\ under Rule 301(b)(5) if the ATS meets 
volume thresholds in NMS stocks, equity securities that are not NMS 
stocks and for which transactions are reported to an SRO, municipal 
securities, or corporate debt securities.\155\ The Commission is 
proposing to apply the requirements of the Fair Access Rule to trading 
of U.S. Treasury Securities and Agency Securities on ATSs.\156\
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    \153\ See infra Section III.B.4 and Section V.A.
    \154\ An ATS subject to the Fair Access Rule, as proposed to be 
revised, must: Establish and apply reasonable written standards for 
granting, limiting, and denying access to the services of the ATS; 
make and keep records of all grants of access including, for all 
participants, the reasons for granting such access, and all denials 
or limitations of access and reasons, for each applicant and 
participant, for denying or limiting access; and report on Form ATS-
R a list of persons granted, denied, and limited access to the ATS. 
See infra Section V.A.
    \155\ See 17 CFR 242.301(b)(5).
    \156\ See infra Section III.B.4.
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    Additionally, under Rule 301(b)(6) (``Capacity, Integrity, and 
Security Rule''), an ATS that trades only municipal securities or 
corporate fixed income debt with 20% or more of the average daily 
volume traded in the U.S. during at least four of the preceding six 
calendar months would be required to comply with capacity, integrity, 
and security standards \157\ with respect to those systems that support 
order entry, order routing, order execution, transaction reporting, and 
trade comparison.\158\ Information provided under the Capacity, 
Integrity, and Security Rule would enable the Commission staff to 
better understand the operation of certain Communication Protocol 
Systems and to identify potential problems and trends that may require 
attention.
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    \157\ An ATS that meets the volume requirements must, with 
respect to those systems that support order entry, order routing, 
order execution, transaction reporting, and trade comparison, 
establish reasonable current and future capacity estimates; conduct 
periodic capacity stress tests of critical systems to determine such 
system's ability to process transactions in an accurate, timely, and 
efficient manner; develop and implement reasonable procedures to 
review and keep current its system development and testing 
methodology; review the vulnerability of its systems and data center 
computer operations to internal and external threats, physical 
hazards, and natural disasters; establish adequate contingency and 
disaster recovery plans; on an annual basis, perform an independent 
review, in accordance with established audit procedures and 
standards, of the ATS's controls for ensuring that the above 
requirements are met, and conduct a review by senior management of a 
report containing the recommendations and conclusions of the 
independent review; and promptly notify the Commission and its staff 
of material systems outages and significant systems changes. See 17 
CFR 242.301(b)(6)(ii).
    \158\ See 17 CFR 242.301(b)(6)(i).
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    NMS Stock ATSs, ATSs that trade non-NMS equity securities that are 
reported to an SRO, and Government Securities ATSs that meet certain 
trading thresholds would be subject to Regulation SCI. Regulation SCI 
superseded and replaced Rule 301(b)(6) requirements with regard to ATSs 
that trade NMS stocks and non-NMS stocks.\159\ The Commission is 
proposing to apply Regulation SCI to Government Securities ATSs, as 
discussed below.\160\ Regulation SCI is designed to help address the 
technological vulnerabilities, and improve the Commission's oversight 
of the core technology of key entities.
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    \159\ Regulation SCI does not apply to ATSs that trade only 
municipal securities or corporate debt securities. See infra notes 
351-356 and accompanying text. See also Regulation SCI Adopting 
Release, supra note 3, at 72262.
    \160\ See infra Section III.C.
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    All ATSs, regardless of the volume traded on their systems, are 
required, pursuant to Rule 301(b)(7),\161\ to permit the examination 
and inspection of their premises, systems, and records, and cooperate 
with the examination, inspection, or investigation of subscribers, 
whether such examination is being conducted by the Commission or by an 
SRO of which such subscriber is a member. Because an ATS subscriber to 
whom the Commission's inspection authority may not extend could use the 
ATS to manipulate the market in a security, the requirement is designed 
to require that ATSs cooperate in all inspections, examinations, and 
investigations.
---------------------------------------------------------------------------

    \161\ See 17 CFR 242.301(b)(7).
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    ATSs are also required, pursuant to Rule 301(b)(8),\162\ to make 
and keep current the records specified in Rule 302 of Regulation ATS 
\163\ and preserve

[[Page 15511]]

the records specified in 17 CFR 242.303.\164\ The Commission is 
proposing to amend Rule 302 of Regulation ATS to require recordkeeping 
related to ``trading interest.'' Rule 302 requires that an ATS shall 
make and keep certain records, which the rule enumerates. Communication 
Protocol Systems that choose to comply with Regulation ATS would be 
required to keep the records enumerated in Rule 302. The Commission is 
proposing to revise certain of these enumerated records that relate to 
``orders'' to require such records related to ``trading interest,'' 
which would include both firm orders and non-firm trading 
interest.\165\ This would include time-sequenced records of trading 
interest information in the ATS.\166\ The recordkeeping requirements 
would require Communication Protocol Systems to make and keep certain 
records for an audit trail of trading activity that would allow the 
Commission to detect and investigate potential market irregularities, 
examine whether the ATS is in compliance with Federal securities laws, 
and ensure investor protections.\167\
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    \162\ See 17 CFR 242.301(b)(8).
    \163\ See 17 CFR 242.302. Rule 302 requires all ATSs to make and 
keep current certain records, including: A record of subscribers to 
the ATS; daily summaries of trading in the ATS; and time-sequenced 
records of order information in the ATS. See 17 CFR 242.302.
    \164\ See Rule 303 of Regulation ATS. In the Regulation ATS 
Adopting Release, the Commission stated that these requirements to 
make, keep, and preserve records are necessary to create a 
meaningful audit trail and to permit surveillance and examination to 
help ensure fair and orderly markets. See Regulation ATS Adopting 
Release, supra note 31, at 70877-78.
    \165\ See supra note 98 and accompanying text.
    \166\ Specifically, the Commission is proposing to revise Rule 
302(c)(1) (date and time (expressed in terms of hours, minutes, and 
seconds) that the trading interest was received); (c)(3) (the number 
of shares, or principal amount of bonds, to which the trading 
interest applies); (c)(5) (the designation of the trading interest 
as buy or sell trading interest); (c)(8) (any limit or stop price 
prescribed by the trading interest); (c)(9) (the date on which the 
trading interest expires and, if the time in force is less than one 
day, the time when the trading interest expires); (c)(10) (the time 
limit during which the trading interest is in force); (c)(11) (any 
instructions to modify or cancel the trading interest); (c)(12) (the 
type of account for which the trading interest is submitted); 
(c)(13) (date and time that the trading interest was executed); 
(c)(14) (price at which the trading interest is executed); and 
(c)(15) (size of the trading interest executed).
    \167\ See Regulation ATS Adopting Release, supra note 31, at 
70878.
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    In addition, ATSs are required to establish adequate written 
safeguards and written procedures \168\ to protect confidential trading 
information and to separate ATS functions from other broker-dealer 
functions, including principal and customer trading pursuant to Rule 
301(b)(10).\169\ Furthermore, all ATSs must adopt and implement 
adequate written oversight procedures to ensure that the above written 
safeguards and procedures are followed.\170\ These requirements are 
designed to help prevent the potential for abuse of subscriber 
confidential trading information.\171\
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    \168\ These written safeguards and written procedures must 
include: Limiting access to the confidential trading information of 
subscribers to those employees of the ATS who are operating the 
system or responsible for its compliance with these or any other 
applicable rules; and implementing standards controlling employees 
of the ATS trading for their own accounts.
    \169\ See 17 CFR 242.301(b)(10); NMS Stock ATS Adopting Release, 
supra note 2, Section VI.
    \170\ See 17 CFR 242.301(b)(10)(ii).
    \171\ See NMS Stock ATS Adopting Release, supra note 2, at 
38864.
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    In addition, an ATS must not use in its name the word ``exchange,'' 
or any derivation of the word ``exchange'' pursuant to Rule 
301(b)(11).\172\ The Commission believes that the use of the word 
``exchange'' by an ATS would be deceptive and could lead investors to 
believe incorrectly that such ATS is registered as a national 
securities exchange.\173\
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    \172\ See 17 CFR 242.301(b)(11); Regulation ATS Adopting 
Release, supra note 31, Section II.C.
    \173\ See Securities Exchange Act Release No. 39884 (April 17, 
1998), 63 FR 23504, 23523 (April 29, 1998) (``Regulation ATS 
Proposing Release'').
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    The Commission is proposing amendments to facilitate an orderly 
transition for Communication Protocol Systems to comply with the 
applicable conditions of the Regulation ATS exemption.\174\ The 
Commission understands that some Communication Protocol Systems are not 
currently registered as broker-dealers.\175\ To become a registered 
broker-dealer, these Communication Protocol Systems would be required 
to file Form BD with the Commission and complete FINRA's processes for 
new members.\176\ The Commission is proposing to allow Communication 
Protocol Systems that are not registered as broker-dealers at the time 
the proposed rule would be effective, if adopted, to provisionally 
operate pursuant to the Rule 3a1-1(a)(2) exemption while their broker-
dealer registration is pending until the earlier of (1) the date the 
ATS registers as a broker-dealer under Section 15 of the Exchange Act 
or Section 15C(a)(1)(A) of the Exchange Act and becomes a member of a 
national securities association or (2) the date 210 calendar days after 
the effective date of any final rule.\177\ The 210 calendar day period 
is designed to provide time for a Communication Protocol System to 
submit its broker-dealer registration application, or continuing 
membership application, as applicable, and for FINRA to conduct its 
review of new member application and continuing member application. The 
proposed transition period is designed to provide a Communication 
Protocol System that is not a registered broker-dealer adequate time to 
comply with the necessary broker-dealer registration requirements under 
Regulation ATS without disrupting its market or its participants.
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    \174\ For purposes of the rule text, the Commission is proposing 
to apply the transitional rules to ``Newly Designated ATSs.''
    \175\ A registered broker-dealer that operates a Communication 
Protocol System and is currently a FINRA member may, under FINRA 
rules, be required to file a Continuing Membership Application with 
FINRA noticing material changes to business operations in connection 
with its operation of an ATS.
    \176\ After receiving a substantially complete application 
package, FINRA must review and process it within 180 calendar days. 
See ``How to Become a Member--Member Application Time Frames'' 
available at https://www.finra.org/registration-exams-ce/broker-dealers/how-become-member-membership-application-time-frames. See 
also FINRA Rule 1014.
    \177\ See proposed revisions to Rule 301(b)(1). This transition 
period for the proposed rule, if adopted, would also apply to 
Currently Exempted Government Securities ATSs (i.e., Legacy 
Government Securities ATSs formerly not required to comply with 
Regulation ATS pursuant to the exemption under Sec.  240.3a1-1(a)(3) 
prior to effective date of any final rule) not registered as a 
broker-dealer. See infra note 283.
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    Proposed Rule 301(b)(2)(i) requires ATSs (other than Covered ATSs) 
\178\ to file an initial operation report on Form ATS at least 20 days 
before commencing operations; however, Communication Protocol Systems 
that seek to operate as ATSs already will be operating when the 
proposed rule, if adopted, becomes effective. To avoid disruption of 
the services of the ATS, the Commission is proposing to amend Rule 
301(b)(2)(i) to require Communication Protocol Systems (other than 
those that are Covered ATSs) \179\ to file an initial operation report 
on Form ATS no later than 30 calendar days after the effective date of 
any final rule.\180\ The Commission is also proposing changes, as 
discussed below, to Rule 301(b)(2)(viii) and Rule 304 to facilitate the 
transition for Communication Protocol Systems that are Covered ATSs to 
file Form ATS-N.\181\ Requiring Communication Protocol Systems to file 
a Form ATS with the Commission at the proposed time would provide the 
Commission with information about its

[[Page 15512]]

operations and facilitate oversight of the systems.
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    \178\ ``Covered ATS'' is defined infra note 257. The Commission 
is proposing changes to Rule 301(b)(2)(i) to clarify that the 
requirement to file Form ATS does not apply to ATSs other than 
Covered ATSs. See proposed Rule 301(b)(2)(i).
    \179\ The rule text uses the term ``Covered Newly Designated 
ATS.''
    \180\ See proposed changes to Rule 301(b)(2)(i).
    \181\ See infra note 300 and Section IV.A.
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Request for Comment
    1. Should the Commission amend Exchange Act Rule 3b-16 as proposed? 
Should the Commission adopt a more expansive or limited interpretation 
of the definition of ``exchange''? Do commenters agree that, in the 
current market, Communication Protocol Systems function as market 
places that conduct similar activities as exchanges do? Would any 
systems that conduct similar activities as exchanges that should be 
included in proposed Rule 3b-16 be excluded? Are there any asset 
classes or types of securities that should be excluded from the 
definition of exchange? If so, why?
    2. What are commenters' views on the potential consequences of 
expanding or limiting the definition of ``exchange'' under Exchange Act 
Rule 3b-16? What are commenters' views on how changing Rule 3b-16 could 
benefit or harm investors and market participants? Are new systems that 
meet the definition of exchange likely to choose to operate as ATSs 
instead of national securities exchanges?
    3. Should the Commission adopt the proposed definition of ``trading 
interest'' under Exchange Act Rule 3b-16? Should the definition of 
``trading interest'' require attributes to be identified in addition to 
at least the security and either quantity, direction (buy or sell), or 
price? Alternatively, would only one of the security, quantity, 
direction (buy or sell), or price be adequate to indicate trading 
interest? Should the definition of ``exchange'' continue to be limited 
to systems that use orders? If so, why?
    4. Should the Commission revise Exchange Act Rule 3b-16 to focus on 
bringing together buyers and sellers, rather than bringing together 
orders (or trading interest)? Would the proposed revisions to the rule 
appropriately describe systems that use non-firm trading interest to 
allow participants to communicate their trading interest?
    5. Should the Commission revise Exchange Act Rule 3b-16(a)(2) to 
describe a system that ``makes available established, non-discretionary 
methods'' under which buyers and sellers interact? Should the 
Commission revise the language further to clarify that a system 
provider that makes available a trading facility or communication 
protocol by way of a third party or affiliate would fall within the 
criteria of Rule 3b-16(a)(2)? Should there be any minimum or baseline 
to the established methods a system must have to qualify as an 
exchange? If so, what are they? Do commenters agree that making 
available communication protocols, as discussed herein, is sufficient 
to be an established, non-discretionary method under which buyers and 
sellers can interact?
    6. Should the Commission remove the reference to ``multiple'' in 
Rule 3b-16(a)(1))? If so, why? If not, why not?
    7. Should Communication Protocol Systems that choose to comply with 
Regulation ATS be subject to all of the requirements of Regulation ATS? 
Are there certain requirements of Regulation ATS that should or should 
not be applicable to Communication Protocol Systems, or certain 
Communication Protocol Systems? For example, are the current Regulation 
ATS recordkeeping requirements appropriate for Communication Protocol 
Systems? Should the Commission require a Communication Protocol System 
that chooses to operate as an ATS to create and maintain records that 
are not otherwise required by Rule 301(b)(8) of Regulation ATS? Is 
there anything that is not currently among the conditions to the 
Regulation ATS exemption that a Communication Protocol System and/or an 
existing ATS should comply with as part of Regulation ATS? And if so, 
why?
    8. Should the Commission amend Regulation ATS, Form ATS, Form ATS-
R, or Form ATS-N in any way to be more tailored to Communication 
Protocol Systems? If so, how?
    9. Are the proposed transition periods for Communication Protocol 
Systems appropriate? Should the Commission provide Communication 
Protocol Systems more or less time to comply with any of the 
requirements of Regulation ATS? Please explain.
    10. Is the Commission's proposal that a Newly Designated ATS must 
file an initial operation report on Form ATS no later than 30 calendar 
days after the effective date of any final rule, if adopted, 
appropriate? If not, should the Commission provide more time or less 
time for a Newly Designated ATS to file an initial Form ATS?
    11. Should the Commission allow a Newly Designated ATS that is not 
registered as a broker-dealer to operate pursuant to the Rule 3a1-
1(a)(2) exemption on a provisional basis? Does the proposal to allow 
such ATSs a maximum 210 calendar days to comply with the broker-dealer 
registration requirement provide an appropriate amount of time to 
register as a broker-dealer? If not, what, if any, transition period 
would be appropriate and why?

III. Proposed Changes Applicable to Government Securities ATSs

A. ATS Markets for Government Securities

    Government securities \182\ play a critical role in the U.S. and 
global economies. Among other things, for example, Treasury rates are a 
fundamental benchmark for pricing virtually all other financial 
assets.\183\ Systems currently operating as ATSs, particularly those 
that operate in the secondary interdealer markets for the most-recently 
issued (``on-the-run'') U.S. Treasury Securities, have become a 
significant location of trading interest for government 
securities.\184\ Specifically, most interdealer trading takes place on 
electronic platforms provided by interdealer brokers that operate limit 
order books, with electronic interdealer trading being

[[Page 15513]]

concentrated in on-the-run Treasury securities.\185\ In July 2021, 
average daily trading in government securities totaled $978 billion, or 
roughly 95 percent of all fixed income trading volume in the U.S.\186\
---------------------------------------------------------------------------

    \182\ Under the Exchange Act, government securities are defined 
as, among other things, securities which are direct obligations of, 
or obligations guaranteed as to principal or interest by, the United 
States. See 15 U.S.C. 78c(42)(A). Government securities include U.S. 
Treasury securities, debt securities issued or guaranteed by a U.S. 
executive agency, as defined in 5 U.S.C. 105, or government-
sponsored enterprise, as defined in 2 U.S.C. 622(8), and Agency 
Mortgage-Backed Securities (``MBSs''). Government securities also 
include securities which are issued or guaranteed by the Tennessee 
Valley Authority or by corporations in which the United States has a 
direct or indirect interest and which are designated by the 
Secretary of the Treasury for exemption as necessary or appropriate 
in the public interest or for the protection of investors; 
securities issued or guaranteed as to principal or interest by any 
corporation the securities of which are designated, by statute 
specifically naming such corporation, to constitute exempt 
securities within the meaning of the laws administered by the 
Commission; and any put, call, straddle, option, or privilege on one 
of the aforementioned (subject to limited exceptions). 15 U.S.C. 
78c(42)(B)-(C).
    \183\ See Group of Thirty Working Group on Treasury Market 
Liquidity, U.S. Treasury Markets: Steps Toward Increased Resilience. 
Group of Thirty at 1 (2021) (``G30 Report''), available at https://group30.org/publications/detail/4950.
    \184\ See Recent Disruptions and Potential Reforms in the U.S. 
Treasury Market: A Staff Progress Report, at 32, available at 
https://home.treasury.gov/system/files/136/IAWG-Treasury-Report.pdf 
(``November 2021 IAWG Report''). The November 2021 IAWG Report is a 
joint report issued by the Inter-Agency Working Group for Treasury 
Market Surveillance (``IAWG''), which consists of staff from the 
U.S. Department of the Treasury, the Board of Governors of the 
Federal Reserve System, the Federal Reserve Bank of New York, the 
Commission, and the Commodity Futures Trading Commission. Among 
other things, the November 2021 IAWG report provides an overview of 
the current structure of the Treasury market and a detailed analysis 
of the recent disruptions to the Treasury market at the onset of the 
COVID-19 pandemic in March 2020 as well as other recent disruptions 
to the Treasury market. The report also sets forth what the IAWG 
believes are the six guiding principles for the Treasury market and 
provides an update about the work streams for specific policy 
analysis being undertaken by the members of the IAWG.
    \185\ See id. at 3.
    \186\ See SIFMA Fixed Income Trading Volume, available at 
https://www.sifma.org/resources/research/us-fixed-income-trading-volume/. This includes U.S. Treasury Securities, Agency Mortgage-
Backed Securities, and Federal Agency Securities.
---------------------------------------------------------------------------

    Legacy Government Securities ATSs now operate with complexity 
similar to that of markets that trade NMS stocks in terms of use of 
technology and speed of trading, the use of limit order books, order 
types, algorithms, connectivity, data feeds, and the active 
participation of principal trading firms (``PTFs'').\187\ For example, 
based on the Commission's review of Form ATS filings by ATSs that trade 
government securities and discussions with market participants, the 
Commission believes that Legacy Government Securities ATSs often offer 
subscribers a variety of order types to pursue both aggressive and 
passive trading strategies and low latency, high-speed connectivity to 
the ATS. These ATSs frequently use automated systems to match orders 
anonymously on a price/time priority basis. Some Legacy Government 
Securities ATSs also segment orders into categories by participants or 
allow participants the ability to interact with specific counterparty 
groups in the ATS and facilitate order interaction and execution.\188\ 
Likewise, Communication Protocol Systems are increasingly used as 
electronic means to bring together buyers and sellers for government 
securities and are particularly prevalent in the dealer-to-customer 
market for U.S. Treasury and markets for off-the-run \189\ U.S. 
Treasury Securities, Agency Securities,\190\ and repos.
---------------------------------------------------------------------------

    \187\ See November 2021 IAWG Report, supra note 184, at 31. See 
also NMS Stock ATS Adopting Release, supra note 2, at 38771 for a 
discussion about the current operational complexities of NMS Stock 
ATSs.
    \188\ See also November 2021 IAWG Report, supra note 184, at 31; 
Joint Staff Report: The U.S. Treasury Market on October 15, 2014, at 
11, 35-36, available at https://www.sec.gov/files/treasury-market-volatility-10-14-2014-joint-report.pdf (``October 15 Staff 
Report''); Department of the Treasury Release No. 2015-0013 (January 
22, 2016), Notice Seeking Public Comment on the Evolution of the 
Treasury Market Structure, 81 FR 3928 (January 22, 2016) (``Treasury 
Request for Information''). This evolution in the interdealer 
secondary cash markets for U.S. Treasury Securities was also 
highlighted in the October 15 Staff Report, the Treasury Request for 
Information, and public comment received by the Commission. The 
October 15 Staff Report is a joint report about the unusually high 
level of volatility and rapid round-trip in prices that occurred in 
the U.S. Treasuries market on October 15, 2014. Among other things, 
the October 15 Staff Report provides an overview of the market 
structure, liquidity, and applicable regulations of the U.S. 
Treasury market, as well as the broad changes to the structure of 
the U.S. Treasury market that have occurred over the past two 
decades.
    \189\ See infra note 193 for a description of ``off-the-run'' 
securities.
    \190\ See James Collin Harkrader and Michael Puglia, Fixed 
Income Market Structure: Treasuries vs. Agency MBS, Board of 
Governors of the Federal Reserve System: FEDS NOTES (August 25, 
2020), available at https://www.federalreserve.gov/econres/notes/feds-notes/fixed-income-market-structure-treasuries-vs-agency-mbs-20200825.htm (``August 25th FEDS Notes'') (explaining the recent 
evolution of the government securities market structure).
---------------------------------------------------------------------------

    The most liquid and commonly traded government securities are U.S. 
Treasury Securities, which are direct obligations of the U.S. 
Government issued by the U.S. Department of the Treasury (``Treasury 
Department''). The Treasury Department issues several different types 
of securities, including Treasury bills, nominal coupons notes and 
bonds, Floating Rate Notes, and Treasury Inflation Protected 
Securities. Treasury nominal coupon notes and bonds, as well as 
Treasury Inflation Protected Securities, may also be separated into 
principal and interest payments and traded as STRIPS.\191\ For each 
security type, the on-the-run securities are generally considered the 
most liquid in the secondary market.\192\ Market participants commonly 
refer to securities issued prior to ``on-the-run'' securities as ``off-
the-run'' securities.\193\ Market participants use U.S. Treasury 
Securities as an investment instrument, hedging vehicle, and to source 
orders and trading interest, among other things. U.S. banks commonly 
own U.S. Treasury Securities due to their low risk and strong liquidity 
characteristics. Additionally, U.S. Treasury Securities are often used 
as collateral in lending arrangements or as margin on other financial 
transactions.
---------------------------------------------------------------------------

    \191\ STRIPS is the acronym for Separate Trading of Registered 
Interest and Principal of Securities. STRIPS let investors hold and 
trade the individual interest and principal components of eligible 
Treasury notes and bonds as separate securities. STRIPS are Treasury 
securities that don't make periodic interest payments. Market 
participants create STRIPS by separating the interest and principal 
parts of a Treasury note or bond. STRIPS can only be bought and sold 
through a financial institution, broker, or dealer and held in the 
commercial book-entry system. See TreasuryDirect, STRIPS, available 
at https://www.treasurydirect.gov/instit/marketables/strips/strips.htm.
    \192\ On-the-run U.S. Treasury Securities are the most recently 
issued nominal coupon securities. Nominal coupon securities pay a 
fixed semi-annual coupon and are currently issued at original 
maturities of 2, 3, 5, 7, 10, 20, and 30 years. These standard 
maturities are commonly referred to as ``benchmark'' securities 
because the yields for these securities are used as references to 
price a number of private market transactions.
    \193\ Off-the-run or ``seasoned'' U.S. Treasury Securities are 
the issues that preceded the current on-the-run securities. The U.S. 
Treasury Securities market also comprises futures and options on 
U.S. Treasury Securities, and securities financing transactions in 
which U.S. Treasury Securities are used as collateral. See Treasury 
Request for Information, supra note 188, at 3928. For the purpose of 
this proposal, the Commission focuses on the secondary cash market.
---------------------------------------------------------------------------

    For U.S. Treasury Securities, the secondary market is bifurcated 
between the dealer-to-customer market, in which dealers trade with 
their customers (e.g., investment companies, pension funds, insurance 
companies, corporations, or retail), and the interdealer market, in 
which dealers and specialty firms trade with one another.\194\ 
Customers, also referred to as ``end users,'' have not traditionally 
traded directly with other end users.\195\ Rather, end users primarily 
trade with dealers, and dealers use the interdealer market as a source 
of liquidity to help facilitate their trading with clients in the 
dealer-to-customer market. Trading in the U.S. Treasury Securities 
dealer-to-customer market is generally--and has historically been--
conducted bilaterally using voice, and more recently, electronically 
through the use of Communication Protocol Systems, most commonly using 
an RFQ protocol. Broker-dealers also internalize a portion of their 
customer flow, although the extent to which broker-dealers internalize 
is unclear.\196\
---------------------------------------------------------------------------

    \194\ See id.
    \195\ See id.
    \196\ See id. For the purposes of this proposal, internalization 
refers to a broker filling a customer order either from the firm's 
own inventory or by matching the order with other customer order 
flow, instead of sending the order to an interdealer market for 
execution. See id. at 3928 n.5.
---------------------------------------------------------------------------

    In the interdealer market, the majority of trading in on-the-run 
U.S. Treasury Securities currently occurs on ATSs using limit order 
books supported by advanced electronic trading technology.\197\ 
Furthermore, interdealer trading for on-the-run U.S. Treasury 
Securities is generally concentrated within a very small number of 
ATSs, especially when compared to the market for NMS stocks, which is 
dispersed among many trading venues.\198\ While

[[Page 15514]]

trading in the most liquid NMS stocks occur on a variety of trading 
venues (e.g., exchanges, ATSs, single-dealer broker platforms), the 
majority of overall trading in the interdealer secondary market for on-
the-run U.S. Treasury Securities occurs on ATSs.\199\ For example, 
during the first nine months of 2021, one ATS accounted for $14.9 
trillion in total dollar volume in all government securities, the 
majority of which were on-the-run U.S. Treasury Securities.\200\ For 
off-the-run U.S. Treasury Securities,\201\ the majority of interdealer 
trading occurs via transactions through traditional voice-assisted 
interdealer broker platforms and Communication Protocol Systems that 
offer various trading protocols to bring together buyers and 
sellers,\202\ though some interdealer trading of off-the-run U.S. 
Treasury Securities does occur on ATSs.\203\
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    \197\ See October 15 Staff Report, supra note 188, at 11, 35-36. 
See also Bloomberg Letter at 5, stating that liquid on-the-run 
government securities are mostly traded on limit order books.
    \198\ The growth of electronic trading has contributed to a 
marked shift in the composition of the interdealer cash market for 
U.S. Treasury Securities over time. Traditionally, interdealer 
brokers only allowed primary dealers to access their trading venues. 
After 1992, however, interdealer brokers expanded access to all 
entities that were netting members of the Government Securities 
Clearing Corporation (which is now the Fixed Income Clearing 
Corporation's Government Securities Division). Thereafter, other 
entities gained access to these trading venues through their prime 
brokers, who themselves had access, and in recent years the trading 
venues granted direct access to an even wider range of participants, 
including non-dealers, which account for more than half of the 
trading activity in the futures and electronically brokered 
interdealer cash markets. See October 15 Staff Report, supra note 
188, at 36. See also Treasury Request for Information, supra note 
188, at 3928.
    \199\ See infra Table VIII.2 and accompanying text.
    \200\ For an additional discussion of trading volume in the U.S. 
bond market as a whole and U.S. Treasury Securities, see infra 
Section VIII.B.2.
    \201\ Also, as noted in the October 15 Staff Report issued by 
the Treasury Department, Board of Governors of the Federal Reserve 
System, Federal Reserve Bank of New York, the Commission, and U.S. 
Commodity Futures Trading Commission, trading in off-the-run U.S. 
Treasury Securities has always been less active than trading in on-
the-run U.S. Treasury Securities, and price discovery in the cash 
markets primarily occurs in on-the-run securities. See October 15 
Staff Report, supra note 188 at n.7.
    \202\ See November 2021 IAWG Report, supra note 184, at 3. See 
also Bloomberg Letter at 5, stating that less liquid off-the-run 
government securities are mostly traded using methods other than 
limit order books.
    \203\ While trading in on-the-run securities likely accounts for 
more than half of total daily trading volumes, off-the-run U.S. 
Treasury Securities make up over 95 percent of the outstanding 
marketable U.S. Treasury Securities. See G30 Report, supra note 183, 
at 1, n.2.
---------------------------------------------------------------------------

    Another type of government securities is Agency Securities. Agency 
Securities include securities issued by or guaranteed by U.S. 
Government corporations or U.S. Government sponsored enterprises 
(``GSEs'').\204\ Agency Securities, which may not be backed by the full 
faith and credit of the U.S. Government, are generally considered to be 
very liquid and offer state and local tax advantages to the holder. 
Market participants can use ATSs to buy and sell Agency Securities, 
although, based on the Commission's review of Form ATS-R filings, 
transaction volume of Agency Securities is not as large as that of U.S. 
Treasury Securities on ATSs.\205\ Investors, banks, and other market 
participants often acquire Agency Securities in the secondary market to 
support various investing strategies, such as hedging against other 
more risky investments in a given portfolio. Agency Securities also 
trade on Communication Protocol Systems where buyers and sellers can 
use RFQ protocols, for example, to engage in price discovery, find a 
counterparty, and negotiate and execute a transaction.
---------------------------------------------------------------------------

    \204\ See U.S. Department of the Treasury Resource Center, 
``Fixed Income: Agency Securities,'' available at https://www.treasury.gov/resource-center/faqs/Markets/Pages/fixedfederal.aspx. For example, the Government National Mortgage 
Association (``Ginnie Mae'') is a U.S. Government corporation that 
issues mortgage-backed securities guaranteed by the full faith and 
credit of the U.S. Government. The assets collateralized into the 
securities issued by Ginnie Mae are federally insured and guaranteed 
mortgage loans. Agency Securities issued by GSEs include those 
issued by the Federal Home Loan Banks (``FHLBs''), the Federal 
National Mortgage Association (``Fannie Mae''), the Federal Home 
Loan Mortgage Corporation (``Freddie Mac''), and the Student Loan 
Marketing Association (``Sallie Mae''). Agency Securities issued by 
GSEs are not normally backed by the full faith and credit of the 
U.S. Government and therefore, may present some default and credit 
risk.
    \205\ Additionally, repos on government securities are also 
traded on some ATSs.
---------------------------------------------------------------------------

    Repos provide short-term financing (often overnight) to help fund 
the borrower's (usually a broker-dealer) trading or lending activities. 
However, the collateral is sold to the lender, and the repo obligates 
the borrower to repurchase the collateral. U.S. Treasury Securities are 
frequently used as the underlying collateral of a repo. Several ATSs 
have provided notice on their Form ATS disclosures that they facilitate 
the trading of repos. Much like the markets for U.S. Treasury 
Securities and Agency Securities, repo trading has historically been 
conducted bi-laterally by voice; however, over the past decade, 
electronic trading of repos on Communication Protocol Systems has 
increased significantly. Electronic trading of repos is primarily 
conducted via RFQ protocols, and many systems for trading in repos now 
offer electronic trading options.
    With regard to the interdealer secondary markets for on-the-run 
U.S. Treasury Securities, the continued growth of electronic trading 
has contributed to an increased presence of PTFs in the market 
place.\206\ Currently, PTFs account for the majority of trading and 
provide top-of-the-book liquidity for on-the-run U.S. Treasury 
Securities on electronic interdealer trading venues.\207\ From January 
1, 2021 to June 30, 2021, PTFs traded on 13 Government Securities ATSs 
accounting for approximately 48.6 percent of total on-the-run 
Government Securities ATS trading volume.\208\ PTFs usually have direct 
access to electronic interdealer trading venues for U.S. Treasury 
Securities, and as is the case with the equity markets, PTFs trading on 
the electronic interdealer trading venues for on-the-run U.S. Treasury 
Securities often employ automated algorithmic trading strategies that 
rely on speed and allow the PTFs to cancel or modify quotes in response 
to perceived market events.\209\ Furthermore, most PTFs trading U.S. 
Treasury Securities on these trading venues for on-the-run U.S. 
Treasury Securities also restrict their activities to principal trading 
and do not hold positions long term, while dealers use the interdealer 
market as a source of orders and trading interest to help facilitate 
their trading with clients in the dealer-to-customer market.\210\ As 
explained in the October 15 Staff Report, the increase in trading by 
PTFs in the interdealer market may affect the amount of liquidity 
available to end users in the dealer-to-customer market.\211\
---------------------------------------------------------------------------

    \206\ PTFs are not, however, very active in the electronic 
markets for Agency Securities. See August 25th FEDS Notes, supra 
note 190 (``Though parts of the agency MBS market have moved from 
voice-based to screen-based trading since the early 2000s, 
algorithmic high-frequency electronic trading still does not 
comprise a meaningful share of average daily volume and the market 
remains devoid of PTF participation.'').
    \207\ See November 2021 IAWG Report, supra note 184, at 5. See 
also October 15 Staff Report, supra note 188, at 36; Remarks of 
Deputy Secretary Justin Muzinich at the 2019 U.S. Treasury Market 
Structure Conference (September 23, 2019), available at https://home.treasury.gov/news/press-releases/sm782.
    \208\ See infra Table VIII.2. (ATS PTF volume/ATS volume) x 100 
= PTF share of ATS volume (%).
    \209\ See October 15 Staff Report, supra note 188, at 32, 35-36, 
39.
    \210\ See November 2021 IAWG Report, supra note 184, at 5; 
October 15 Staff Report, supra note 188, at 38.
    \211\ See October 15 Staff Report, supra note 188, at 37.
---------------------------------------------------------------------------

    In response to the 2020 Proposal, the Commission received several 
comments that broadly supported expanding the regulatory framework 
under Regulation ATS with respect to Government Securities ATSs.\212\ 
Commenters stated that ATSs have become increasingly important in the 
government securities market.\213\ One commenter stated that, given 
that Government Securities ATSs closely resemble NMS Stock ATSs, it 
would be appropriate to impose similar regulatory oversight, including 
regulatory oversight by the Commission

[[Page 15515]]

and FINRA.\214\ Likewise, another commenter stated that many of the 
concerns surrounding potential conflicts of interest that arise between 
an ATS and the activities of its bank/broker-dealer operator and 
affiliates--and the transparency of an ATS's operations--are equally 
relevant with respect to ATSs that transact in government securities as 
to NMS Stock ATSs.\215\ In addition, one commenter stated that critical 
intermediaries in the U.S. Treasury market are ``effectively 
unregulated'' as trading venues or dealers, and this hampers 
availability of information concerning trading in these critical 
markets, and that oversight of the core ``plumbing'' of these critical 
markets, which determines their resiliency, is lacking.\216\ This 
commenter stated that several ATSs now dominate the trading of U.S. 
Treasury Securities and agency mortgage backed securities, and that 
ensuring that Regulation ATS and Regulation SCI apply to these entities 
will provide for additional data and create more transparency into the 
trading around those critical markets.\217\ This commenter also stated 
that expanding Regulation ATS with respect to ATSs that trade U.S. 
Treasuries has also become important as the role of PTFs has become 
more significant in the U.S. Treasury markets and related repo 
markets.\218\
---------------------------------------------------------------------------

    \212\ See, e.g., BrokerTec Letter, SIFMA Letter, AFREF Letter.
    \213\ See FINRA Letter.
    \214\ See SIFMA Letter at 2.
    \215\ See also MFA Letter at 4.
    \216\ See AFREF Letter at 1.
    \217\ See id.
    \218\ See id. at 2 (stating that the growing role of PTFs means 
that much trading activity is not coming from long-term investors 
but rather proprietary trading firms who may trade in-and-out of 
their positions several times in a day and are likely to react 
sharply to market volatility).
---------------------------------------------------------------------------

B. Heightened Regulatory Requirements Under Regulation ATS for 
Government Securities ATSs

    The vast majority of ATSs that operate today do so pursuant to the 
exemption provided by Exchange Act Rule 3a1-1(a)(2), which requires the 
ATSs to be in compliance with Regulation ATS, which includes, among 
other things, registering as broker-dealers. Currently Exempted 
Government Securities ATSs, however, operate pursuant to Exchange Act 
Rule 3a1-1(a)(3) \219\ and Rule 301(a)(4)(ii)(A).\220\ These provisions 
currently exempt an ATS from compliance with the requirements in Rule 
301(b) of Regulation ATS \221\ if, in relevant part, the ATS (1) is 
registered as a broker-dealer under Sections 15(b) \222\ or 15C \223\ 
of the Exchange Act, or is a bank, and (2) limits its securities 
activities to government securities (as defined in Section 3(a)(42) of 
the Exchange Act), repos, any puts, calls, straddles, options, or 
privileges on government securities, other than puts, calls, straddles, 
options, or privileges that: (i) Are traded on one or more national 
securities exchanges; or (ii) for which quotations are disseminated 
through an automated quotation system operated by a registered 
securities association, and commercial paper.\224\ Accordingly, such 
Currently Exempted Government Securities ATSs are not required to 
register as a national securities exchange or comply with Regulation 
ATS.\225\ To the Commission's knowledge, most Currently Exempted 
Government Securities ATSs operating pursuant to this exemption 
register as broker-dealers with the Commission.\226\
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    \219\ 17 CFR 240.3a1-1(a)(3).
    \220\ 17 CFR 242.301(a)(4)(ii)(A).
    \221\ 17 CFR 242.301(b).
    \222\ See 15 U.S.C. 78o(b) (pertaining to the registration and 
regulation of brokers and dealers).
    \223\ See 15 U.S.C. 78o-5 (pertaining to the registration and 
regulation of government securities brokers and dealers).
    \224\ See 15 U.S.C. 78c(a)(42). The definition of ``government 
securities'' in Section 3(a)(42) of the Exchange Act (and, 
therefore, references to ``government securities'' throughout this 
proposal) includes certain puts, calls, straddles, options, or 
privileges on government securities, other than puts, straddles, 
options, or privileges that: Are traded on one or more national 
securities exchanges; or for which quotations are disseminated 
through an automated quotation system operated by a registered 
securities association. See supra note 182.
    \225\ See 17 CFR 242.301(a)(4)(i) and (a)(4)(ii)(A). Although 
not required to register as a national securities exchange or comply 
with Regulation ATS, a Currently Exempted Government Securities ATS 
may need to register as a broker-dealer under Section 15(b) or as a 
government securities broker or government securities dealer 
pursuant to Exchange Act Section 15C, and comply with the associated 
regulatory requirements. See, e.g., 17 CFR chapter IV, subchapter 
A--Regulations under Section 15C of the Securities Exchange Act of 
1934.
    \226\ Some ATSs that are eligible for the exemption voluntarily 
comply with Regulation ATS, even though ATSs that trade only 
government securities are not required to comply with Regulation ATS 
at all.
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    ATSs that do not limit their securities activities solely to 
government securities or repos, trading for example corporate bonds or 
municipal securities, cannot use this exemption. Such ATSs must either 
register as an exchange or comply with Regulation ATS pursuant to 
Exchange Act Rule 3a1-1(a)(2), which includes, among other things, 
registering as a broker-dealer under Section 15 of the Exchange 
Act.\227\ Government Securities ATSs that are currently subject to 
Regulation ATS must report transactions in U.S. Treasury Securities and 
Agency Securities to the Trade Reporting and Compliance Engine 
(``TRACE''),\228\ and FINRA publicly disseminates data about these 
transactions. Currently, FINRA publishes weekly aggregated transaction 
information on U.S. Treasury Securities and disseminates certain 
transaction information on Agency Securities immediately upon receipt 
of a transaction report.\229\ Today, Legacy Government Securities ATSs 
are subject only to certain provisions of Regulation ATS because not 
all the provisions are applicable to trading in government 
securities.\230\ In particular, government securities are not included 
in any category of securities under the Fair Access Rule.\231\ Today, 
the categories of securities under the Fair Access Rule only include 
NMS stocks, equity securities that are not NMS stocks and for which 
transactions are reported to an SRO, municipal securities, and 
corporate debt securities.\232\ In addition, Regulation SCI does not 
apply to ATSs with respect to their trading in

[[Page 15516]]

government securities.\233\ The Capacity, Integrity, and Security Rule 
under Rule 301(b)(6) \234\ also does not apply to the government 
securities activities of an ATS.\235\
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    \227\ See supra notes 130-131 and accompanying text.
    \228\ See FINRA Rule 6730(a)(1) requires FINRA members to report 
transactions in TRACE-Eligible Securities, which FINRA Rule 6710 
defines to include U.S. Treasury Securities and Agency Securities. 
For each transaction in U.S. Treasury Securities and Agency 
Securities, a FINRA member would be required to report the CUSIP 
number or similar numeric identifier or FINRA symbol; size (volume) 
of the transaction; price of the transaction (or elements necessary 
to calculate price); symbol indicating whether transaction is a buy 
or sell; date of trade execution (``as/of'' trades only); contra-
party's identifier; capacity (principal or agent); time of 
execution; reporting side executing broker as ``give-up'' (if any); 
contra side introducing broker (in case of ``give-up'' trade); the 
commission (total dollar amount), if applicable; date of settlement; 
if the member is reporting a transaction that occurred on an ATS 
pursuant to FINRA Rule 6732, the ATS's separate Market Participant 
Identifier (``MPID''); and trade modifiers as required. For when-
issued transactions in U.S. Treasury Securities, a FINRA member 
would be required to report the yield in lieu of price. See FINRA 
Rule 6730(c).
    \229\ FINRA Rule 6750(a) requires FINRA to disseminate 
information on all transactions on certain securities, including 
Agency Securities (but excluding U.S. Treasury Securities), 
immediately upon receipt of the transaction report. FINRA is 
permitted to publish or distribute weekly aggregated transaction 
information and statistics on U.S. Treasury Securities, and has 
stated that it intends to publish weekly volume information 
aggregated by U.S. Treasury subtype (e.g., Bills, Floating Rate 
Notes, Treasury Inflation-Protected Securities, and Nominal 
Coupons). See Securities Exchange Release No. 87837 (December 20, 
2019), 84 FR 71986 (December 30, 2019) (approving a proposed rule 
change to allow FINRA to publish or distribute aggregated 
transaction information and statistics on U.S. Treasury Securities).
    \230\ See 17 CFR 242.301(b)(1), (2), and (7) through (11). The 
order display and execution access provisions under Rule 301(b)(3) 
and the related fee restrictions of Rule 301(b)(4) of Regulation ATS 
only apply to an ATS's NMS stock activities. See 17 CFR 
242.301(b)(3) and (4). See also supra Section II.D.2 (discussing the 
requirements for compliance with the Regulation ATS exemption).
    \231\ 17 CFR 242.301(b)(5). See also supra notes 153-157 and 
accompanying text.
    \232\ See 17 CFR 242.301(b)(5).
    \233\ See infra Section III.C (describing the types of entities 
that are currently subject to the requirements of Regulation SCI).
    \234\ 17 CFR 242.301(b)(6).
    \235\ See supra notes 157-158 and accompanying text.
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    Finally, Government Securities ATSs are not required to comply with 
rules applicable to ATSs that trade NMS stocks, including the 
obligation to file a public Form ATS-N pursuant to Rule 304 of 
Regulation ATS.\236\ ATSs that transact in government securities or 
repos are also not required to comply with the order display and 
execution access provisions under Rule 301(b)(3) \237\ and the related 
fee restrictions of Rule 301(b)(4),\238\ both of which only apply to an 
ATS's NMS stock activities.
---------------------------------------------------------------------------

    \236\ 17 CFR 242.304. See also supra notes 139-143 and 
accompanying text.
    \237\ See supra notes 149-151 and accompanying text.
    \238\ See supra note 152 and accompanying text.
---------------------------------------------------------------------------

    Despite the critical role of government securities in the U.S. and 
global economy, the significant volume in government securities 
transacted on ATSs, and these ATSs' growing importance to investors and 
overall securities market structure, Currently Exempted Government 
Securities ATSs are exempt from exchange registration and are not 
required to comply with Regulation ATS. In addition, Communication 
Protocol Systems that transact in government securities and/or repos, 
but do not currently meet the definition of ``exchange,'' are not 
subject to exchange registration requirements and are likewise not 
required to comply with Regulation ATS.\239\ Furthermore, ATSs that 
trade both government securities and non-government debt securities 
(e.g., corporate bonds) are not subject to all the provisions of 
Regulation ATS. Market participants today have limited access to 
information that permits them to adequately compare and contrast how 
they can use a Government Securities ATS or how their trading interest 
would be handled by Government Securities ATSs.\240\ In addition, 
Government Securities ATSs are not currently subject to the Fair Access 
Rule and Regulation SCI, which would help ensure the fair treatment of 
subscribers and address technological vulnerabilities, and improve the 
Commission's oversight, of the core technology of key entities in the 
markets for government securities.\241\ Given these concerns, and 
comments received on the 2020 Proposal, the Commission is re-proposing 
and revising the amendments described below.
---------------------------------------------------------------------------

    \239\ See supra Section II.A.
    \240\ See, e.g., 2020 Proposal, supra note 4, at 87125.
    \241\ See id. at Section III.B.4 (discussing the Fair Access 
Rule) and III.C (discussing Regulation SCI).
---------------------------------------------------------------------------

1. Proposed Definition of Government Securities ATS
    The Commission is re-proposing to amend Rule 300 of Regulation ATS 
to define ``Government Securities ATS'' to mean an alternative trading 
system, as defined in Rule 300(a), that trades government securities, 
as defined in section 3(a)(42) of the Exchange Act (15 U.S.C. 
78c(a)(42)), or repurchase and reverse repurchase agreements on 
government securities.\242\ To meet the definition of a Government 
Securities ATS, the organization, association, person, group of 
persons, or system must meet the definition of an alternative trading 
system under Rule 300(a) of Regulation ATS.\243\ The Commission is also 
re-proposing that a Government Securities ATS shall not trade 
securities other than government securities or repos \244\ and that 
trading of securities other than government securities or repos would 
require the separate filing of a Form ATS or a Form ATS-N, depending on 
the types of securities traded.\245\ Other than complying with Rule 304 
and filing Form ATS-N, this amendment would not, however, impose new 
compliance requirements on ATSs that currently trade government 
securities in addition to non-government securities.\246\ Under the 
proposal, if a broker-dealer operator currently operates an ATS for 
government securities and non-government securities (for example, 
corporate bonds), the broker-dealer operator would separately be 
required to comply with Regulation ATS for: (1) A Government Securities 
ATS that would trade government securities, which would be subject to 
Rule 304, and file disclosures on Form ATS-N, as proposed to be revised 
and (2) a non-Government Securities ATS (that, for example, would trade 
corporate bonds), which would not be subject to Rule 304, and file 
disclosures on its existing Form ATS, as amended to remove references 
to government securities.
---------------------------------------------------------------------------

    \242\ See proposed Rule 300(l).
    \243\ 17 CFR 242.300(a). See Regulation ATS Adopting Release, 
supra note 31, at 70851-52.
    \244\ See proposed Rule 300(l).
    \245\ An ATS that does not trade NMS stocks or government 
securities, as proposed, must file Form ATS. If the broker-dealer 
operates an ATS that trades NMS stocks and an ATS that trades 
government securities, it would be required to file a separate Form 
ATS-N for each of the NMS Stock ATS and Government Securities ATS.
    \246\ Broker-dealers that operate Government Securities ATSs 
that are currently subject to Regulation ATS already must have 
established written safeguards and written procedures to protect 
subscribers' confidential trading information, pursuant to Rule 
301(b)(10), and already must make and keep records pursuant to Rule 
301(b)(8) that are tailored to the types of securities the ATS 
trades and the subscribers that trade those securities on the ATS. 
The Commission believes the proposal is broadly consistent with the 
manner in which broker-dealers that operate NMS Stock ATSs and non-
NMS Stock ATSs currently comply with Regulation ATS. For further 
discussion, see infra Section III.B.3.
---------------------------------------------------------------------------

    In response to the 2020 Proposal, the Commission received one 
comment letter opposing the proposed definition of Government 
Securities ATS.\247\ This commenter stated that separating trading 
activity in government securities and repos from non-NMS stock trading 
activity could impose administrative and operational burdens on both 
Government Securities ATSs and subscribers.\248\ The commenter stated 
that the Commission did not explain why requiring a Government 
Securities ATS to separate its operations from other non-NMS Stock ATS 
trading activity would improve Commission oversight or other regulatory 
goals.\249\
---------------------------------------------------------------------------

    \247\ See ICE Bonds Letter I at 5.
    \248\ See id. The commenter stated that the initial set-up of a 
new Government Securities ATS would require, among other things, the 
development of a matching engine, separate connectivity for 
subscribers, new clearing connectivity, additional personnel to 
support trading operations of the Government Securities ATS, and 
regulatory controls (e.g., Rule 15c3-5). The commenter further 
stated that these requirements would ultimately lead to fewer venues 
for subscribers to trade and hedge and concentrate trading among a 
few large Government Securities ATSs, as smaller Legacy Government 
Securities ATSs may determine that this separation requirement is 
cost prohibitive. In addition, the commenter stated that if a 
subscriber has to execute a corporate bond on one ATS and sell the 
treasury on a different ATS, there is an administrative and 
operational burden placed on the subscriber, as well as additional 
economic and market risk to the subscriber as the price on the other 
venue may move by the time the hedge trade is initiated.
    \249\ See id.
---------------------------------------------------------------------------

    The proposed definition of Government Securities ATS, however, 
would not require operational separation by a Government Securities 
ATS, and the operational costs that the commenter described would 
therefore not apply.\250\ The proposed definition would not, for 
example, require the Government Securities ATS to develop a new 
matching engine nor require changes with regard to how subscribers 
enter trading interest into the ATS. Other than requiring the 
Government Securities ATS to separately comply with the requirements of 
Regulation ATS (and, as applicable, Regulation SCI), the proposed 
definition does not create new compliance requirements on

[[Page 15517]]

Government Securities ATSs.\251\ Under the proposed rule, a broker-
dealer operator for an ATS that currently trades both government 
securities and corporate debt securities, for example, would be 
required to file a Form ATS-N for the trading of government securities 
on a Government Securities ATS and a separate Form ATS for trading of 
corporate debt securities on an ATS. In this example, the broker-dealer 
operator for a Government Securities ATS and non-Government Securities 
ATS may be required to disclose certain information on Form ATS-N about 
the non-Government Securities ATS. For example, to the extent that any 
persons support both the operation of the Government Securities ATS and 
the ATS that trades corporate debt securities and have access to 
subscriber confidential trading information for the Government 
Securities ATS, the Government Securities ATS would need to disclose 
that on Part II, Item 7 of Form ATS-N.\252\ In addition, the Government 
Securities ATS would be required to provide under Part III, Item 11 
information about interaction with non-government securities markets 
(e.g., futures, currencies, swaps, corporate bonds).\253\
---------------------------------------------------------------------------

    \250\ See id.
    \251\ See supra note 246.
    \252\ See infra Section IV.D.4.f.
    \253\ See infra Section IV.D.5.k.
---------------------------------------------------------------------------

    Further, the Commission believes that by stating that a Government 
Securities ATS trades only government securities, the definition of 
Government Securities ATS clarifies which regulatory requirements are 
applicable for trading activity in government securities and non-
government securities. For example, a Government Securities ATS would 
file a Form ATS-N specifically disclosing information regarding its 
trading in government securities, which would enable market 
participants to understand the ATS's government securities operations 
and readily compare the ATS against other Government Securities ATSs.
    To provide that the same approach applies to broker-dealers that 
operate NMS Stock ATSs and non-NMS Stock ATSs, and to clarify 
requirements applicable to NMS Stock ATSs, the Commission is proposing 
to amend the definition of ``NMS Stock ATS'' to state that an NMS Stock 
ATS shall not trade securities other than NMS stocks.\254\ Today, 
securities other than NMS stocks are not traded in any NMS Stock ATS 
and the proposed amendment to the definition of NMS Stock ATS would 
have no impact on any existing ATS nor on the requirements applicable 
to existing NMS Stock ATSs. Broker-dealer operators of NMS Stock ATSs 
are currently required to file a Form ATS-N for NMS Stock ATS 
operations and a separate Form ATS for any non-NMS Stock ATS 
operations.\255\ This would not change under this proposal. In 
addition, to facilitate the orderly transition to the heightened 
requirements for Government Securities ATSs that are currently 
operating, the Commission is defining such ATSs as Legacy Government 
Securities ATSs.\256\
---------------------------------------------------------------------------

    \254\ See proposed Rule 300(k).
    \255\ See current Rule 301(b)(2)(viii).
    \256\ See proposed Rule 300(n). See also supra note 5. See infra 
notes 433-439 and accompanying text for a description of the filing 
and effectiveness rules applicable to Legacy Government Securities 
ATSs.
---------------------------------------------------------------------------

    To help specify which ATSs are subject to Rule 304 requirements, 
the Commission is proposing to define ``Covered ATS'' as an NMS Stock 
ATS or Government Securities ATS, as applicable.\257\ The Commission is 
also proposing to define ``Covered Newly Designated ATS'' to mean a 
Newly Designated ATS that is a Government Securities ATS or NMS Stock 
ATS, which the Commission believes would facilitate the transition of 
Communication Protocol Systems that are NMS Stock ATSs or Government 
Securities ATSs to the regulatory requirements of Regulation ATS.\258\
---------------------------------------------------------------------------

    \257\ See proposed Rule 300(m).
    \258\ See proposed Rule 300(s).
---------------------------------------------------------------------------

    The Commission is also proposing to add definitions of ``U.S. 
Treasury Security'' and ``Agency Security'' for purposes of Regulation 
ATS.\259\ ``U.S. Treasury Security'' would mean a security issued by 
the U.S. Department of the Treasury. ``Agency Security'' would mean a 
debt security issued or guaranteed by a U.S. executive agency, as 
defined in 5 U.S.C. 105, or government-sponsored enterprise, as defined 
in 2 U.S.C. 622(8). The proposed definitions are designed to provide 
the scope of securities a Government Securities ATS must include when 
calculating whether the fair access requirements set forth in Rule 
301(b)(5) are applicable and to facilitate compliance with the Fair 
Access Rule.\260\
---------------------------------------------------------------------------

    \259\ See proposed Rule 300(o)-(p).
    \260\ See infra Section III.B.4. The proposed definitions are 
similar to those in FINRA's rules. See FINRA Rules 6710(l) and 
6710(p).
---------------------------------------------------------------------------

Request for Comment
    12. Should the Commission adopt a more limited or expansive 
definition of Government Securities ATS than the definition that is 
being proposed? Given that, unlike the 2020 Proposal, the definition of 
Government Securities ATS would now include Communication Protocol 
Systems that transact in government securities and/or repos, do 
commenters believe that the definition of Government Securities ATS 
should be limited or expanded?
    13. Should the Commission cite to the section 3(a)(42) (15 U.S.C. 
78c(a)(42)) definition of government securities for purposes of 
defining Government Securities ATS? Should the securities encompassed 
by the definition (e.g., certain options on government securities) be 
considered ``government securities'' for purposes of this regulation?
    14. Should the Commission modify the proposed definitions of U.S. 
Treasury Securities and Agency Securities in any way? For example, 
should the proposed definitions of U.S. Treasury Securities and Agency 
Securities be based on definitions in any other existing rules?
    15. The proposed amendments to the definitions of NMS Stock ATS and 
Government Securities ATS are not designed to limit a broker-dealer 
operator for an NMS Stock ATS or Government Securities ATS with respect 
to other types of securities that the broker-dealer operator may make 
available for trading in an ATS that is subject to Rule 301(b)(2) of 
Regulation ATS or how the broker-dealer operator may structure the 
operations of its ATS businesses. Would the proposed amendments to the 
definitions of NMS Stock ATS and Government Securities ATS impose any 
operational or other burdens on the broker-dealer operator, other than 
those related to filing Form ATS, Form ATS-R, or Form ATS-N, as 
applicable?
    16. Should the Commission require an ATS that currently trades 
government securities and non-government securities, such as corporate 
bonds, to comply with Rule 304, including filing a Form ATS-N, with 
respect to the ATS's corporate bond activities as well as its 
government securities activities?
2. Proposed Elimination of the Exemption for ATSs That Limit Securities 
Activities to Government Securities and Repos
    The Commission is re-proposing amendments to Regulation ATS that 
would require a Currently Exempted Government Securities ATS that seeks 
to operate pursuant to the exemption from the definition of an 
``exchange'' under Exchange Act Rule 3a1-1(a)(2), and thus not be 
required to be registered as a national securities exchange, to comply 
with Regulation ATS. The Commission is proposing to eliminate the 
exemption under Rule 301(a)(4) of

[[Page 15518]]

Regulation ATS, which exempts from the definition of an ``exchange'' 
under Section 3(a)(1) of the Exchange Act an ATS that is operated by a 
registered broker-dealer or a bank that solely trades government 
securities or repos.\261\ As a result, Currently Exempted Government 
Securities ATSs would either have to register as an exchange or operate 
pursuant to an exemption to such registration, such as the exemption 
under Regulation ATS.\262\ A Currently Exempted Government Securities 
ATS that opts to comply with Regulation ATS would then be subject to 
the conditions to the exemption from exchange registration that are 
designed to provide its subscribers with investor protections and 
enable Commission oversight, including the surveillance and examination 
of ATSs, and to help assure fair and orderly markets.\263\ The 
Commission is also proposing to subject Currently Exempted Government 
Securities ATSs to the enhanced public transparency requirements of 
Rule 304 and Form ATS-N.
---------------------------------------------------------------------------

    \261\ See 17 CFR 240.3a1-1(a)(3) and 17 CFR 242.301(a)(4).
    \262\ The Commission is proposing to delete the text of Rule 
301(a)(4)(ii)(A)-(C) and replace each paragraph with the term 
``Reserved.'' Based on Commission staff experience, ATSs generally 
do not trade commercial paper, and the Commission is not proposing 
to eliminate Rule 301(a)(4)(ii)(D), which exempts an ATS from 
compliance with Regulation ATS if the ATS limits its securities 
activities to commercial paper. Accordingly, the only ATSs that 
would continue to be exempt under Rule 301(a)(4) would be ATSs that 
are registered broker-dealers or are banks and limit their 
securities activities to commercial paper.
    \263\ See Regulation ATS Adopting Release, supra note 31, at 
70878. See also infra notes 287-297 and accompanying text.
---------------------------------------------------------------------------

    In response to the 2020 Proposal, several commenters expressed 
support for eliminating the exemption for ATSs that both (1) limit 
their securities activities to government securities or repos and (2) 
either register as broker-dealers or are banks.\264\ Commenters stated 
such requirements would help impose regulatory oversight,\265\ and one 
commenter stated that the requirements could promote market 
transparency, resiliency, and integrity.\266\ One commenter stated that 
requiring Currently Exempted Government Securities ATSs to adopt 
written safeguards and procedures to protect subscriber confidential 
trading information could help protect the integrity of a subscriber's 
confidential trading information that could otherwise be at risk of 
unauthorized disclosure and subject to potential misuse.\267\ In 
addition, commenters specifically expressed support for the requirement 
that all Government Securities ATSs register as broker-dealers, stating 
that such requirement would provide regulatory oversight with regard to 
risk management and regulatory controls.\268\
---------------------------------------------------------------------------

    \264\ See, e.g., SIFMA Letter at 2 (stating that given that 
Government Securities ATSs closely resemble ATSs that trade NMS 
stocks, it would be appropriate to impose similar regulatory 
oversight over such trading venues); FINRA Letter at 2; BrokerTec 
Letter at 2; ICE Bonds Letter I at 2.
    \265\ See SIFMA Letter at 2; FINRA Letter at 2; MFA Letter at 3; 
ICE Bonds Letter I at 2; and AFREF Letter at 2-3 (stating that the 
regulatory extension would help to discourage some of the deceptive 
and manipulative trading practices that occur in government 
securities markets).
    \266\ See Citadel Letter.
    \267\ See MFA Letter at 3.
    \268\ See SIFMA Letter at 2.
---------------------------------------------------------------------------

    One commenter suggested the Commission consider subjecting ATSs for 
a class of securities to an enhanced regime if the ATSs trading in that 
asset class are ``significant''; the commenter suggested that the 
Commission may recognize 30 percent as the threshold for 
``significant'' threshold, and noted that equity-NMS Stock ATSs were 
matching about 30 percent of the total share volume when Regulation ATS 
was implemented.\269\ The commenter suggested that the Commission apply 
this test when considering removing the exemption for Currently 
Exempted Government Securities ATSs and that the Commission make 
proposed Form ATS-G public when the ATSs are ``significant'' with 
respect to trading volume.\270\ The Commission is not, however, 
proposing a specific trading volume test to determine whether to remove 
the exemption for Currently Exempted Government Securities ATSs. In 
addition to the significant volume in government securities transacted 
on ATSs (as well as Communication Protocol Systems),\271\ the 
Commission also recognizes that government securities have a critical 
role in the U.S. and global economy and ATSs have grown in importance 
to investors and overall securities market structure for purposes of 
the execution and pricing of government securities.
---------------------------------------------------------------------------

    \269\ See Bloomberg Letter at 4.
    \270\ See id.
    \271\ See, e.g., supra note 197 and accompanying text 
(describing that, on the interdealer market, the majority of trading 
currently occurs on ATSs). See also infra note 840 and accompanying 
text (describing that Communication Protocol Systems account for 
approximately 30 to 40 percent of total electronic trading volume on 
multilateral U.S. Treasury trading venues).
---------------------------------------------------------------------------

    The Commission is also proposing to amend Rule 301(b)(1) of 
Regulation ATS, which currently requires an ATS to register as a 
broker-dealer under Section 15 of the Exchange Act,\272\ to allow an 
ATS to register either as a broker-dealer under Exchange Act Section 15 
or a government securities broker or government securities dealer under 
Exchange Act Section 15C(a)(1)(A).\273\ Registration pursuant to 
Section 15C(a)(1)(A) specifically applies to government securities 
brokers and dealers other than registered broker-dealers or financial 
institutions.\274\ Registration as a broker-dealer under Section 15 or 
government securities broker or government securities dealer under 
Section 15C(a)(1)(A) of the Exchange Act is important because, among 
other things, it requires membership in an SRO, such as FINRA.\275\ 
Because ATSs that register as broker-dealers or government securities 
brokers or dealers do not have self-regulatory responsibilities, the 
Commission believes it is important for these ATSs to be members of an 
SRO and thus subject to SRO examination and market surveillance,\276\ 
trade reporting obligations,\277\ and certain investor protection 
rules.\278\ Like ATSs registered as broker-dealers under Section 15, an 
ATS registered as a government securities broker or government 
securities dealer under Section 15C(a)(1)(A) would be subject to 
oversight and market surveillance by an SRO.\279\
---------------------------------------------------------------------------

    \272\ 15 U.S.C. 78o.
    \273\ See 15 U.S.C. 78o-5. Exchange Act Section 15C(a)(1)(A) 
makes it unlawful for a government securities broker or government 
securities dealer (other than a registered broker or dealer or a 
financial institution) to make use of the mails or any means or 
instrumentality of interstate commerce to effect a transaction in 
any government securities unless the government securities broker or 
government securities dealer is registered with Commission pursuant 
to Exchange Act Section 15C(a)(2). See 15 U.S.C. 78o-5(a)(1)(A). 
Section 15C(e) in turn generally requires that a government 
securities broker or government securities dealer that is registered 
or required to be registered under Section 15C(a)(1)(A) must be a 
member of a registered national securities exchange or registered 
securities association such as FINRA.
    \274\ Broker-dealers that limit their activity to government 
securities require specialized registration under Section 15C of the 
Exchange Act and do not have to register as general-purpose broker-
dealers under Section 15(b). See 15 U.S.C. 78o-5.
    \275\ See Regulation ATS Adopting Release, supra note 31, at 
70863 (discussing the importance of an ATS being a member of an SRO 
because ATSs registered as broker-dealers will not have self-
regulatory responsibilities). As noted above, Section 15C(e) 
generally requires SRO membership for a government securities broker 
or government securities dealer that is registered or required to be 
registered under Section 15C(a)(1)(A). Similarly, Section 15(b)(8) 
generally requires a registered broker-dealer to be a member of a 
registered securities association such as FINRA.
    \276\ See, e.g., FINRA Rule 1000 Series, FINRA Rules 4140, 4510, 
4520, 4530, and 8210.
    \277\ See, e.g., FINRA Rule 6730.
    \278\ See, e.g., FINRA Rules 3110, 4370, 5210, 5220, 5230, 5310, 
and 5340.
    \279\ See Regulation ATS Adopting Release, supra note 31, at 
70863.

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[[Page 15519]]

    In contrast, SRO membership is not required for a bank or other 
financial institution that registers as a government securities broker 
or dealer.\280\ Accordingly, the amendment to Regulation ATS would not 
permit a bank or other financial institution to satisfy the broker-
dealer registration requirement by registering as a government 
securities broker or government securities dealer under Section 
15C(a)(1)(B) of the Exchange Act.\281\ The Commission believes it is 
important for an ATS to be a member of an SRO, and unlike registrants 
under Sections 15 and 15C(a)(1)(A), a bank or other financial 
institution that registers under Section 15C(a)(1)(B) is not required 
to be a member of an SRO.\282\
---------------------------------------------------------------------------

    \280\ Unlike registered broker-dealers (Section 15(b)(8)) and 
government securities brokers or government securities dealers that 
are registered or required to be registered under Section 
15C(a)(1)(A) (Section 15C(e)), there is no statutory requirement of 
SRO membership for banks. Because banks typically operate in 
reliance on exceptions from broker or dealer status, they are not 
required to become a member of an SRO, such as FINRA. In this 
regard, Exchange Act Section 3(a)(4)(B)(iii)(II) excludes from the 
definition of ``broker'' a bank that effects transactions in 
``exempted securities'' such as government securities. 15 U.S.C. 
78c(a)(4)(B)(iii)(II). See Exchange Act Section 3(a)(12) (defining 
``exempted securities'' to include ``government securities'' as 
defined in Section 3(a)(42) of the Exchange Act). Exchange Act 
Section 3(a)(5)(C)(i)(II) similarly excepts from the definition of 
``dealer'' a bank that buys or sells exempted securities. 15 U.S.C. 
78c(a)(5)(C)(i)(II).
    \281\ Exchange Act Section 15C(a)(1)(B) makes it unlawful for 
any government securities broker or government securities dealer 
that is a registered broker or dealer or a financial institution to 
make use of the mails or any means or instrumentality of interstate 
commerce to effect any transaction in, or to induce or attempt to 
induce the purchase or sale of, any government security unless such 
government securities broker or government securities dealer has 
filed with the appropriate regulatory agency written notice that it 
is a government securities broker or government securities dealer. 
15 U.S.C. 78o-5(a)(1)(B)(i).
    \282\ See Exchange Act Sections 3(a)(6) (defining ``bank'') and 
3(a)(46) (defining ``financial institution'').
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    As a result, a bank-operated ATS that trades only government 
securities or repos would be unable to rely on the exemption provided 
by Regulation ATS, as proposed to be amended, and could not otherwise 
operate unless registered as a national securities exchange as required 
by Section 5 of the Exchange Act. However, this is the case currently 
with respect to bank-operated ATSs that trade securities other than 
government securities, and it is the Commission's understanding that 
these ATSs often are operated by bank affiliates that are themselves 
registered broker-dealers, rather than by the banks themselves. The 
Commission believes that a bank that operates an ATS that trades only 
government securities might adopt a similar registered affiliate 
structure for its government securities operations, such as by moving 
its ATS operations into a new or existing broker-dealer affiliate of 
the bank.
    In addition to Rule 301(b)(1) of Regulation ATS, which most 
Currently Exempted Government Securities ATSs already satisfy,\283\ a 
Currently Exempted Government Securities ATS would be required to 
comply with other conditions of the Regulation ATS exemption, as 
proposed to be amended. This includes Rule 304, which would require 
that Government Securities ATSs file Form ATS-N. Government Securities 
ATSs would not, however, be subject to the order display and execution 
access provisions under Rule 301(b)(3) or the fees provision of Rule 
301(b)(4) that are applicable only to NMS Stock ATSs.\284\ The 
Commission is proposing to require Government Securities ATSs that meet 
a certain volume threshold to comply with the Fair Access Rule with 
respect to trading in U.S. Treasury Securities and Agency 
Securities.\285\ Because the Commission is proposing to apply 
Regulation SCI to certain Government Securities ATSs that trade U.S. 
Treasury Securities and/or Agency Securities, the Capacity, Integrity, 
and Security Rule under Rule 301(b)(6) would not apply to the trading 
of government securities on ATSs.\286\
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    \283\ See supra text accompanying note 226 (stating that most 
Currently Exempted Government Securities ATSs register as broker-
dealers with the Commission). For those Currently Exempted 
Government Securities ATSs that are operating as banks and not 
registered broker-dealers, the Commission is proposing to amend Rule 
301(b)(1) to provide a transition period to allow them to operate 
without interruption while their broker-dealer registration is 
pending until the earlier of the date the alternative trading system 
registers as a broker-dealer under section 15 of the Act or section 
15C(a)(1)(A) of the Act and becomes a member of a national 
securities association; or the date 210 calendar days after 
effective date of any final rule. See supra note 177.
    \284\ See 17 CFR 242.301(b)(3)-(4).
    \285\ See infra Section III.B.4.
    \286\ See infra Section III.C.
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    The Commission believes that it is important that all Government 
Securities ATSs, including Currently Exempted Government Securities 
ATSs, be subject to the conditions of the Regulation ATS exemption, 
which are designed to protect investors and to facilitate Commission 
oversight. Accordingly, the Commission is re-proposing that a Currently 
Exempted Government Securities ATS must:
     Permit the examination and inspection of its premises, 
systems, and records, and cooperate with the examination, inspection, 
or investigation of subscribers, whether such examination is being 
conducted by the Commission or by an SRO of which such subscriber is a 
member, pursuant to Rule 301(b)(7).\287\ The Commission believes that 
because subscribers to whom the Commission's inspection authority may 
not extend could use a Currently Exempted Government Securities ATS to 
manipulate the market in a security, it is important that these ATSs 
cooperate in all inspections, examinations, and investigations.\288\
---------------------------------------------------------------------------

    \287\ See 17 CFR 242.301(b)(7). See also Regulation ATS Adopting 
Release, supra note 31, Section IV.A.2.f.
    \288\ See Regulation ATS Adopting Release, supra note 31, at 
70877.
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     Make and keep certain records specified in Rule 302 \289\ 
and preserve records specified in Rule 303,\290\ pursuant to Rule 
301(b)(8).\291\ The recordkeeping requirements would require the 
Currently Exempted Government Securities ATSs to make and keep certain 
records for an audit trail of trading activity that would allow the 
Commission to examine whether the ATS is in compliance with Federal 
securities laws.\292\
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    \289\ See supra note 163.
    \290\ See supra notes 164 and 166.
    \291\ See 17 CFR 242.301(b)(8). See also Regulation ATS Adopting 
Release, supra note 31, Section IV.A.2.g.
    \292\ See Regulation ATS Adopting Release, supra note 31, at 
70878.
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     Periodically report certain information about transactions 
in the ATS and information about certain activities on Form ATS-R 
within 30 calendar days after the end of each calendar quarter in which 
the market has operated pursuant to Rule 301(b)(9).\293\ The 
information reported on Form ATS-R by Currently Exempted Government 
Securities ATSs will permit the Commission to monitor the trading on 
these ATSs for compliance with the Exchange Act and applicable rules 
thereunder and enforce the Fair Access Rule.\294\
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    \293\ See 17 CFR 242.301(b)(9). See also supra notes 144-148 and 
infra Section III.B.4.
    \294\ See Regulation ATS Adopting Release, supra note 31, at 
70874 and 70878.
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     Adopt written safeguards and written procedures to protect 
confidential trading information and to separate ATS functions from 
other broker-dealer functions, including principal and customer trading 
pursuant to Rule 301(b)(10).\295\ The Commission believes that applying 
the requirements of Rule 301(b)(10) to Currently Exempted Government 
Securities ATSs will help prevent the potential for abuse

[[Page 15520]]

of subscriber confidential trading information.\296\
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    \295\ See 17 CFR 242.301(b)(10); infra note 168; NMS Stock ATS 
Adopting Release, supra note 2, Section VI.
    \296\ See NMS Stock ATS Adopting Release, supra note 2, at 
38864.
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     Not use in its name the word ``exchange,'' or any 
derivation of the word ``exchange'' pursuant to Rule 301(b)(11).\297\ 
The Commission believes that the use of the word ``exchange'' by an 
ATS, including a Currently Exempted Government Securities ATS, would be 
deceptive and could lead investors to believe incorrectly that such ATS 
is registered as a national securities exchange.\298\
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    \297\ See 17 CFR 242.301(b)(11); Regulation ATS Adopting 
Release, supra note 31, Section II.C.
    \298\ See Regulation ATS Proposing Release, supra note 173.
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Request for Comment
    17. Should the Commission amend Regulation ATS to eliminate the 
exemption from compliance with Regulation ATS under Rule 
301(a)(4)(ii)(A) for all Currently Exempted Government Securities ATS, 
including those operated by banks?
    18. Should the proposed elimination of the exemption from 
compliance with Regulation ATS only apply to Government Securities ATSs 
that trade a certain type of government security (e.g., only U.S. 
Treasury Securities or only Agency Securities)? Should the proposed 
elimination of the exemption from compliance with Regulation ATS only 
apply to Government Securities ATSs that trade government securities 
(and not repos)? If so, for which type of Government Securities ATS 
should the exemption be eliminated?
    19. Should Government Securities ATSs seeking to operate pursuant 
to the exemption provided by Regulation ATS have the alternative option 
to satisfy broker-dealer registration with the Commission pursuant to 
Section 15C(a)(1)(A)?
    20. Should the Commission adopt any alternatives to requiring 
Government Securities ATSs to register with the Commission as broker-
dealers under Section 15 or Section 15C(a)(1)(A)? For example, should 
the Commission amend Rule 301(b)(1) of Regulation ATS to include an 
alternative for a bank to register as a government securities broker or 
dealer pursuant to Section 15C(a)(1)(B), which would not require the 
bank to become a member of an SRO?
    21. Should there be a transition period for Currently Exempted 
Government Securities ATSs that are currently operated by banks to 
comply with the proposed amendments to Rule 301(b)(1), including ATSs 
provided and operated by an affiliate of the bank? Should the 
Commission allow a Currently Exempted Government Securities ATS that is 
not registered as a broker-dealer to operate pursuant to the Rule 3a1-
1(a)(2) exemption on a provisional basis? Does the proposal to allow 
such ATSs a maximum 210 calendar days from the effective date to comply 
with the broker-dealer registration requirement provide an appropriate 
amount of time to register as a broker-dealer? If not, what, if any, 
transition period would be appropriate? For Currently Exempted 
Securities ATSs that are currently operated by banks, should there be a 
different transition period? If so, why?
    22. Should there be a transition period for Currently Exempted 
Government Securities ATSs or Covered Newly Designated ATSs to comply 
with all or some of the requirements of Regulation ATS? If so, which 
requirements would require such a transition period, and how long 
should such transition period be?
    23 Should the Commission amend Regulation ATS to remove the 
exemption from Regulation ATS for ATSs that limit their securities 
activities to commercial paper? Do market participants use ATSs to 
trade commercial paper? If so, how is commercial paper traded on an 
ATS? Should the Commission remove any other exemption from Regulation 
ATS available under Rule 301?
    24. Should the Commission require Currently Exempted Government 
Securities ATSs to comply with all of the requirements of Regulation 
ATS applicable to all ATSs that are currently required to comply with 
Regulation ATS? If not, which requirements should a Currently Exempted 
Government Securities ATS not be required to comply with and why?
3. Filing Requirements for Broker-Dealers That Operate ATSs That Trade 
Government Securities and Non-Government Securities
    The Commission is re-proposing to revise Rule 301(b)(2)(viii) \299\ 
of Regulation ATS to provide that a Legacy Government Securities ATS 
that is operating pursuant to a Form ATS as of the effective date of 
any final rule will continue to be subject to the Rule 301(b)(2) 
requirements to file a Form ATS. However, once the ATS files a Form 
ATS-N, it will no longer be subject to Rule 301(b)(2)(i) through (vii) 
and will instead be subject to the reporting requirements under Rule 
304, which provides the rules for filing of Form ATS-N. The Commission 
is also proposing to provide that as of the effective date of any final 
rule, an entity seeking to operate as a Government Securities ATS will 
not be subject to the requirements of Rule 301(b)(2)(i) through (vii) 
and will instead be required to file reports under Rule 304. In 
addition, the Commission is proposing rules to make clear that a 
Currently Exempted Government Securities ATS would be subject to Rule 
304 and would not be subject to Rule 301(b)(2)(i) through (viii). These 
rules are designed to prevent Government Securities ATSs from being 
subject to potentially duplicative requirements in Rule 304 and Rule 
301(b)(2).
---------------------------------------------------------------------------

    \299\ 17 CFR 242.301(b)(2)(viii). Current Rule 301(b)(2)(viii) 
provides that NMS Stock ATSs must file with the Commission the 
reports and amendments required by Rule 304 and that NMS Stock ATSs 
are not subject to Rule 301(b)(2). NMS Stock ATSs or entities 
seeking to operate as NMS Stock ATSs would continue to file reports 
pursuant to Rule 304. Because the Commission review period for all 
Forms ATS-N filed by Legacy NMS Stock ATSs ended in October 2019, 
the Commission is proposing to delete references in Rule 
301(b)(2)(viii) to Legacy NMS Stock ATSs. The Commission is also 
proposing to consolidate the current provisions of Rule 
301(b)(2)(viii) applicable to NMS Stock ATSs to state that NMS Stock 
ATSs or entities seeking to operate as an NMS Stock ATS shall not be 
subject to the requirements of Rule 301(b)(2)(i) through (vii) and 
would be subject to Rule 304.
---------------------------------------------------------------------------

    The Commission is proposing to amend Rule 301(b)(2)(viii) to make 
clear that Covered ATSs are required to file reports pursuant to Sec.  
242.304 and ATSs that are not Covered ATSs are subject to Rule 
301(b)(2).\300\ Today, there are some broker-dealers that operate 
multiple types of ATSs that trade different types of securities (e.g., 
NMS Stock ATS and non-NMS Stock ATS) or operate multiple ATSs that 
trade the same type of securities but are separate and distinct from 
each other (e.g., a broker-dealer registered for, and operates, two NMS 
Stock ATSs, each of which maintains a separate book of orders that is 
governed by distinct priority and order interaction rules for one type 
of security).\301\ In both instances, each of the ATSs must comply with 
Regulation ATS.\302\ The Commission is proposing to add to Rule 
301(b)(2)(viii) to provide that each NMS Stock ATS or Government 
Securities ATS that is operated by a broker-dealer that is the

[[Page 15521]]

registered broker-dealer for more than one ATS must comply with 
Regulation ATS, including the filing requirements of Rule 304. The 
Commission believes that the proposed language makes clear that the 
proposal would not require compliance with the heightened transparency 
requirements of Regulation ATS for ATSs that are not NMS Stock ATSs or 
Government Securities ATSs. Under the proposal, a broker-dealer 
operator, for example, for an ATS that noticed on its initial operation 
report on Form ATS that the ATS trades government securities and 
corporate debt securities would be the broker-dealer operator for two 
types of ATSs that would be separate from each other with regard to 
trading these types of securities and each would comply with Regulation 
ATS. These two types of ATSs would be (1) a Government Securities ATS 
that would file a Form ATS-N with respect to government securities and 
(2) a non-Government Securities ATS that would file a Form ATS with 
respect to corporate debt.\303\ In addition, each of the two ATSs would 
be required to comply with the conditions to Regulation ATS, including, 
among other things, adopting written safeguards and written procedures 
to protect subscriber confidential trading information for the ATS 
pursuant to Rule 301(b)(10) and making and keeping records for the ATS 
pursuant to Rule 301(b)(8).\304\
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    \300\ The Commission is also proposing to amend Rule 
301(b)(2)(viii) to state that Covered Newly Designated ATSs will be 
subject to Rule 304.
    \301\ The Commission is proposing that, for the purposes of 
calculating volume thresholds for the Fair Access Rule, the average 
trading volume of ATSs that are operated by a common broker-dealer, 
or ATSs operated by affiliated broker-dealers, will be aggregated. 
See infra Section V.A.2.
    \302\ See Rule 3a1-1(a)(2) (providing that an organization, 
association, or group of persons shall be exempt from the definition 
of ``exchange'' if it is in compliance with Regulation ATS) and Rule 
301(a) (providing that an ATS shall comply with the requirements of 
Rule 301(b)).
    \303\ Under the proposed rules, a broker-dealer operator for an 
ATS that currently trades government securities and corporate bonds, 
for example, would file a Form ATS-N to disclose its government 
securities activities for the Government Securities ATS. The broker-
dealer operator would disclose the corporate bond activities of its 
existing ATS by filing with the Commission a material amendment to 
its Form ATS pursuant to Rule 301(b)(2)(ii) of Regulation ATS to 
remove information regarding government securities activities. See 
Regulation ATS Adopting Release, supra note 31, at 70864 (discussing 
circumstances under which an ATS would file a material amendment to 
Form ATS pursuant to Rule 301(b)(2), which, among other things, 
includes changes to the operating platform, the types of securities 
traded, or types of subscribers).
    \304\ See supra note 246 and accompanying text.
---------------------------------------------------------------------------

    The Commission also is proposing to amend Rule 301(b)(9) of 
Regulation ATS.\305\ This rule requires an ATS to report transaction 
volume in various types of securities, including government securities 
and repos, on Form ATS-R on a quarterly basis and within 10 calendar 
days after it ceases operation.\306\ As discussed above, the Commission 
is proposing to define ``Government Securities ATS'' and to clarify the 
definition of ``NMS Stock ATS'' to make clear that a Government 
Securities ATS cannot trade securities other than government securities 
or repos and that an NMS Stock ATS cannot trade securities other than 
NMS stocks.\307\ For example, a Government Securities ATS operated by a 
broker-dealer that is also the registered broker-dealer for a non-
Government Securities ATS would be required to file a Form ATS-R for 
the Government Securities ATS and a separate Form ATS-R for the non-
Government Securities ATS. The Commission is proposing to amend Rule 
301(b)(9) by removing language stating that an ATS must ``separately 
file'' a Form ATS-R for transactions in NMS stocks and for transactions 
in securities other than NMS stocks to simplify the text and convey 
that each ATS, even if operated by a broker-dealer that operates other 
ATSs, must file a Form ATS-R. This is consistent with the current Form 
ATS-R filing process for a broker-dealer that operates an NMS Stock ATS 
and non-NMS Stock ATS.\308\
---------------------------------------------------------------------------

    \305\ See 17 CFR 242.301(b)(9).
    \306\ The information filed on Form ATS-R permits the Commission 
to monitor trading on an ATS. See Regulation ATS Adopting Release, 
supra note 31, at 70878.
    \307\ See supra notes 244 and 254 and accompanying text.
    \308\ See NMS Stock ATS Adopting Release, supra note 2, Section 
III.B.5.
---------------------------------------------------------------------------

Request for Comment
    25. Should an NMS Stock ATS or Government Securities ATS that is 
operated by a broker-dealer that is a registered broker-dealer for more 
than one ATS be subject to Rule 304 independent of any other ATS 
operated by its broker-dealer?
    26. Should a broker-dealer that is the registered broker-dealer for 
more than one ATS be required to file separate Forms ATS-R for each of 
the ATSs it operates?
    27. Should a broker-dealer that is the registered broker-dealer for 
an ATS that trades government securities or repos and an ATS that 
trades NMS stocks be required to file separate Forms ATS-N for each of 
the ATSs it operates?
    28. Should the Commission allow a broker-dealer operator of an NMS 
Stock ATS or a Government Securities ATS to disclose on its Form ATS-N 
its non-government securities or non-NMS stock activities, in addition 
to its government securities or NMS stock activities, on a voluntary 
basis?
    29. Do commenters believe that additional changes or requirements 
to the ATS framework are needed? For example, should the Commission 
propose amendments to Regulation ATS to require ATSs that trade equity 
securities other than NMS stocks, corporate debt securities, municipal 
securities, or any other category of securities to comply with Rule 
304, including filing with the Commission public Form ATS-N and 
requiring their Forms ATS-N to be subject to Commission review and 
effectiveness processes?
4. Application of Fair Access to Government Securities ATSs
    The Fair Access Rule, as proposed to be amended and as described in 
detail below,\309\ requires an ATS to, among other things, establish 
and apply reasonable written standards for granting access on its 
system. Today, the Fair Access Rule only applies if an ATS's trading 
volume for certain securities or a certain type of securities exceeds 
an average daily volume threshold during a period time set forth in the 
rule. Currently, the Fair Access Rule only applies to the trading of 
NMS stocks, equity securities that are not NMS stocks and for which 
transactions are reported to an SRO, municipal securities, and 
corporate debt securities, but not to trading in government 
securities.\310\
---------------------------------------------------------------------------

    \309\ See infra Section V.A. See also proposed Rule 
301(b)(5)(iii).
    \310\ See 17 CFR 242.301(b)(5)(i).
---------------------------------------------------------------------------

    The Fair Access Rule was designed to ensure that qualified market 
participants have fair access to the significant sources of liquidity 
in the U.S. securities markets. When Regulation ATS was adopted, the 
Commission explained that the fair treatment by ATSs of potential and 
current subscribers is particularly important when an ATS captures a 
large percentage of trading volume in a security, because viable 
alternatives to trading on such a system are limited.\311\ The 
Commission further explained that if an ATS has a significantly large 
percentage of the volume of trading in a security or type of security, 
unfairly discriminatory actions can hurt investors lacking access to 
that ATS.\312\ Currently, however, Regulation ATS does not provide a 
mechanism to prevent unfair denials or limitations of access by ATSs 
that trade U.S. Treasury Securities or Agency Securities or regulatory 
oversight of such denials or limitations of access. Today, the 
principles undergirding the Fair Access Rule are equally relevant to a 
Government Securities ATS, and amending the Fair Access Rule to include 
the trading of U.S. Treasury Securities and Agency Securities would 
help ensure the fair treatment of potential and current subscribers to 
ATSs that consist of a large percentage

[[Page 15522]]

of trading volume in these two types of securities.\313\
---------------------------------------------------------------------------

    \311\ See Regulation ATS Adopting Release, supra note 31, at 
70872.
    \312\ See id.
    \313\ Under the proposal, the Fair Access Rule would not apply 
to trading of repos, including repos on U.S. Treasury Securities and 
Agency Securities. The Commission notes FINRA does not require ATSs 
to report transactions for repos. The Commission is requesting 
comment on its preliminary assessment and on whether the Commission 
should amend Regulation ATS to require Government Securities ATSs 
that meet certain volume thresholds for the trading of repos, 
including repos on U.S. Treasury Securities and Agency Securities, 
to be subject to the requirements of the Fair Access Rule.
---------------------------------------------------------------------------

    In the 2020 Proposal, the Commission proposed that a Government 
Securities ATS would be subject to the Fair Access Rule if during at 
least four of the preceding six calendar months, the Government 
Securities ATS had: (1) With respect to U.S. Treasury Securities, five 
percent or more of the average weekly dollar volume traded in the 
United States as provided by the SRO to which such transactions are 
reported; or (2) with respect to Agency Securities, five percent or 
more of the average daily dollar volume traded in the United States as 
provided by the SRO to which such transactions are reported.
    In response to the 2020 Proposal, commenters generally supported 
amending Regulation ATS to apply the Fair Access Rule for Government 
Securities ATSs that meet certain trading thresholds.\314\ Some 
commenters stated that the proposed amendments would ensure that market 
participants are not unreasonably denied access from important sources 
of liquidity for a particular security,\315\ and prevent discriminatory 
actions that could hurt investors, and potentially result in higher 
trading costs and a reduction in trading efficiency.\316\ One commenter 
stated that the Commission should, as was proposed in the 2020 
Proposal, apply the thresholds to all types of U.S. Treasury Securities 
and Agency Securities, each on an aggregate basis.\317\ One commenter, 
however, suggested that the Commission may apply the fair access 
thresholds to on-the-run securities that are ``likely'' to trade on an 
ATS as off-the-run securities are less liquid and tend to trade using 
other methods.\318\
---------------------------------------------------------------------------

    \314\ See, e.g., SIFMA Letter; MFA Letter; ICE Bonds Letter I; 
and Healthy Markets Letter.
    \315\ See SIFMA Letter at 4. See also ICI Letter at 4 (stating 
that funds generally are not able to directly access liquidity on 
most of these platforms, and that applying the fair access 
requirements would enhance the ability of funds to onboard and 
participate on these platforms directly and would generally enhance 
market structure for U.S. Treasury Securities and benefit fund 
shareholders); FIA PTG Letter at 2 (stating that the requirements 
will ensure qualified market participants have access to the 
government securities market).
    \316\ See MFA Letter at 4. See also ICI Letter at 4 (stating 
that the fair access requirements would enable the Commission to 
evaluate ATS standards and determine whether they are being applied 
in an unfair or discriminatory manner).
    \317\ See Tradeweb Letter at 3 (stating that the Commission 
should not, for example, distinguish between on-the-run and off-the-
run U.S. Treasury Securities, and that a broader measure of market 
significance is preferable in order to provide for more stable 
application of the Fair Access Rule); ICE Bonds Letter I at 5.
    \318\ See Bloomberg Letter at 5 (noting that FINRA's aggregated 
weekly data report currently segments the data into on-the-run/off-
the-run and dealer-to-dealer and dealer-to-customer transactions).
---------------------------------------------------------------------------

    The Commission is re-proposing to apply the Fair Access Rule to the 
trading of government securities on an ATS with certain revisions. 
After considering comments received, proposed changes to Exchange Act 
Rule 3b-16, and further analysis of the U.S. Treasury Securities 
markets, as explained further below, the Commission is proposing to 
revise the average weekly trading volume percentage for ATSs trading 
U.S. Treasury Securities from the threshold proposed in the 2020 
Proposal. Accordingly, the Commission is proposing that a Government 
Securities ATS will be subject to the Fair Access Rule if, during at 
least four of the preceding six calendar months: (1) It had three 
percent or more of the U.S. Treasury Securities average weekly dollar 
volume traded in the United States as provided by the SRO to which such 
transactions are reported; or (2) it had five percent or more of the 
Agency Securities average daily dollar volume traded in the United 
States as provided by the SRO to which such transactions are reported.
    First, the Commission is re-proposing that the thresholds include 
only securities for which transactions are reported to an SRO, and the 
volume thresholds are based on how the SRO subsequently reports that 
volume to the public. FINRA publishes weekly aggregate data on U.S. 
Treasury Securities based on the mandatory transaction reports of its 
members to TRACE, and disseminates transaction data about Agency 
Securities immediately upon receipt of a transaction report.\319\ 
Currently, FINRA neither provides individual trade reports nor 
aggregates daily volume data for U.S. Treasury Securities transactions 
to TRACE subscribers (or to the public). FINRA, however, provides 
individual trade reports for all Agency Securities transactions to 
TRACE subscribers.\320\ Accordingly, because weekly dollar volume data 
about transactions in U.S. Treasury Securities and daily dollar volume 
data about transactions in Agency Securities are publicly available via 
TRACE, Government Securities ATSs will be able to readily calculate 
whether they meet the applicable thresholds.\321\
---------------------------------------------------------------------------

    \319\ See supra note 229.
    \320\ The Commission believes that the vast majority--and 
likely, all--broker-dealer operators of Legacy Government Securities 
ATSs that trade Agency Securities currently subscribe to TRACE. 
Communication Protocol Systems that are not currently FINRA members, 
however, are not required to report to TRACE. The Commission is 
requesting public comment on the extent to which Government 
Securities ATSs (which may include Legacy Government Securities ATSs 
and Communication Protocol Systems) have access to TRACE trade 
reports for Agency Securities.
    \321\ In response to the 2020 Proposal, one commenter stated 
that the proposal would need to be based on ``weekly par value 
traded'' because FINRA publishes volume data on a weekly basis. See 
Bloomberg Letter at 6. The Commission believes that data to 
calculate the proposed threshold, which is based on dollar volume 
published by FINRA on a weekly basis, would be readily available.
---------------------------------------------------------------------------

    Second, the Commission continues to believe that separate volume 
thresholds for U.S. Treasury Securities and Agency Securities would 
best advance the investor protection goals of the Fair Access 
Rule.\322\ The proposed volume thresholds would help ensure that the 
Fair Access Rule is appropriately tailored so that it only applies to 
the category of security for which an ATS has significant trading 
volume.\323\ The Commission believes that it would be unnecessary and 
overly burdensome to require a Government Securities ATS to comply with 
the Fair Access Rule for a category of government security for which 
that ATS does not have significant volume. Furthermore, the Commission 
now proposes different trading volume thresholds for U.S. Treasury 
Securities and Agency Securities. As such, the Commission believes it 
would be impractical for the Fair Access Rule to combine trading volume 
in these two types of securities to determine whether a Government 
Securities ATS has triggered its requirements.
---------------------------------------------------------------------------

    \322\ In response to the 2020 Proposal, one commenter stated 
that it supports applying the Fair Access Rule to all types of U.S. 
Treasury Securities and all types of Agency Securities, each on an 
aggregate basis. See Tradeweb Letter at 3.
    \323\ For example, suppose a Government Securities ATS has 
significant trading volume in U.S. Treasury Securities but not 
Agency Securities. In this example, the proposed rule would help 
ensure that investors receive fair access to the ATS's services with 
respect to U.S. Treasury Securities, but it would not require the 
ATS to provide fair access for its Agency Securities services.
---------------------------------------------------------------------------

    Third, the Commission believes that it is appropriate to determine 
these volume thresholds on a category basis.\324\ Given that U.S. 
Treasury

[[Page 15523]]

Securities and Agency Securities are types of debt securities, doing so 
would be consistent with the Fair Access Rule's application to other 
categories of fixed income securities (i.e., corporate bonds and 
municipal securities). The Fair Access Rule applies on a security-by-
security basis for NMS stocks and equity securities that are not NMS 
stocks, and on a category basis for corporate bonds and municipal 
securities.
---------------------------------------------------------------------------

    \324\ In response to the 2020 Proposal, some commenters stated 
that they support applying the thresholds on an aggregate basis. See 
ICE Bonds Letter at 6 and Tradeweb Letter at 3. One commenter stated 
that Commission should not, for example, distinguish between on-the-
run and off-the-run Treasuries in applying the Fair Access Rule 
because a broader measure of market significance is preferable in 
order to provide for a more stable application of the Fair Access 
Rule. See Tradeweb Letter at 3.
---------------------------------------------------------------------------

    Fourth, the Commission is proposing that a Government Securities 
ATS would be required to comply with the Fair Access Rule only if it 
has met at least one of the applicable volume thresholds during at 
least four of the preceding six calendar months.\325\ For ATSs that 
trade Agency Securities, this is the same time period for evaluating 
the applicability of the Fair Access Rule that is currently applied to 
ATSs that trade NMS stocks, equity securities that are not NMS stocks 
and for which transactions are reported to an SRO, municipal 
securities, and corporate debt securities.
---------------------------------------------------------------------------

    \325\ However, if, for example, during the six month period from 
January to June, the Government Securities ATS met the threshold for 
U.S. Treasury Securities only during January and April and met the 
threshold for Agency Securities only during February and May, the 
Government Securities ATS would not be subject to the Fair Access 
Rule in July because the ATS would not have met the threshold for 
either type of security during at least four of the preceding six 
months in either U.S. Treasury Securities or Agency Securities.
---------------------------------------------------------------------------

    Fifth, the Commission is proposing a three percent threshold to 
apply the Fair Access Rule for Government Securities ATSs that trade 
U.S. Treasury Securities. The Commission received several comments on 
the threshold proposed in the 2020 Proposal, which expressed differing 
opinions. One commenter stated that it would support a threshold of 
three percent of daily market volume, observing that such a threshold 
would apply the Fair Access Rule to only four ATSs for U.S. Treasury 
Securities and one for Agency Securities, and stating that these ATSs 
are ``leading exchanges'' whose customers deserve fair access.\326\ On 
the other hand, one commenter stated that an ATS should be subject to 
the Fair Access Rule only if it is a ``significant'' source of 
liquidity and that it believed that most market participants view 10 
percent of the par value traded in the asset class as the market share 
threshold where an ATS's liquidity is significant.\327\ Another 
commenter supported the previously-proposed five percent 
thresholds.\328\
---------------------------------------------------------------------------

    \326\ See AFREF Letter at 3.
    \327\ See Bloomberg Letter at 6.
    \328\ See SIFMA Letter at 5.
---------------------------------------------------------------------------

    While public comment on what constitutes a significant market 
center for U.S. Treasury Securities is split, the Commission believes 
that a three percent average weekly trading volume threshold would 
encompass the significant markets for and advance the policy goals of 
the Fair Access Rule. The Commission believes that the policy goals 
behind the Fair Access Rule are of particular importance in the U.S. 
Treasury Securities market. Market participants must have reasonable 
access to significant sources of liquidity in the secondary markets for 
U.S. Treasury Securities because, among other things, U.S. Treasury 
Securities play a vital and irreplaceable role in both the U.S. and 
global economies. In addition, ATSs that operate in the secondary 
interdealer markets for on-the-run U.S. Treasury Securities have become 
a significant source of trading interest for government securities. 
Also, under this proposal, RFQ systems will now be subject to 
Regulation ATS. Given that RFQ systems make up over half of secondary 
trading in the U.S. Treasury market,\329\ the Fair Access Rule's policy 
goals would be advanced by requiring RFQs that facilitate a significant 
percentage of U.S. Treasury trading to provide fair access to market 
participants. Additionally, when compared to the application of the 
Fair Access Rule to NMS Stock ATSs, denying fair access to services of 
an ATS for U.S. Treasury Securities under this proposal would be 
particularly impactful. The Fair Access Rule would be applied 
categorically for government securities rather than on a security-by-
security basis like in the NMS equities market. Thus, a market 
participant being denied access to a significant U.S. Treasury 
Securities ATS could be denied access to the system's entire portfolio 
of U.S. Treasury Securities operations.
---------------------------------------------------------------------------

    \329\ See Treasury Market Practices Group (TMPG), White Paper on 
Clearing and Settlement in the Secondary Market for U.S. Treasury 
Securities (July 2019), available at https://www.newyorkfed.org/medialibrary/Microsites/tmpg/files/CS_FinalPaper_071119.pdf.
---------------------------------------------------------------------------

    Based on the current market, a three percent volume threshold would 
help ensure appropriate access for market participants, particularly 
retail and other non-broker-dealer investors who rely on liquidity in 
the government securities markets. Specifically, under the proposed 
three percent threshold, based on volume currently required to be 
reported to TRACE, the Commission estimates that seven Legacy 
Government Securities ATSs that trade U.S. Treasury Securities 
(including four Legacy Government Securities ATSs with greater than 
three percent market share and three affiliated ATSs with which their 
volume would be aggregated under the proposed changes to the Fair 
Access Rule) \330\ would be subject to the Fair Access Rule.\331\ Under 
the previously proposed five percent threshold, an estimated three ATSs 
trading U.S. Treasury Securities (including two Legacy Government 
Securities ATSs with greater than five percent market share and one 
affiliated ATS) would be subject to the Fair Access Rule.\332\ As such, 
a three percent threshold would result in market participants having 
fair access to an estimated nearly eight percent more of the U.S. 
Treasury Securities market than they would under a five percent 
threshold, based on volume currently reported to TRACE.\333\
---------------------------------------------------------------------------

    \330\ See infra Section V.A. See also infra Table VIII.1. For 
purposes of estimating the number of unique affiliated ATSs that 
would meet the proposed three percent threshold, the data in Table 
VIII.1 (stating a total of nine ``grouped-affiliated ATSs'' would be 
affected) has been adjusted based on the Commission's knowledge of 
current ATS operations.
    \331\ Based on Coalition Greenwich's Greenwich MarketView data 
from April 2021 through September 2021, approximately two currently 
operating Communication Protocol Systems would be subject to the 
Fair Access Rule using a three percent threshold in U.S. Treasury 
Securities. This would remain unchanged if the Commission used the 
previously-proposed five percent threshold.
    \332\ See infra Table VIII.1. For purposes of estimating the 
number of unique affiliated ATSs that would meet a five percent 
threshold, the data in Table VIII.1 (stating a total of five 
``grouped-affiliated ATSs'' would be affected) has been adjusted 
based on the Commission's knowledge of current ATS operations.
    \333\ See id.
---------------------------------------------------------------------------

    Furthermore, applying the Fair Access Rule to ATSs that meet a 
three percent threshold in U.S. Treasury Securities would result in the 
Fair Access Rule applying to Legacy Government Securities ATSs 
transacting in approximately 32 percent of market volume currently 
reported to FINRA in U.S. Treasury Securities. ATSs that trade U.S. 
Treasury Securities that would be subject to the Fair Access Rule under 
the proposed three percent threshold would comprise approximately 94 
percent of U.S. Treasury Securities volume traded on ATSs.\334\ 
Accordingly, the Commission believes that the three percent threshold 
would provide investors with access to

[[Page 15524]]

markets that are important venues for trading in U.S. Treasury 
Securities.
---------------------------------------------------------------------------

    \334\ Data is based on the regulatory version of TRACE for U.S. 
Treasury Securities from April 1, 2021 through September 30, 2021.
---------------------------------------------------------------------------

    Sixth, the five percent threshold set forth in the 2020 Proposal 
for Agency Securities is being re-proposed unchanged. Because the U.S. 
Treasury Securities market is one of the deepest and most liquid in the 
world, and because of the vital role that U.S. Treasury Securities play 
in the U.S. and global economies, it is particularly important to 
ensure that investors have access to ATSs with significant volume in 
U.S. Treasury Securities. The Agency Securities market, however, does 
not share the unique qualities of the U.S. Treasury Securities market, 
and accordingly, the Commission is re-proposing for Agency Securities a 
five percent threshold that is consistent with the current volume 
threshold applicable to corporate bonds and municipal securities.\335\ 
Furthermore, based on volume currently reported to TRACE, the estimated 
one Legacy Government Securities ATS that would exceed the proposed 
five percent threshold for Agency Securities accounts for nearly 12 
percent of volume reported in TRACE in Agency Securities.\336\
---------------------------------------------------------------------------

    \335\ See Rule 301(b)(5)(i)(A)-(D).
    \336\ This ATS would also meet the proposed threshold for 
trading in U.S. Treasury Securities.
---------------------------------------------------------------------------

    The Commission is proposing a compliance period for Communication 
Protocol Systems, which seek to operate as ATSs, and Legacy Government 
Securities ATSs that become subject to the Fair Access Rule. Under the 
proposal, a Communication Protocol System or a Legacy Government 
Securities ATS that becomes subject to the Fair Access Rule would be 
required to comply with the Fair Access Rule one month from the date 
that the Communication Protocol System or the Legacy Government 
Securities ATS initially triggers any of the fair access 
thresholds.\337\ The Commission believes that it is appropriate to 
provide the one-month compliance period to allow the Communication 
Protocol System or the Legacy Government Securities ATS to establish 
and apply reasonable written standards for granting, limiting, and 
denying access to the ATS services, as proposed, and, for those that 
would be NMS Stock ATSs and Government Securities ATSs, to prepare 
responses to Item 24 of Form ATS-N.\338\ The additional compliance 
period is designed to provide the Communication Protocol Systems and 
the Legacy Government Securities ATSs sufficient time to transition 
into the new ATS regulatory regime and prevent any disruptions to the 
operation of these systems and their participants.
---------------------------------------------------------------------------

    \337\ See proposed Rule 301(b)(5)(i)(G). The rule text uses the 
term ``Newly Designated ATS'' to refer to a Communication Protocol 
System. See supra note 134. Under this proposal, an ATS that 
triggers the fair access threshold for a security (for NMS stocks or 
equity securities that are not NMS stocks) or a category of security 
(for municipal securities, corporate debt securities, U.S. Treasury 
Securities, or Agency Securities) would not be able to avail itself 
to the one-month compliance period for triggering the fair access 
threshold for another security or another category of securities.
    \338\ See infra Section V.A.3.
---------------------------------------------------------------------------

Request for Comment
    30. Should any other type of government securities be included as a 
category of securities under Rule 301(b)(5)? Should the Commission 
apply Rule 301(b)(5) to all Government Securities ATSs? What would be 
the costs and benefits associated with such a requirement?
    31. Should the proposed three percent fair access threshold for 
U.S. Treasury Securities be applied to all types of U.S. Treasury 
Securities or to subset categories of U.S. Treasury Securities? For 
example, should the three percent fair access threshold be applied to 
transaction volume in only on-the-run U.S. Treasury Securities? Should 
the five percent fair access threshold be applied to all Agency 
Securities or to subset categories? If so, why or why not?
    32. Should the proposed three percent fair access threshold for 
U.S. Treasury Securities be set higher or lower than three percent? 
Should the proposed five percent fair access threshold for Agency 
Securities be set higher or lower than five percent? If so, what should 
the percentage thresholds be? Should there be no thresholds so that the 
Fair Access Rule would apply to all Government Securities ATSs that 
trade U.S. Treasury Securities or Agency Securities regardless of 
volume transacted on the ATS? Please support your views. Are the five 
percent and three percent thresholds appropriate thresholds to capture 
ATSs that are significant markets for trading in U.S. Treasury 
Securities and Agency Securities, respectively? Would the proposed 
thresholds capture ATSs that are not significant markets for U.S. 
Treasury Securities and Agency Securities? If there should be a percent 
threshold for a category finer than all U.S. Treasury Securities, for 
example on-the-run U.S. Treasury Securities or off-the-run U.S. 
Treasury Securities, what should that threshold should be?
    33. Should the fair access threshold be based on average weekly 
dollar volume traded in the United States for U.S. Treasury Securities 
and daily dollar volume traded in the United States for Agency 
Securities?
    34. Would the proposed four out of six month period be an 
appropriate period to measure the volume thresholds for U.S. Treasury 
Securities and Agency Securities? With respect to calculating the 
appropriate thresholds, would Government Securities ATSs have available 
appropriate data with which to determine whether the proposed 
thresholds have been met? Would ATSs that trade U.S. Treasury 
Securities be able to readily calculate whether they meet the volume 
thresholds in at least four out of the preceding six months, given that 
U.S. Treasury Securities are disseminated on a weekly, rather than 
daily basis? Would it be appropriate for the Commission to change the 
proposed four out of six month period to a time period measured in 
weeks (e.g., at least 16 out of the preceding 24 weeks) with respect to 
U.S. Treasury Securities? What effect would any such change have on the 
likelihood that ATSs trading U.S. Treasury Securities would meet the 
volume thresholds?
    35. If the average weekly dollar volumes were to include 
transactions for U.S Treasury Securities by non-FINRA members, which 
currently are not reported to, or collected by, the SRO that makes 
public average weekly dollar volume statistics, should the fair access 
threshold change? If so, what should be the appropriate threshold?
    36. Would it be appropriate to use five percent of average daily 
dollar volume traded in the United States as a fair access threshold 
for Agency Securities? Do ATSs that trade Agency Securities currently 
subscribe to TRACE and, therefore, receive TRACE trade reports for 
Agency Securities? If not, what percentage of these ATSs do not 
currently subscribe to TRACE?
    37. Should the requirements under the Fair Access Rule be amended 
specifically for Government Securities ATS? If so, how?
    38. Are there any unique challenges for ATSs that would be required 
to comply with the requirements under the Fair Access Rule for the 
first time? If so, please explain.
    39. Do commenters believe that it is appropriate to provide to 
Communication Protocol Systems and Legacy Government Securities ATSs a 
one-month compliance period to comply with the Fair Access Rule? Should 
the proposed compliance period be longer or shorter? Should the 
eligibility for the compliance period be expanded to ATSs that are 
currently operating or limited in any way? Please explain.

[[Page 15525]]

C. Application of Regulation SCI to Government Securities ATS

    The Commission is re-proposing to amend Regulation SCI to expand 
the definition of ``SCI alternative trading system'' to include 
Government Securities ATSs that meet a specified volume threshold. A 
Government Securities ATS that meets the proposed amended definition of 
``SCI alternative trading system'' would fall within the definition of 
``SCI entity'' and, as a result, would be subject to the requirements 
of Regulation SCI.
    Because the proposed amendments to Exchange Act Rule 3b-16(a) would 
cause Communication Protocol Systems to fall within the definition of 
``exchange,'' \339\ Communication Protocol Systems that transact in 
U.S. Treasuries or Agency Securities that choose to register as a 
broker-dealer and comply with Regulation ATS would, if they meet the 
proposed volume threshold, also meet the proposed amended definition of 
``SCI alternative trading system'' and become subject to the 
requirements of Regulation SCI. The proposed amendments to Exchange 
Rule 3b-16(a) likewise would cause Communication Protocol Systems that 
transact in NMS stocks and equity securities that are not NMS stocks to 
fall within the current definition of SCI alternative trading system if 
they reached the current volume thresholds within the definition, and 
become subject to the requirements of Regulation SCI.\340\ As discussed 
in detail below, the Commission believes that extending the 
requirements of Regulation SCI to Government Securities ATSs that trade 
a significant volume in U.S. Treasury Securities or Agency Securities 
would help to address any technological vulnerabilities, and improve 
the Commission's oversight, of the core technology of key entities in 
the markets for government securities.
---------------------------------------------------------------------------

    \339\ See supra Section II.
    \340\ A Communication Protocol System that chooses to register 
as a national securities exchange would also be subject to 
Regulation SCI under the definition of ``SCI entity'' which includes 
SROs such as national securities exchanges. As discussed above, 
Communication Protocol Systems, such as RFQ systems, that use 
trading interest and protocols to bring together buyers and sellers 
perform an exchange market place function similar to systems that 
offer the use of orders and trading facilities. These systems allow 
market participants to use non-firm trading interest to seek and 
negotiate a trade. Accordingly, the Commission preliminarily 
believes that such systems, whether they are systems of a registered 
national securities exchange or an ATS that is an SCI entity, would 
be covered by the definition of ``SCI systems'' under Regulation SCI 
because they directly support trading. See 17 CFR 242.1000 and infra 
note 348 and accompanying text. As detailed further below, the 
Commission is requesting comment on whether Communication Protocol 
Systems of SCI entities would meet the definition of ``SCI systems'' 
under Regulation SCI.
---------------------------------------------------------------------------

    The Commission adopted Regulation SCI in November 2014 to 
strengthen the technology infrastructure of the U.S. securities 
markets.\341\ As discussed in the Regulation SCI Adopting Release, a 
number of factors contributed to the Commission's proposal and adoption 
of Regulation SCI. These factors included: The evolution of the markets 
becoming significantly more dependent upon sophisticated, complex, and 
interconnected technology; the successes and limitations of the 
Automation Review Policy (``ARP'') Inspection Program; a significant 
number of, and lessons learned from, systems issues at exchanges and 
other trading venues; \342\ and increased concerns over the potential 
for ``single points of failure'' in the securities markets.\343\ 
Regulation SCI is designed to strengthen the infrastructure of the U.S. 
securities markets, reduce the occurrence of systems issues in those 
markets, improve their resiliency when technological issues arise, and 
implement an updated and formalized regulatory framework, thereby 
helping to ensure more effective Commission oversight of such 
systems.\344\
---------------------------------------------------------------------------

    \341\ See Regulation SCI Adopting Release, supra note 3, at 
72252-56 for a discussion of the background of Regulation SCI.
    \342\ See id. at 72253-56.
    \343\ See id. at 72277-79.
    \344\ Id. at 72253, 72256.
---------------------------------------------------------------------------

    The key market participants that are currently subject to 
Regulation SCI are called ``SCI entities'' and include certain SROs 
(including stock and options exchanges, registered clearing agencies, 
FINRA and the MSRB) (``SCI SROs''), alternative trading systems that 
trade NMS and non-NMS stocks exceeding specified volume thresholds 
(``SCI ATSs''), the exclusive SIPs (``plan processors''), certain 
exempt clearing agencies, and SCI competing consolidators.\345\ ATSs 
trading NMS or non-NMS stocks that are currently subject to Regulation 
SCI are heavily reliant on trading technology and represent a 
significant pool of liquidity for NMS and non-NMS stocks. As discussed 
in further detail below, Regulation SCI requires these SCI entities to, 
among other things, establish, maintain, and enforce written policies 
and procedures reasonably designed to ensure that their key automated 
systems have levels of capacity, integrity, resiliency, availability, 
and security adequate to maintain their operational capability and 
promote the maintenance of fair and orderly markets, and that such 
systems operate in accordance with the Exchange Act and the rules and 
regulations thereunder and the entities' rules and governing documents, 
as applicable.\346\ Broadly speaking, Regulation SCI also requires SCI 
entities to take appropriate corrective action when systems issues 
occur, provide certain notifications and reports to the Commission 
regarding systems problems and systems changes, inform members and 
participants about systems issues, conduct business continuity and 
disaster recovery testing, conduct annual reviews of their automated 
systems, including penetration testing, and make and keep certain books 
and records.\347\
---------------------------------------------------------------------------

    \345\ See 17 CFR 242.1000.
    \346\ See 17 CFR 242.1001; infra notes 397-398.
    \347\ See 17 CFR 242.1002-1007; infra notes 400-411.
---------------------------------------------------------------------------

    Regulation SCI applies primarily to the systems of SCI entities, 
whether operated by SCI entities or on their behalf, that directly 
support any one of six key securities market functions--trading, 
clearance and settlement, order routing, market data, market 
regulation, and market surveillance (``SCI systems'').\348\ With 
respect to security, Regulation SCI also applies to systems that, if 
breached, would be reasonably likely to pose a security threat to SCI 
systems (``indirect SCI systems'').\349\ In addition, certain systems 
whose functions are critical to the operation of the markets, including 
those that represent single points of failure (defined as ``critical 
SCI systems''), are subject to certain heightened requirements.\350\
---------------------------------------------------------------------------

    \348\ See 17 CFR 242.1000.
    \349\ Id.
    \350\ Id. See also Regulation SCI Adopting Release, supra note 
3, at 72277. Paragraph (1) of the definition of ``critical SCI 
systems'' in Rule 1000 of Regulation SCI specifically enumerates 
certain systems to be within its scope, including those that 
directly support functionality relating to: Clearance and settlement 
systems of clearing agencies; openings, reopenings, and closings on 
the primary listing market; trading halts; initial public offerings; 
the provision of consolidated market data; or exclusively-listed 
securities. The second prong of the definition provides a broader 
catch-all for systems that ``[p]rovide functionality to the 
securities markets for which the availability of alternatives is 
significantly limited or nonexistent and without which there would 
be a material impact on fair and orderly markets.'' 17 CFR 242.1000 
(definition of ``critical SCI system'').
---------------------------------------------------------------------------

    When the Commission adopted Regulation SCI, the Commission departed 
from its proposal to apply Regulation SCI to fixed income ATSs that 
trade municipal and corporate debt.\351\ Explaining this departure, the 
Commission differentiated ATSs trading

[[Page 15526]]

municipal and corporate debt securities from those trading equity 
securities, stating generally that fixed income markets rely much less 
on automation and electronic trading than markets that trade NMS stocks 
or non-NMS stocks.\352\ The Commission also stated that the municipal 
and corporate debt markets tend to be less liquid than the equity 
markets, with slower execution times and less complex routing 
strategies.\353\ At the same time, the Commission stated that it would 
``monitor and evaluate the implementation of Regulation SCI, the risks 
posed by the systems of other market participants, and the continued 
evolution of the securities markets, such that it may consider, in the 
future, extending the types of requirements in Regulation SCI to 
additional categories of market participants.'' \354\
---------------------------------------------------------------------------

    \351\ See Regulation SCI Proposing Release, Securities Exchange 
Act Release No. 69077 (Mar. 8, 2013), 78 FR 18084, 18093-95 (Mar. 
25, 2013).
    \352\ See Regulation SCI Adopting Release, supra note 3, at 
72270.
    \353\ See id.
    \354\ See id.
---------------------------------------------------------------------------

    In the 2020 Proposal, where the Commission was addressing 
Government Securities ATSs specifically, the Commission stated that, in 
light of the increasing automation of the government securities market 
and the operational similarities between many Government Securities 
ATSs and NMS Stock ATSs, it believed that it was appropriate to propose 
to apply the requirements of Regulation SCI to Government Securities 
ATSs that meet certain volume thresholds, and noted again that while 
technological developments provide many benefits to the U.S. securities 
markets, they also have increased the risk of operational problems that 
have the potential to cause a widespread impact on the securities 
market and its participants.\355\ Therefore, the Commission stated in 
the 2020 Proposal that application of Regulation SCI to Government 
Securities ATSs that trade a significant volume of U.S. Treasury 
Securities or Agency Securities would further help to address those 
technological vulnerabilities, and improve the Commission's oversight, 
of the core technology used by key U.S. securities markets 
participants.\356\
---------------------------------------------------------------------------

    \355\ See 2020 Proposal, supra note 4, at 87152. See also supra 
Section II.B; Regulation SCI Adopting Release, supra note 3, at 
72253.
    \356\ See 2020 Proposal, supra note 4, at 87152.
---------------------------------------------------------------------------

    A number of commenters on the 2020 Proposal supported applying the 
requirements of Regulation SCI to Government Securities ATSs above a 
specified volume threshold.\357\ These commenters stated that such 
requirements could promote the integrity and resiliency of the key 
automated systems of Government Securities ATSs and ensure Commission 
oversight.\358\ One commenter added that extending Regulation SCI to 
Government Securities ATSs could reduce the potential for systems 
issues, as well as reduce the frequency, severity, and duration of any 
systems issues that may occur.\359\ As support for the 2020 Proposal, 
some commenters cited the increased automation in the government 
securities markets and/or operational similarities with NMS stock 
ATSs,\360\ with one commenter stating that the distinctions that the 
Commission made between stock market ATSs and fixed income ATSs in its 
adoption of Regulation SCI have not ``stood up well against the rapid 
evolution of the markets.'' \361\ One commenter asserted that the 
government securities markets are more systemically significant than 
the equity markets, to which Regulation SCI already applies.\362\
---------------------------------------------------------------------------

    \357\ See SIFMA Letter at 5; MFA Letter at 5; AFREF Letter at 2, 
4; Healthy Markets Letter at 9-11; and ICE Bonds Letter II at 5 
(stating that it would support application of Regulation SCI to 
fixed income ATSs if the threshold was set at the 20% volume 
threshold test currently used under Rule 301(b)(6)). Commenters on 
the 2020 Proposal that generally supported the application of 
Regulation SCI expressed varying views as to the appropriate 
threshold level that the Commission should adopt. See discussion 
infra regarding comments pertaining to threshold levels.
    \358\ See SIFMA Letter at 5; MFA Letter at 5; AFREF Letter at 2, 
4; and Healthy Markets Letter at 10-11.
    \359\ See MFA Letter at n.13.
    \360\ See MFA Letter at 5; and Healthy Markets Letter at 9.
    \361\ See Healthy Markets Letter at 10. See also infra note 367 
and accompanying text (discussing MarketAxess's comment with respect 
to stock market ATSs and fixed income ATSs).
    \362\ See AFREF Letter at 2.
---------------------------------------------------------------------------

    Other commenters on the 2020 Proposal opposed requiring Government 
Securities ATSs above a volume threshold to comply with Regulation 
SCI.\363\ These commenters advocated for applying the narrower 
technology and resiliency requirements of Rule 301(b)(6), rather than 
Regulation SCI.\364\ Some of these commenters expressed concerns 
regarding the costs and burdens of complying with Regulation SCI.\365\ 
One commenter distinguished the equities markets from the market for 
government securities, asserting that the government securities markets 
do not have the same type of linkages among trading venues that 
increase the risk of a systems issue in one market spreading to another 
and causing significant market impact.\366\ As such, this commenter 
argued that applying Regulation SCI would only increase costs without 
materially increasing the integrity or security of the government 
securities markets. Another commenter, while focusing its comments on 
the corporate and municipal bond markets, argued that, when the 
Commission adopted Regulation SCI, it did not include fixed-income ATSs 
within the scope of the regulation out of a concern that it could 
discourage greater automation in the fixed-income markets and that this 
concern still exists today.\367\
---------------------------------------------------------------------------

    \363\ See Tradeweb Letter at 3, 11; BrokerTec Letter at 5-9; and 
MarketAxess Letter at 11. The Commission notes that MarketAxess 
focused its comments specifically on corporate and municipal bonds, 
rather than government securities, but we have included such 
comments here for completeness.
    \364\ See Tradeweb Letter at 11; BrokerTec Letter at 5-9; and 
MarketAxess Letter at 11.
    \365\ See Tradeweb Letter at 3, 11; and BrokerTec Letter at 8-9.
    \366\ See Tradeweb Letter at 3, 11.
    \367\ See MarketAxess Letter at 11.
---------------------------------------------------------------------------

    Acknowledging comment letters on the 2020 Proposal, the Commission 
continues to believe that the inclusion of Government Securities ATSs 
meeting specified volume thresholds in Regulation SCI would be 
appropriate because such Government Securities ATSs (inclusive of 
Communication Protocol Systems, as proposed), are heavily reliant on 
technology and represent significant pools of liquidity, as the 
Commission has determined to be the case for current SCI ATSs.\368\ The 
Commission believes that, particularly in light of the evolution of the 
government securities markets, it is important to impose the 
requirements of Regulation SCI to help ensure that the technology 
systems of such Government Securities ATSs are reliable and 
resilient.\369\
---------------------------------------------------------------------------

    \368\ Some commenters on the 2020 Proposal also provided views 
on whether the Commission should extend application of Regulation 
SCI to additional entities beyond Government Securities ATSs. See, 
e.g., Healthy Markets Letter at 9 (stating that the Commission 
should expand the scope of Regulation SCI to include not just 
government securities ATSs, but other essential market participants 
in equities, futures, and fixed income markets); and SIFMA Letter at 
5 (arguing that the Commission should not extend Regulation SCI to 
broker-dealers more generally at this time). As the Commission 
stated in the Regulation SCI Adopting Release, the Commission will 
continue to monitor and evaluate the risks posed by the systems of 
other market participants and the continued evolution of the 
securities markets to determine whether it would be appropriate to 
extend the requirements of Regulation SCI to additional categories 
of entities in the future. See Regulation SCI Adopting Release, 
supra note 3, at 72259.
    \369\ As discussed in detail above and as commenters have 
stated, the structure of the U.S. Treasury market has evolved in 
recent years and electronic trading has become an increasingly 
important feature of the interdealer market for U.S. Treasury 
Securities. See supra Section II.B and notes 62-63, 187 and 
accompanying text.
---------------------------------------------------------------------------

    The focus of the Commission's discussion in the Regulation SCI

[[Page 15527]]

Adopting Release regarding the fixed income markets was on the 
corporate and municipal bond markets, not the government securities 
markets.\370\ As discussed in detail below, given the evolution of the 
government securities markets, the Commission now believes that there 
are Government Securities ATSs that operate with similar complexity as 
SCI ATSs that are currently subject to Regulation SCI, and that 
Government Securities ATSs with significant trading volume play an 
important role in the government securities markets and face similar 
technological vulnerabilities as existing SCI entities. Several 
commenters on the 2020 Proposal stated that \371\ the application of 
Regulation SCI would help the Commission improve its oversight of the 
market for government securities, thereby continuing its efforts to 
address technological vulnerabilities of the core technology systems of 
key U.S. securities markets entities.
---------------------------------------------------------------------------

    \370\ See Regulation SCI Adopting Release, supra note 3, at 
72270.
    \371\ See generally SIFMA Letter at 5, MFA Letter at 5, and 
AFREF Letter at 2.
---------------------------------------------------------------------------

    The Commission explained in the Regulation SCI Adopting Release 
that it adopted Regulation SCI to expand upon, update, and modernize 
the requirements of Rule 301(b)(6) for those ATSs trading NMS stocks 
and non-NMS stocks that it had identified as playing a significant role 
in the securities markets.\372\ As stated above, because Government 
Securities ATSs with significant trading volume play an important role 
in the government securities markets and present similar risks to the 
market as SCI ATSs, the re-proposal of the broader set of requirements 
and safeguards of Regulation SCI is more appropriate for such entities 
than proposing to amend the older and more limited requirements of Rule 
301(b)(6).\373\
---------------------------------------------------------------------------

    \372\ See Regulation SCI Adopting Release, supra note 3, at 
72264.
    \373\ See 17 CFR 242.301(b)(6). At the same time, as specified 
below, the Commission continues to request comment on whether 
Government Securities ATSs that meet the proposed volume thresholds 
for SCI ATSs should be governed by Rule 301(b)(6) instead of being 
defined as SCI entities. The requirements of Rule 301(b)(6) are less 
rigorous than the requirements of Regulation SCI. Among other 
things, Rule 301(b)(6) requires an ATS to notify the Commission 
staff of material systems outages and significant systems changes 
and that the ATS establish adequate contingency and disaster 
recovery plans. See id. Regulation SCI expanded upon these 
requirements, by, for example, expanding the requirements to a 
broader set of systems, imposing new requirements for information 
dissemination regarding SCI events, and requiring Commission 
notification for additional types of events, among others. Rule 
301(b)(6) currently applies to an ATS that trades only municipal 
securities or corporate debt securities with 20 percent or more of 
the average daily volume traded in the United States during at least 
four of the preceding six calendar months. Currently, there are no 
ATSs that are subject to requirements of Rule 301(b)(6) of 
Regulation ATS.
---------------------------------------------------------------------------

    In discussing the costs and burdens of Regulation SCI, one 
commenter on the 2020 Proposal characterized the requirements of 
Regulation SCI as being prescriptive and ``one size fits all.'' \374\ 
This commenter argued that many Government Securities ATSs already 
align with industry standards that are more flexible and achieve many 
of the same goals of Regulation SCI without additional compliance 
costs. Regulation SCI specifically incorporates, and provides that SCI 
entities can look to, industry standards to comply with the policies 
and procedures requirement under Regulation SCI.\375\ As the Commission 
emphasized at the time of adoption, Regulation SCI is not intended to 
be a ``one-size-fits-all'' regulation, but rather takes a risk-based 
approach pursuant to which an SCI entity's policies and procedures 
could be tailored to a particular system's criticality and risk, and 
includes other rules and definitions that similarly incorporated risk-
based considerations.\376\
---------------------------------------------------------------------------

    \374\ See BrokerTec Letter at 6.
    \375\ Specifically, 17 CFR 242.1001(a)(4) (Rule 1001(a)(4)) 
provides that the policies and procedures required under Rule 
1001(a) shall be deemed to be reasonably designed if they are 
consistent with current SCI industry standards. See Rule 1001(a)(4) 
of Regulation SCI. ``SCI industry standards'' are those standards 
comprising information technology practices that are widely 
available to information technology professionals in the financial 
sector and issued by an authoritative body that is a U.S. 
governmental entity or agency, association of U.S. governmental 
entities or agencies, or widely recognized organization.
    \376\ See Regulation SCI Adopting Release, supra note 3, at 
72259-60, 72290-91.
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    Accordingly, the Commission is re-proposing to expand the 
definition of ``SCI ATSs'' to include Government Securities ATSs that 
meet certain volume thresholds with respect to U.S. Treasury Securities 
and/or Agency Securities.\377\ Specifically, the definition of ``SCI 
ATS'' would be revised to include those ATSs which, during at least 
four of the preceding six calendar months, had, with respect to U.S. 
Treasury Securities, five percent or more of the average weekly dollar 
volume traded in the United States as provided by the SRO to which such 
transactions are reported; or had, with respect to Agency Securities, 
five percent or more of the average daily dollar volume traded in the 
United States as provided by the SRO to which such transactions are 
reported.
---------------------------------------------------------------------------

    \377\ See paragraphs (3) and (4) of the definition of ``SCI 
ATS'' under Rule 1000 of Regulation SCI.
---------------------------------------------------------------------------

    Several commenters on the 2020 Proposal discussed the specific 
proposed volume thresholds for Government Securities ATSs to become 
subject to Regulation SCI. One commenter stated that the five percent 
threshold level represents a reasonable level for the systemic 
integrity issues targeted by Regulation SCI,\378\ while other 
commenters expressed support for the application of Regulation SCI as 
proposed without specifically commenting on the threshold level.
---------------------------------------------------------------------------

    \378\ See AFREF Letter at 2 and 4.
---------------------------------------------------------------------------

    Other commenters offered alternative standards for determining 
which Government Securities ATSs should be included within the scope of 
Regulation SCI. For example, one commenter recommended that the 
Commission adopt a lower (i.e., more stringent) threshold level and 
incorporate a threshold based on a dollar amount.\379\
---------------------------------------------------------------------------

    \379\ Specifically, this commenter stated that Regulation SCI 
should apply to any family of related trading venues for government 
or agency securities with combined notional average daily values 
over the lesser of one percent of the overall market share on an 
appropriate dollar threshold, e.g., $25 billion. See Healthy Markets 
Letter at 10-11. In contrast, two commenters advocated for the 
application of Rule 301(b)(6) rather than Regulation SCI to 
Government Securities ATSs, but stated that the current 20 percent 
threshold in Rule 301(b)(6) is too high. See MarketAxess Letter at 
10 (noting that 20 percent is not an appropriate threshold to 
capture ATSs with a significant percentage of trading volume in 
corporate or municipal debt); and BrokerTec Letter at 8 
(recommending that Rule 301(b)(6) should apply to all Government 
Trading Securities regardless of trading volume).
---------------------------------------------------------------------------

    Other commenters on the 2020 Proposal suggested adoption of a 
higher threshold level for the application of Regulation SCI to 
Government Securities ATSs. For example, one commenter stated that it 
would support the application of Regulation SCI instead of Rule 
301(b)(6) to fixed income ATSs if the Commission adopted the 20 percent 
volume threshold test currently used under Rule 301(b)(6).\380\ One 
commenter who generally opposed the 2020 Proposal also urged the 
Commission to adopt a higher threshold if it, in fact, extended 
application of Regulation SCI to Government Securities ATSs.\381\ 
Another commenter suggested that application of Regulation SCI should 
depend on whether the ATS itself is a ``significant'' source of 
liquidity, recommending that this determination could, for example, be 
based on whether the ATS's par value traded in the asset class, for 
four months over the prior six months, averaged at least 10 percent of 
par value traded in the asset class.\382\
---------------------------------------------------------------------------

    \380\ See ICE Bonds Letter II at 5.
    \381\ See Tradeweb Letter at 3, 11. This commenter stated that 
the threshold should be raised to a ``more material percentage'' 
such as 25 percent.
    \382\ See Bloomberg Letter at 5.

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

[[Page 15528]]

    The Commission is re-proposing the five percent thresholds for 
Government Securities ATSs, consistent with the 2020 Proposal. Although 
some commenters provided suggestions for different thresholds or 
recommended applying Rule 301(b)(6) instead, the Commission believes 
that the proposed five percent thresholds for applying Regulation SCI 
to Government Securities ATSs (inclusive of Communication Protocol 
Systems, as now proposed) would be appropriate measures to identify 
those ATSs that have the potential to significantly impact investors 
and the market should a systems issue occur and thus warrant the 
protections and requirements of Regulation SCI.\383\ At the same time, 
as detailed further below, the Commission is requesting additional 
comment on whether these proposed volume thresholds should be set 
higher or lower for ATSs trading government securities.
---------------------------------------------------------------------------

    \383\ Regulation SCI would not apply to Government Securities 
ATSs that trade repos, including repos on U.S. Treasury Securities 
and Agency Securities. The Commission notes FINRA does not require 
ATSs to report transactions for repos. See supra note 313. Based on 
information available to the Commission, the Commission does not 
believe that ATSs today capture a significant market share for 
trading repos nor do they rely on the same use of technology as ATSs 
that trade U.S. Treasury Securities or Agency Securities, but below 
requests comment on whether Government Securities ATSs that trade 
repos, including repos on U.S. Treasury Securities and Agency 
Securities should be subject to Regulation SCI.
---------------------------------------------------------------------------

    The Commission has analyzed the number of entities it believes are 
likely to be covered by the thresholds it is proposing and believes 
that, currently, approximately two Legacy Government Securities ATSs 
trading U.S. Treasury Securities would be subject to Regulation SCI 
under the five percent volume thresholds, one of which would also meet 
the volume thresholds for trading Agency Securities.\384\ In addition, 
the Commission believes that approximately two currently operating 
Communication Protocol Systems would likely be subject to Regulation 
SCI under the proposed five percent threshold in U.S. Treasury 
Securities.
---------------------------------------------------------------------------

    \384\ See supra Section II.D and infra Section X.B.1a. As 
discussed above with regard to the Fair Access Rule, the ATS with 
the largest market volume in U.S. Treasury Securities has 
approximately 14 percent of market volume, while the second largest 
has approximately six percent of market share, and the third and 
fourth largest both have a little less than four percent market 
share. The one Legacy Government Securities ATS that would also 
exceed the threshold for Agency Securities accounts for roughly 11 
percent of volume in Agency Securities. See infra Table VIII.1. If 
the proposed volume thresholds were ten percent, only one Legacy 
Government Securities ATS would be subject to Regulation SCI, 
meeting the threshold levels for both U.S. Treasury Securities and 
Agency Securities. However, the Commission believes that there would 
still be approximately two currently operating Communication 
Protocol Systems subject to Regulation SCI using a ten percent 
threshold in U.S. Treasury Securities. See id.
---------------------------------------------------------------------------

    The Commission believes that the proposed volume thresholds to 
apply Regulation SCI to a Government Securities ATS that trades U.S. 
Treasury Securities and Agency Securities are reasonable compared to 
volume thresholds that would subject an ATS to Rule 301(b)(6) under 
Regulation ATS for the ATS's trading of corporate bonds and municipal 
securities. Currently, an ATS that trades corporate bonds or municipal 
securities is subject to Rule 301(b)(6) if its trading volume reaches 
20 percent or more of the average daily volume traded in the United 
States for either corporate bonds or municipal securities. As discussed 
in detail above, when the Commission adopted Regulation SCI, it decided 
not to apply Regulation SCI and its lower volume thresholds to the 
fixed income markets, concluding that a systems issue in fixed income 
markets would not have had as significant or widespread an impact as in 
the equities market.\385\ Among other things, the Commission reasoned 
that the fixed income markets at the time relied much less on 
electronic trading than the equities markets, and that the municipal 
securities and corporate bond fixed income markets tended to be less 
liquid than the equity markets, with slower execution times and less 
complex routing strategies.\386\ As explained above, however, ATSs for 
government securities now operate with complexity similar to that of 
markets that trade NMS stocks in terms of use of technology and speed 
of trading, the use of limit order books, order types, algorithms, 
connectivity, data feeds, and the active participation of PTFs, and 
Communication Protocol Systems are increasingly used as electronic 
means to bring together buyers and sellers using non-firm trading 
interest for government securities, being particularly prevalent in the 
dealer-to-customer market for off-the-run U.S. Treasury securities, 
Agency Securities, and repos.\387\ Given the critical role government 
securities play in the U.S. and global economies,\388\ the Commission 
believes that, due to their increased reliance on electronic trading 
and the important role played by Government Securities ATSs in today's 
markets, an ATS whose government securities volume falls between five 
percent and 20 percent of trading volume could significantly impact 
investors and the market should a systems issue occur. By proposing to 
apply Regulation SCI to Government Securities ATSs with a threshold of 
five percent, the Commission seeks to impose the protections of 
Regulation SCI to these ATSs because of their importance and potential 
technological risks to the U.S. securities markets.\389\
---------------------------------------------------------------------------

    \385\ See Regulation SCI Adopting Release, supra note 3, at 
72270.
    \386\ See id.
    \387\ See supra notes 187-190 and accompanying text.
    \388\ See supra notes 182-186 and accompanying text. One 
commenter, while arguing that Government Securities ATSs should be 
subject to Rule 301(b)(6) in lieu of expanding Regulation SCI, in 
fact similarly emphasized the fundamental importance of the U.S. 
Treasury market and the need to take appropriate steps to enhance 
the resilience of the market, arguing that all Government Securities 
ATSs should be subject to technology and resiliency requirements 
regardless of volume. See BrokerTec Letter at 8.
    \389\ The Commission also recognizes that ATSs for corporate 
bonds and municipal securities are becoming increasingly electronic 
and as part of the 2020 Proposal, the Commission requested comment 
on, among other things, whether the 20 percent volume threshold 
under Rule 301(b)(6) of Regulation ATS should be amended to capture 
ATSs that might be critical markets for those securities.
---------------------------------------------------------------------------

    While the Commission acknowledges that, as one commenter on the 
2020 Proposal suggested,\390\ the government securities markets may not 
have the same type of linkages between trading venues as exists in the 
equities markets today, as described above, Government Securities ATSs 
with significant trading volume have the potential to significantly 
impact investors, the overall market, and the trading of individual 
securities should an SCI event occur, similar to SCI ATSs currently 
subject to Regulation SCI. In addition, a system outage at a 
significant Government Securities ATS could disrupt trading at another 
significant Government Securities ATS even if these Government 
Securities ATSs are not connected. For example, if a significant 
Government Securities ATS is experiencing a system outage, there could 
be a sudden surge in message traffic (e.g., quoting activities) and 
trading at another significant Government Securities ATS, which could 
exceed the system capacity of such Government Securities ATS and 
potentially result in a systems issue and/or a disruption of trading on 
that ATS as well. Further, the Commission did not base its 
determination regarding which entities played a significant role in the 
market and should be included within the scope of the regulation on the 
linkages that exist in the equities markets. In adopting Regulation 
SCI, the Commission acknowledged that a temporary outage at an ATS 
might not lead to a widespread systemic disruption and stated that 
``Regulation SCI is not designed to solely address

[[Page 15529]]

systems issues that cause widespread systemic disruption, but also to 
address more limited systems malfunctions that can harm market 
participants.'' \391\ The Commission believes that, without appropriate 
safeguards in place for these Government Securities ATSs, technological 
vulnerabilities could lead to the potential for failures, disruptions, 
delays, and intrusions, which could place government securities market 
participants at risk and interfere with the maintenance of fair and 
orderly markets.
---------------------------------------------------------------------------

    \390\ See Tradeweb Letter at 3, 11.
    \391\ See Regulation SCI Adopting Release, supra note 3, at 
72263.
---------------------------------------------------------------------------

    The Commission believes that the proposed volume thresholds to 
apply Regulation SCI to a Government Securities ATS that trades U.S. 
Treasury Securities and Agency Securities are reasonable as compared to 
the volume thresholds for applying Regulation SCI to ATSs that trade 
NMS stocks and ATSs that trade equities that are not NMS stocks. First, 
an ATS that trades NMS stocks is subject to Regulation SCI if its 
trading volume reaches: (i) Five percent or more in any single NMS 
stock and one-quarter percent or more in all NMS stocks of the average 
daily dollar volume reported by applicable transaction reporting plans; 
or (ii) one percent or more in all NMS stocks of the average daily 
dollar volume reported by applicable transaction reporting plans. With 
respect to non-NMS equity securities, an ATS is subject to Regulation 
SCI if its trading volume is five percent or more of the average daily 
dollar volume (across all non-NMS equity securities) as calculated by 
the SRO to which such transactions are reported. These thresholds 
reflect the Commission's determination as to what constitutes a 
material pool of liquidity traded by ATSs in the respective asset 
classes: One percent for NMS stocks and five percent for non-NMS equity 
securities. The proposed five percent SCI volume thresholds for 
Government Securities ATSs would be similar to those for ATSs that 
trade non-NMS equity securities. Basing the thresholds on volume as 
provided to the SRO to which such transactions are reported is 
reasonable given that there is no transaction reporting plan for 
government securities and thus, the trading figures are based on dollar 
volume traded in the United States as provided by the SRO to which such 
transactions are reported.
    With regard to one commenter's suggestion that the threshold should 
be based on combined notional average daily values of any family of 
related trading venues, the Commission requests comment, as set forth 
below, on whether it would be appropriate to aggregate the volumes of 
ATSs that trade the same security or category of securities and are 
operated by a common broker-dealer, or operated by affiliated broker-
dealers, and treat the ATSs market places as a single ATS for purposes 
of determining whether the ATSs meet the threshold levels in the 
definition of SCI ATS.\392\
---------------------------------------------------------------------------

    \392\ See supra note 379.
---------------------------------------------------------------------------

    One commenter on the 2020 Proposal urged the Commission to apply 
the deferred compliance period in the current definition of ``SCI ATS'' 
to Government Securities ATSs and asked for clarification as to whether 
this provision would be applicable.\393\ Specifically, the definition 
of SCI ATS currently provides that an SCI ATS shall not be required to 
comply with the requirements of Regulation SCI until six months after 
satisfying the thresholds for NMS or non-NMS stocks for the first time. 
The Commission believes that it is appropriate to provide Government 
Securities ATS that meet the volume threshold in the definition of 
``SCI ATS'' for the first time a period of time before they are 
required to comply with the requirements of Regulation SCI. Thus, the 
Commission is providing clarification that the deferred compliance 
period would be applicable to Government Securities ATSs.\394\ 
Accordingly, Rule 1000 would provide that, like ATSs trading NMS stocks 
and non-NMS stocks, a Government Securities ATS would not be required 
to comply with the requirements of Regulation SCI until six months 
after satisfying the U.S. Treasury Securities or Agency Securities 
thresholds in the definition for the first time.\395\ The Commission 
believes that this six-month additional compliance period is 
appropriate to allow a Government Securities ATS the time needed to 
take steps to meet the requirements of the rules, rather than requiring 
compliance immediately upon meeting the threshold level.
---------------------------------------------------------------------------

    \393\ See BrokerTec Letter at 9-10.
    \394\ As in the 2020 Proposal, the Commission is proposing to 
amend the last paragraph in the definition of ``SCI alternative 
trading system or SCI ATS'' (newly redesignated paragraph (5)), 
which provides for the 6-month deferred compliance period, to apply 
it to Government Securities ATSs.
    \395\ See Rule 1000 of Regulation SCI.
---------------------------------------------------------------------------

    Government Securities ATSs trading U.S. Treasury Securities and/or 
Agency Securities that meet the volume thresholds under the proposed 
revised definition of SCI ATS would be subject to the requirements of 
Regulation SCI, as broadly described below.\396\ The provision at 17 
CFR 242.1001(a) requires SCI entities to establish, maintain, enforce 
and periodically update policies and procedures reasonably designed to 
ensure that their SCI systems and, for purposes of security standards, 
indirect SCI systems, have levels of capacity, integrity, resiliency, 
availability, and security adequate to maintain their operational 
capability and promote the maintenance of fair and orderly markets, and 
includes certain minimum requirements for those policies and procedures 
relating to capacity planning, stress tests, systems development and 
testing methodology, the identification of vulnerabilities, business 
continuity and disaster recovery plans (including geographic diversity 
and resumption goals), market data, and monitoring.\397\
---------------------------------------------------------------------------

    \396\ In the 2020 Proposal, the Commission requested comment on 
whether all of the obligations in Regulation SCI should apply to 
Government Securities ATSs that would be SCI ATSs, or whether only 
certain requirements should be imposed, such as those requiring 
written policies and procedures, notification of systems problems, 
business continuity and disaster recovery testing (including testing 
with subscribers of ATSs), and penetration testing. While, as 
discussed above, some commenters argue that Rule 301(b)(6) would be 
more appropriate framework for Government Securities ATSs (see supra 
note 364), no commenters advocate for applying only a subset of the 
requirements of Regulation SCI to Government Securities ATSs.
    \397\ 17 CFR 242.1001(a) (Rule 1001(a) of Regulation SCI).
---------------------------------------------------------------------------

    Rule 1001(b) of Regulation SCI requires that each SCI entity 
establish, maintain, enforce and periodically update written policies 
and procedures reasonably designed to ensure that its SCI systems 
operate in a manner that complies with the Exchange Act and the rules 
and regulations thereunder and the entity's rules and governing 
documents, as applicable, and specifies certain minimum requirements 
for such policies and procedures.\398\
---------------------------------------------------------------------------

    \398\ 17 CFR 242.1001(b)(1)-(2).
---------------------------------------------------------------------------

    Rule 1001(c) of Regulation SCI requires SCI entities to establish, 
maintain, enforce periodically update reasonably designed written 
policies and procedures that include the criteria for identifying 
responsible SCI personnel, the designation and documentation of 
responsible SCI personnel, and escalation procedures to quickly inform 
``responsible SCI personnel'' of potential SCI events.\399\
---------------------------------------------------------------------------

    \399\ 17 CFR 242.1001(c).
---------------------------------------------------------------------------

    Under 17 CFR 242.1002, SCI entities have certain obligations 
related to SCI events. Specifically, when any responsible SCI personnel 
has a reasonable basis to conclude that an SCI event has occurred, the 
SCI entity must

[[Page 15530]]

begin to take appropriate corrective action which must include, at a 
minimum, mitigating potential harm to investors and market integrity 
resulting from the SCI event and devoting adequate resources to remedy 
the SCI event as soon as reasonably practicable.\400\ Rule 1002(b) 
provides the framework for notifying the Commission of SCI events 
including, among other things, to: Immediately notify the Commission of 
the event; provide a written notification within 24 hours that includes 
a description of the SCI event and the system(s) affected, with other 
information required to the extent available at the time; provide 
regular updates regarding the SCI event until the event is resolved; 
and submit a final detailed written report regarding the SCI 
event.\401\ Rule 1002(c) of Regulation SCI also requires that SCI 
entities disseminate information to their members or participants 
regarding SCI events.\402\ These information dissemination requirements 
are scaled based on the nature and severity of an event. \403\
---------------------------------------------------------------------------

    \400\ See 17 CFR 242.1002(a) (Rule 1002(a) of Regulation SCI).
    \401\ See 17 CFR 242.1002(b). For any SCI event that ``has had, 
or the SCI entity reasonably estimates would have, no or a de 
minimis impact on the SCI entity's operations or on market 
participants,'' Rule 1002(b)(5) provides an exception to the general 
Commission notification requirements under Rule 1002(b). Instead, an 
SCI entity must make, keep, and preserve records relating to all 
such SCI events, and submit a quarterly report to the Commission 
regarding any such events that are systems disruptions or systems 
intrusions.
    \402\ See 17 CFR 242.1002(c).
    \403\ See id.
---------------------------------------------------------------------------

    The provison at 17 CFR 242.1003(a) requires SCI entities to provide 
quarterly reports to the Commission relating to system changes.\404\ 
Rule 1003(b) of Regulation SCI also requires that an SCI entity conduct 
an ``SCI review'' not less than once each calendar year.\405\ ``SCI 
review'' is defined in Rule 1000 of Regulation SCI to mean a review, 
following established procedures and standards, that is performed by 
objective personnel having appropriate experience to conduct reviews of 
SCI systems and indirect SCI systems, and which review contains: A risk 
assessment with respect to such systems of an SCI entity; and an 
assessment of internal control design and effectiveness of its SCI 
systems and indirect SCI systems to include logical and physical 
security controls, development processes, and information technology 
governance, consistent with industry standards.\406\ Under Rule 
1003(b)(2)-(3), SCI entities are also required to submit a report of 
the SCI review to their senior management, and must also submit the 
report and any response by senior management to the report, to their 
board of directors as well as to the Commission.\407\
---------------------------------------------------------------------------

    \404\ See 17 CFR 242.1003(a) (Rule 1003(a) of Regulation SCI).
    \405\ See 17 CFR 242.1003(b).
    \406\ See 17 CFR 242.1000. Rule 1003(b)(1) of Regulation SCI 
also states that penetration test reviews of an SCI entity's 
network, firewalls, and production systems must be conducted at a 
frequency of not less than once every three years, and assessments 
of SCI systems directly supporting market regulation or market 
surveillance must be conducted at a frequency based upon the risk 
assessment conducted as part of the SCI review, but in no case less 
than once every three years. See 17 CFR 242.1003(b)(1)(i)-(ii).
    \407\ See 17 CFR 242.1003(b)(2)-(3).
---------------------------------------------------------------------------

    The provision at 17 CFR 242.1004 sets forth the requirements for 
testing an SCI entity's business continuity and disaster recovery plans 
with its members or participants.\408\
---------------------------------------------------------------------------

    \408\ See 17 CFR 242.1004 (Rule 1004 of Regulation SCI).
---------------------------------------------------------------------------

    SCI entities are required by 17 CFR 242.1005 to make, keep, and 
preserve certain records related to their compliance with Regulation 
SCI \409\ and by 17 CFR 242.1006 to make required filings 
electronically, on Form SCI.\410\ Finally, 17 CFR 242.1007 contains 
requirements relating to a written undertaking when records required to 
be filed or kept by an SCI entity under Regulation SCI are prepared or 
maintained by a service bureau or other recordkeeping service on behalf 
of the SCI entity.\411\
---------------------------------------------------------------------------

    \409\ See 17 CFR 242.1005 (Rule 1005 of Regulation SCI). Rule 
1005(a) of Regulation SCI relates to recordkeeping provisions for 
SCI SROs, whereas Rule 1005(b) relates to the recordkeeping 
provision for SCI entities other than SCI SROs.
    \410\ See 17 CFR 242.1006 (Rule 1006 of Regulation SCI).
    \411\ See 17 CFR 242.1007 (Rule 1007 of Regulation SCI).
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Request for Comment
    40. Should Regulation SCI apply to Government Securities ATSs that 
meet the proposed definition of SCI ATS? If so, are the proposed 
revisions to the definition of SCI ATS appropriate? If not, please 
specifically explain how the policy goals of Regulation SCI would be 
achieved for such systems without application of the regulation.
    41. What are the risks associated with systems issues at a 
significant Government Securities ATS? What impact would a systems 
issue have on the trading of government securities and the maintenance 
of fair and orderly markets? Do the government securities markets have 
the same types of linkages between trading venues as the equities 
markets? If not, what kind of linkages between trading venues exist in 
the government securities markets? How does this impact the risk of an 
SCI event at a Government Securities ATS on the market and/or market 
participants? Should all of the requirements set forth in Regulation 
SCI apply to Government Securities ATSs that meet the proposed 
definition of SCI ATS?
    42. Should Government Securities ATSs that meet the proposed volume 
thresholds for SCI ATSs be governed by the Capacity, Integrity, and 
Security Rule instead of being defined as SCI entities? Are there 
Government Securities ATSs that play a significant role in the 
secondary market for U.S. Treasury Securities but do not meet the 
proposed volume thresholds for SCI ATSs for which a different threshold 
should be established to mandate compliance with the Capacity, 
Integrity, and Security Rule? If yes, what additional regulatory 
requirements, if any, should be imposed on such ATSs? What would be the 
costs and benefits associated with applying Rule 301(b)(6) to 
Government Securities ATSs that are not SCI ATSs?
    43. Should the Commission amend Regulation ATS to require 
Government Securities ATSs to comply with Rule 301(b)(6) but adopt a 
threshold that is lower or higher than 20 percent? For example, should 
the Commission amend Rule 301(b)(6) to subject Government Securities 
ATSs, or certain Government Securities ATSs, to the requirements of the 
rule if the Government Securities ATS reaches a 5 percent, 7.5 percent, 
10 percent, or 15 percent volume threshold?
    44. Should the volume threshold to meet the definition of SCI ATS 
include trading in U.S. Treasury Securities and Agency Securities? 
Should Regulation SCI be applied to ATSs for any other type of 
government securities? Should Regulation SCI be applied to ATSs that 
trade repos or reverse repos on government securities, including repos 
or reverse repos on U.S. Treasury Securities, Agency Securities, or 
both?
    45. Should the proposed five percent threshold test for U.S. 
Treasury Securities be applied to all types of U.S. Treasury Securities 
or to a subset of U.S. Treasury Securities? For example, should the 
five percent volume test only be applied to transaction volume in on-
the-run U.S. Treasury Securities? Should the five percent threshold be 
applied to transaction volume in all Agency Securities or to a subset 
of Agency Securities? If so, why or why not?
    46. Is the proposed five percent threshold an appropriate threshold 
to apply Regulation SCI to Government Securities ATSs (inclusive of

[[Page 15531]]

Communication Protocol Systems, as proposed), as significant markets 
for trading in U.S. Treasury Securities or Agency Securities? If 
commenters believe that there should be a percent threshold for a 
subset of U.S. Treasury Securities, such as on-the-run U.S. Treasury 
Securities or off-the-run U.S. Treasury Securities, what should that 
threshold be?
    47. Should the Commission adopt a percent volume threshold that is 
lower than five percent for U.S. Treasury Securities, Agency 
Securities, or both? If so, what percent threshold should the 
Commission adopt for U.S. Treasury Securities and Agency Securities? 
For example, should the Commission adopt a threshold that is four 
percent, three percent, two percent, or one percent for U.S. Treasury 
Securities? Should the Commission adopt a threshold that is four 
percent, three percent, two percent, or one percent for Agency 
Securities? Should there be no threshold for U.S. Treasury Securities? 
Should there be no threshold for Agency Securities? Please support your 
views.
    48. Should the Commission adopt a percent volume threshold that is 
higher than five percent for U.S. Treasury Securities, Agency 
Securities, or both? For example, should the Commission adopt a 
threshold that is 7.5 percent, 10 percent, 15 percent, or 20 percent 
for U.S. Treasury Securities? Should the Commission adopt a threshold 
that is 7.5 percent, 10 percent, 15 percent, or 20 percent for Agency 
Securities?
    49. Is it appropriate to use five percent of average weekly dollar 
volume traded in the United States as a threshold for application of 
Regulation SCI requirements to U.S. Treasury Securities? If the average 
weekly dollar volumes were to include transactions in the secondary 
cash market for U.S Treasury Securities by non-FINRA members, which 
currently are not reported to, or collected by, the SRO that makes 
public average weekly dollar volume statistics, should the Regulation 
SCI threshold change? If so, what should be the appropriate threshold? 
Please support your views.
    50. Is it appropriate to use five percent of average daily dollar 
volume traded in the United States as a threshold for the application 
of Regulation SCI requirements to Agency Securities?
    51. Would the proposed four out of six month period be an 
appropriate period to measure the volume thresholds for U.S. Treasury 
Securities and Agency Securities for purposes of Regulation SCI? With 
respect to calculating the appropriate thresholds, would Government 
Securities ATSs have available appropriate data with which to determine 
whether the proposed thresholds have been met? Would ATSs that trade 
U.S. Treasury Securities be able to readily calculate whether they meet 
the volume thresholds in at least four out of the preceding six months, 
given that U.S. Treasury Securities are disseminated on a weekly, 
rather than daily basis? If not, what data or information is missing? 
Would it be appropriate for the Commission to change the proposed four 
out of six month period to a time period measured in weeks (e.g., at 
least 16 out of the preceding 24 weeks) with respect to U.S. Treasury 
Securities? What effect would any such change have on the likelihood 
that ATSs trading U.S. Treasury Securities would meet the volume 
thresholds?
    52. Should the proposed Regulation SCI volume threshold measurement 
for Government Securities ATSs take into account whether Government 
Securities ATSs are operated by a common broker-dealer, or operated by 
affiliated broker-dealers? \412\ For example, should the Commission 
aggregate the Treasury volume of two Government Securities ATSs that 
are each operated by a common broker-dealer, or operated by affiliated 
broker-dealers, for purposes of determining whether the threshold test 
has been satisfied and, if it has, apply Regulation SCI to each ATS? 
Why or why not?
---------------------------------------------------------------------------

    \412\ See Section V.A.2, infra, discussing the proposed 
aggregation of volume of affiliated ATSs for purposes of application 
of the Fair Access Rule.
---------------------------------------------------------------------------

    53. Should only certain provisions of Regulation SCI apply to 
Government Securities ATSs that meet the proposed definition of SCI 
ATS? For example, should they only be subject to certain aspects of 
Regulation SCI? If so, which provisions should apply? Do commenters 
believe that different or unique requirements should apply to the 
systems of such Government Securities ATSs? What should they be and 
why?
    54. In what instances, if at all, should the systems of Government 
Securities ATSs that meet the proposed definition of SCI ATS be defined 
as ``critical SCI systems''? Please describe.
    55. Which subscribers or types of subscribers should Government 
Securities ATSs that meet the proposed definition of SCI ATS consider 
as ``designated members or participants'' that should be required to 
participate in the annual mandatory business continuity and disaster 
recovery testing? Please describe.
    56. Should Government Securities ATSs that meet the proposed 
definition of SCI ATS not be defined as SCI entities but instead be 
required to comply with provisions comparable to provisions of 
Regulation SCI?
    57. What are the current practices of Government Securities ATSs 
with respect to the subject matter covered by Regulation SCI? To what 
extent do Government Securities ATSs have practices that are consistent 
or inconsistent with the requirements under Regulation SCI? Please 
describe and be specific. Would the application of Regulation SCI or 
the Capacity, Integrity, and Security Rule weaken ATSs' existing 
capacity, integrity, and security programs?
    58. Are there characteristics specific to the government securities 
market that would make applying Regulation SCI broadly or any specific 
provision of Regulation SCI to Government Securities ATSs unduly 
burdensome or inappropriate?
    59. As commenters think about whether and how to apply Regulation 
SCI to Government Securities ATSs, are there any lessons commenters can 
draw from the market stress during Spring 2020, including, for example, 
lessons learned regarding business continuity or capacity planning?
    60. Are there characteristics specific to Communication Protocol 
Systems that would make applying Regulation SCI broadly or any specific 
provision of Regulation SCI to such systems unduly burdensome or 
inappropriate? For these entities, do commenters believe that 
Communication Protocol Systems would have systems that meet the 
definition of ``SCI systems''? Why or why not? Are there certain types 
of Communication Protocol Systems that would have systems that meet the 
definition while others would not, for example, RFQ, BWIC, or 
conditional order systems? Please describe. Are there certain features 
or systems functionalities of Communication Protocol Systems that would 
not meet the definition of SCI systems, but that should be subject to 
Regulation SCI as SCI systems? Please describe. Should only certain 
provisions of Regulation SCI apply to Communication Protocol Systems? 
If so, which provisions should apply? Do commenters believe that 
different or unique requirements should apply to Communication Protocol 
Systems? What should they be and why?

[[Page 15532]]

IV. Revised Form ATS-N: Changes Applicable to Government Securities 
ATSs and NMS Stock ATSs

A. Proposed Filing and Effectiveness Requirements for Government 
Securities ATSs and NMS Stock ATSs

    The Commission is re-proposing to amend Rule 304(a) to require that 
a Covered ATS, which would include a Government Securities ATS, must 
comply with Rules 300 through 304 of Regulation ATS, as applicable, to 
be exempt from the definition of ``exchange'' pursuant to Rule 3a1-
1(a)(2).\413\ Rule 304, as proposed to be amended, would require all 
Government Securities ATSs to file Form ATS-N, as revised. In addition, 
Communication Protocol Systems that choose to comply with Regulation 
ATS would be required to meet all applicable requirements of Regulation 
ATS, including filing a Form ATS-N if they trade NMS stocks, government 
securities, or repos. The Commission is proposing to make changes to 
current Form ATS-N, including by adding questions about interaction 
with related markets, liquidity providers, and surveillance and 
monitoring, and by making organizational and other changes that would 
make the form more relevant for Government Securities ATSs inclusive of 
Communication Protocol Systems, as proposed.\414\ These changes would 
be applicable to both Government Securities ATSs and NMS Stock ATSs and 
would require NMS Stock ATSs to file amendments to their existing 
form.\415\
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    \413\ As proposed, references to ``NMS Stock ATSs'' throughout 
Rule 304 would be changed to refer to ``Covered ATSs,'' which would 
encompass Government Securities ATSs. See supra Section III.B.
    \414\ See infra Section IV.D.
    \415\ See infra Section IV.D.1.
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    Each Form ATS-N would be subject to an effectiveness process, which 
would allow the Commission to review disclosures on Form ATS-N and 
declare the Form ATS-N ineffective if the Commission finds, after 
notice and opportunity for hearing, that such action is necessary and 
appropriate in the public interest and the protection of investors. The 
effectiveness process is not merit-based, but is designed to facilitate 
the Commission's oversight of Covered ATSs, and address, for example, 
material deficiencies with respect to the accuracy, currency, and 
completeness of disclosures on Form ATS-N.\416\ The Commission is 
proposing to apply the same filing and effectiveness process to 
Government Securities ATSs that is applicable to NMS Stock ATSs filing 
Form ATS-N. However, the Commission is proposing changes, as described 
below, to the processes that would apply to both NMS Stock ATSs and 
Government Securities ATSs, including with regard to extensions of the 
Commission review period for initial Form ATS-N and Form ATS-N 
amendments and the filing of amendments related to fees.
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    \416\ In the NMS Stock ATS Adopting Release, the Commission 
stated that, while it will review Form ATS-N filings, its review 
``is not designed to verify the accuracy of the disclosures nor 
designed as an independent investigation of whether all aspects of 
the NMS Stock ATS operations or the ATS-related activities of the 
broker-dealer operator are disclosed on Form ATS-N.'' See NMS Stock 
ATS Adopting Release, supra note 2, at 38851. This would equally 
apply to the Commission's review of Forms ATS-N filed by Government 
Securities ATSs, as proposed.
---------------------------------------------------------------------------

    Commenters on the 2020 Proposal generally supported the requirement 
that Government Securities ATSs file Form ATS-G.\417\ Although one 
commenter stated that the requirement to file Form ATS-G is 
unnecessarily burdensome for Government Securities ATSs with limited 
volume,\418\ another commenter stated it does not support requiring 
different levels of public disclosure by Government Securities ATSs 
depending on their trading volume, as it could result in a complex and 
confusing system of disclosure for market participants.\419\ The 
Commission is proposing the requirement to file a public Form ATS-N, as 
revised, for all Government Securities ATSs, regardless of their 
volume, as this requirement is designed to allow market participants to 
compare Government Securities ATSs, and excluding low volume Government 
Securities ATSs from this requirement would undermine the goal of 
transparency and the ability of market participants to use Form ATS-N 
to assess Government Securities ATSs to select the most appropriate 
trading venue for their needs.
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    \417\ See, e.g., MFA Letter at 5; AFREF Letter, at 3; BrokerTec 
Letter at 2. One commenter, which expressed general support for the 
enhanced filing requirements and urged the Commission to move 
forward with finalization and implementation of the proposal, stated 
that applying Regulation ATS to Government Securities ATSs that meet 
certain volume thresholds would increase public operational 
transparency. See FIA PTG Letter at 2.
    \418\ See ICE Bonds Letter I at 4-5.
    \419\ See MFA Letter at 5.
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    The Commission is proposing to apply to Government Securities ATSs 
the existing provisions of current Rule 304(a) for the filing and 
Commission review of an initial Form ATS-N with a modification to the 
circumstances under which the Commission can extend the review period 
for an initial Form ATS-N.\420\ The Commission believes that the review 
process is appropriate for the same reasons stated in the NMS Stock ATS 
Adopting Release,\421\ will facilitate the Commission's oversight of 
Government Securities ATSs, and will help ensure that information is 
disclosed in a complete and comprehensible manner. The differences 
between Form ATS-N filed by Government Securities ATSs and Form ATS-N 
filed by NMS Stock ATSs should not warrant a different review and 
effectiveness process and hence the Commission is proposing to apply 
the same provisions that are applicable to NMS Stock ATSs to Government 
Securities ATSs, which include the following:
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    \420\ See infra notes 430-432 and accompanying text. The 
proposed amendment to Rule 304(a) would also apply to the review of 
initial Form ATS-N filed by NMS Stock ATSs.
    \421\ See NMS Stock ATS Adopting Release, supra note 2, at 
38782.
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     No exemption is available to a Government Securities ATS 
pursuant to Exchange Act Rule 3a1-1(a)(2) unless the Government 
Securities ATS files with the Commission an initial Form ATS-N,\422\ 
and the initial Form ATS-N is effective.\423\
---------------------------------------------------------------------------

    \422\ The Commission staff may reject a Form ATS-N filing that 
is defective because, for example, it is missing sections or missing 
responses to any sub-questions, or does not comply with the 
electronic filing requirements. This is a separate process from the 
determination to declare a Form ATS-N ineffective. See NMS Stock ATS 
Adopting Release, supra note 2, at 38791.
    \423\ See Rule 304(a)(1)(i).
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     The Commission will, by order, declare ineffective an 
initial Form ATS-N no later than 120 calendar days from the date of 
filing with the Commission, or, if applicable, the end of the extended 
Commission review period.\424\ During the Commission review period, the 
Government Securities ATS shall amend its initial Form ATS-N by filing 
updating amendments, correcting amendments, and fee amendments \425\ as 
applicable.\426\
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    \424\ See proposed Rule 304(a)(1)(ii). See also infra note 430.
    \425\ See infra note 451.
    \426\ As proposed, to make material changes to its initial Form 
ATS-N during the Commission review period, the Government Securities 
ATS shall withdraw its filed initial Form ATS-N and may refile an 
initial Form ATS-N pursuant to Rule 304(a)(1). See Rule 
304(a)(1)(ii)(B).
---------------------------------------------------------------------------

     An initial Form ATS-N will become effective, unless 
declared ineffective, upon the earlier of: (1) The completion of review 
by the Commission and publication pursuant to Rule 304(b)(2)(i); or (2) 
the expiration of the Commission review period, or, if applicable, the 
end of the extended review period.\427\
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    \427\ See proposed Rule 304(a)(1)(iii)(A).
---------------------------------------------------------------------------

     The Commission will, by order, declare an initial Form 
ATS-N

[[Page 15533]]

ineffective if it finds, after notice and opportunity for hearing, that 
such action is necessary or appropriate in the public interest, and is 
consistent with the protection of investors.\428\ If the Commission 
declares an initial Form ATS-N ineffective, the Government Securities 
ATS shall be prohibited from operating as a Government Securities ATS 
pursuant to Exchange Act Rule 3a1-1(a)(2). An initial Form ATS-N 
declared ineffective does not prevent the Government Securities ATS 
from subsequently filing a new Form ATS-N.\429\
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    \428\ Like the review process for Form ATS-N for NMS Stock ATSs, 
the Commission's review of Form ATS-N for Government Securities ATSs 
would not be merit-based; instead it would focus on the completeness 
and comprehensibility of the disclosures. See NMS Stock ATS Adopting 
Release, supra note 2, at 38790. In the NMS Stock ATS Adopting 
Release, the Commission discussed the circumstances under which the 
Commission would declare a Form ATS-N amendment ineffective. Such 
circumstances would also apply to the Commission's review of an 
amendment to Form ATS-N filed by a Government Securities ATS. For 
example, the Commission believes it would be necessary or 
appropriate in the public interest, and consistent with the 
protection of investors, to declare ineffective a Form ATS-N if, for 
example, the Commission finds, after notice and opportunity for a 
hearing, the Form ATS-N was filed by an entity that does not meet 
the definition of a Government Securities ATS; one or more 
disclosures reveal non-compliance with Federal securities laws, or 
the rules or regulations thereunder, including Regulation ATS; or 
one or more disclosures on Form ATS-N are materially deficient with 
respect to their completeness or comprehensibility. For further 
discussion, see infra Section IV.B.2.
    \429\ See Rule 304(a)(1)(iii)(B).
---------------------------------------------------------------------------

    The Commission is re-proposing to amend Rule 304(a)(1)(ii)(A)(1), 
which currently provides that the Commission may extend the initial 
Form ATS-N review period for an additional 90 calendar days if the Form 
ATS-N is unusually lengthy or raises novel or complex issues that 
require additional time for review, to provide that the Commission may 
extend the review period if it finds that an extension is 
appropriate.\430\ The proposed standard is the same standard for 
extending the Commission review period for SRO rule filings under 
Section 19 of the Exchange Act.\431\ This would apply to Form ATS-N 
filed by Government Securities ATSs as well as NMS Stock ATSs. The 
Commission believes that extending the Commission review period for 
Form ATS-N if it finds that an extension is appropriate would 
facilitate an effective review process.\432\ For example, if an ATS's 
disclosures on an initial Form ATS-N are difficult to understand or 
appear to be incomplete, the Commission may need additional time to 
discuss the disclosures with the ATS to ascertain whether to declare 
the Form ATS-N ineffective, even if the form is not unusually lengthy 
or does not raise novel or complex issues. Rather than moving to 
declare an initial Form ATS-N ineffective because of material 
deficiencies with respect to completeness and comprehensibility, the 
Commission could extend the review period to allow the filer to resolve 
the deficiencies. As under current Rule 304(a)(1)(ii)(A)(1), in such 
case, the Commission will notify the Covered ATS in writing within the 
initial 120-calendar day review period and will briefly describe the 
reason for the determination for which additional time for review is 
required.
---------------------------------------------------------------------------

    \430\ See Rule 304(a)(1)(ii)(A)(1). The rule provides that the 
Commission extends the review period, it will notify the Government 
Securities ATS in writing within the initial 120-calendar day review 
period and will briefly describe the reason for the determination 
for which additional time for review is required. The Commission may 
also extend the initial Form ATS-N review period for any extended 
review period to which a duly authorized representative of the Form 
ATS-N agrees in writing. See Rule 304(a)(1)(ii)(A)(2).
    \431\ See 15 U.S.C. 78s(b)(2)(A)(ii).
    \432\ In the Commission staff's experience reviewing Form ATS-N 
filed by NMS Stock ATSs, the Commission review period was extended 
(either by the Commission or by the agreement of a duly authorized 
representative of the ATS) for 33 of the 43 Forms ATS-N that the 
Commission has reviewed and published. In its review of each Form 
ATS-N, the Commission staff engaged in extensive conversations with 
the NMS Stock ATS with regard to the NMS Stock ATS's disclosures on 
its initial Form ATS-N.
---------------------------------------------------------------------------

    The Commission is also re-proposing a process for Legacy Government 
Securities ATSs that have a Form ATS on file with the Commission as of 
the effective date of any final rule to continue to operate during the 
Commission's review period.\433\ In addition, to allow a Currently 
Exempted Government Securities ATS or Covered Newly Designated ATS to 
continue to operate without disruption while its initial Form ATS-N is 
under Commission review, the Commission is proposing to amend Rule 
304(a)(1)(i) to provide that a Currently Exempted Government Securities 
ATS or Covered Newly Designated ATS may continue to operate pursuant to 
Regulation ATS until its initial Form ATS-N becomes effective. The 
Commission believes that all Legacy Government Securities ATSs--whether 
they are operating pursuant to a Form ATS or whether they have operated 
as a Currently Exempted Government Securities ATS--should be permitted 
to continue to operate during the Commission review period. The 
Commission further believes Covered Newly Designated ATSs should be 
permitted to operate without disruption to their participants and the 
market. A Government Securities ATS or Covered Newly Designated ATS 
would file with the Commission an initial Form ATS-N no later than the 
date 90 calendar days after the effective date of any final rule. An 
initial Form ATS-N filed by a Legacy Government Securities ATS would 
supersede and replace a previously filed Form ATS of the Legacy 
Government Securities ATS. A Legacy Government Securities ATS that 
fails to comply with the requirements of Regulation ATS by filing Form 
ATS-N by the 90th calendar day from the effective date of any final 
rule and continues operating as a Government Securities ATS would no 
longer qualify for the exemption provided under Rule 3a1-1(a)(2), and 
thus, risks operating as an unregistered exchange in violation of 
Section 5 of the Exchange Act. If a Legacy Government Securities ATS 
that has a Form ATS on file with the Commission seeks to trade, for 
example, government securities and corporate bonds fails to file a Form 
ATS-N by the 90th calendar day, the ATS must either file a cessation of 
operations report on Form ATS or file a material amendment on Form ATS 
to remove information related to government securities. A Legacy 
Government Securities ATS or Newly Designated Covered ATS would be 
permitted to operate, on a provisional basis, pursuant to the filed 
initial Form ATS-N, and any amendments thereto, while the Commission 
reviews the initial Form ATS-N.
---------------------------------------------------------------------------

    \433\ See proposed Rule 304(a)(1)(iv). Other than the 
differences discussed below, the proposed process is similar to the 
process currently provided under Rule 304(a)(1)(iv) for Legacy NMS 
Stock ATSs. ``Legacy NMS Stock ATSs'' are NMS Stock ATSs that were 
operating pursuant to an initial operation report on Form ATS on 
file with the Commission as of January 7, 2019. The Commission is 
proposing to delete references to Legacy NMS Stock ATSs throughout 
the rule text, as the transition period for such ATSs has ended.
---------------------------------------------------------------------------

    The Commission is proposing the initial Commission review period 
(not including any extension) for an initial Form ATS-N filed by a 
Legacy Government Securities ATS or Newly Designated Covered ATS to be 
180 calendar days. Based on Commission staff experience reviewing 
initial Form ATS-N filings during the transition period for Form ATS-N, 
the Commission believes it would be appropriate to provide a 180 
calendar day review period rather than the 120 calendar day review 
period that was applicable to initial filings by Legacy NMS Stock ATSs 
and that would be applicable to a new Covered ATSs under Rule 
304(a)(1)(ii)(A).\434\ The 180 calendar day review period is designed 
to provide Commission staff with adequate time to review filings, 
discuss

[[Page 15534]]

disclosures with Covered ATSs, and address any deficiencies.
---------------------------------------------------------------------------

    \434\ See supra note 424 and accompanying text.
---------------------------------------------------------------------------

    For the same reasons discussed above,\435\ the Commission is 
proposing to amend Rule 304(a)(1)(iv)(B) to provide that the Commission 
can extend the initial Form ATS-N review period for Legacy Government 
Securities ATSs by an additional 120 calendar days \436\ if it 
determines that a longer period is appropriate.
---------------------------------------------------------------------------

    \435\ See supra notes 430-432 and accompanying text.
    \436\ Consistent with the process for Legacy NMS Stock ATSs 
today, Rule 304(a)(1)(iv) would permit the Commission to extend the 
initial Form ATS-N review period for Legacy Government Securities 
ATSs for an additional 120-calendar days. See infra note 437.
---------------------------------------------------------------------------

    Other than the proposed changes to the circumstances under which 
the Commission may extend the Commission review period, the Commission 
is also proposing that the process for the Commission to review and 
declare ineffective, if necessary, an initial Form ATS-N filed by a 
Legacy Government Securities ATS would be the same as the process for 
an initial Form ATS-N filed by a Legacy NMS Stock ATS.\437\ Given the 
proposed intended uses of Form ATS-N to allow the Commission to monitor 
developments and carry out its oversight functions over Government 
Securities ATSs and to enable market participants to make more informed 
decisions about how their trading interest will be handled by the ATSs, 
the Commission believes that it is important for a Government 
Securities ATS to maintain an accurate, current, and complete Form ATS-
N.\438\ Providing the Commission with the opportunity to review Form 
ATS-N disclosures helps ensure that information is disclosed in a 
complete and comprehensible manner.\439\
---------------------------------------------------------------------------

    \437\ See Rule 301(b)(2)(viii). Rule 304(a)(1)(iv)(B), as 
proposed, would provide that the Commission may, by order, as 
provided in Rule 304(a)(1)(iii), declare an initial Form ATS-N filed 
by a Legacy Government Securities ATS or Covered Newly Designated 
ATS ineffective no later than 180 calendar days from the date of 
filing with the Commission, or, if applicable, the end of the 
extended review period. As proposed, the Commission may extend the 
initial Form ATS-N review period for a Legacy Government Securities 
ATS or Covered Newly Designated ATS for: An additional 120 calendar 
days if the Commission determines that a longer period is 
appropriate, in which case the Commission will notify the Legacy 
Government Securities ATS or Covered Newly Designated ATS in writing 
within the initial 180-calendar day review period and will briefly 
describe the reason for the determination for which additional time 
for review is required; or any extended review period to which a 
duly-authorized representative of the Legacy Government Securities 
ATS agrees in writing.
    \438\ See NMS Stock ATS Proposing Release, supra note 29 
(discussing the proposed process for amendments to, and Commission 
review of, Form ATS-N filed by NMS Stock ATSs).
    \439\ See NMS Stock ATS Adopting Release, supra note 2, Section 
IV.A.3.
---------------------------------------------------------------------------

    As the intended uses of Form ATS-N filed by Government Securities 
ATS and Form ATS-N disclosures filed by NMS Stock ATSs are similar, the 
Commission is proposing the same filing requirements that are currently 
applicable to Form ATS-N amendments filed by NMS Stock ATSs to Form 
ATS-N amendments filed by Government Securities ATSs. Like an NMS Stock 
ATS, a Government Securities ATS would be required to amend Form ATS-N:
     At least 30 calendar days, or the length of any extended 
review period, prior to the date of implementation of a material change 
to the operations of the Government Securities ATS or to the activities 
of the broker-dealer operator or its affiliates that are subject to 
disclosure on the Form ATS-N, other than changes related to order 
display or fair access, which will be contingent amendments reported 
pursuant to Rule 304(a)(2)(i)(D), or fees, which will be fee amendments 
reported pursuant to Rule 304(a)(2)(E) (``material amendment'').\440\
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    \440\ See Rule 304(a)(2)(i)(A). The Commission is proposing 
revisions to Rule 304(a)(2)(i)(A) to reference fee amendments and to 
clarify the language of the provision. See also infra note 451.
---------------------------------------------------------------------------

     No later than 30 calendar days after the end of each 
calendar quarter to correct information that has become inaccurate or 
incomplete for any reason and was not required to be reported to the 
Commission as a material amendment, correcting amendment, contingent 
amendment, or fee amendment (``updating amendment'').\441\
---------------------------------------------------------------------------

    \441\ See Rule 304(a)(2)(i)(B). See also infra note 451.
---------------------------------------------------------------------------

     Promptly to correct information in any previous disclosure 
on the Form ATS-N, after discovery that any information previously 
filed on a Form ATS-N was materially inaccurate or incomplete when 
filed (``correcting amendment'').\442\
---------------------------------------------------------------------------

    \442\ See Rule 304(a)(2)(i)(C). For a discussion of when an ATS 
should file a correcting amendment, see NMS Stock ATS Adopting 
Release, supra note 2, at 38806.
---------------------------------------------------------------------------

     No later than the date that information required to be 
disclosed in Part III, Item 23 on Form ATS-N, which addresses fair 
access, has become inaccurate or incomplete (``contingent amendment''). 
Because the order display and execution access rule under Rule 
301(b)(3) does not apply to Government Securities ATSs, Government 
Securities ATSs would not be required to disclose information 
pertaining to order display and execution access. Accordingly, for 
Government Securities ATSs, Rule 304(a)(2)(i)(D) would only apply to 
the fair access disclosure on Form ATS-N.\443\
---------------------------------------------------------------------------

    \443\ The Commission is re-proposing to revise Rule 304 to 
replace references to ``Order Display and Fair Access Amendments'' 
with ``Contingent Amendments.'' The term ``Contingent Amendment'' 
would apply to amendments related to Form ATS-N disclosures 
regarding order display and fair access, as applicable, under Rule 
304(a)(2)(i)(D) to Form ATS-N filed by both NMS Stock ATSs and 
Government Securities ATSs.
---------------------------------------------------------------------------

     No later than after the date that information required to 
be disclosed in Part III, Item 18 on Form ATS-N has become inaccurate 
or incomplete (``fee amendment'').
    In the NMS Stock ATS Adopting Release, the Commission provided 
examples of scenarios that are particularly likely to implicate a 
material change.\444\ In consideration of Commission staff's experience 
with Form ATS-N, the proposed change to include Communication Protocol 
Systems in the definition of ``exchange,'' and the proposed changes to 
Form ATS-N, the Commission is reiterating and adding to the list of 
scenarios particularly likely to implicate a material change, which 
would include, but are not limited to: (1) A broker-dealer operator or 
its affiliates beginning to trade on the Covered ATS; (2) a change to 
the broker-dealer operator's policies and procedures governing the 
written safeguards and written procedures to protect the confidential 
trading information of subscribers pursuant to Rule 301(b)(10)(i) of 
Regulation ATS, including types of persons that have access to 
confidential trading information; \445\ (3) a change to the types of 
participants on the Covered ATS or the eligibility to participate in 
the ATS; (4) the introduction or removal of, or change to, an order 
type or type of message that subscribers can receive or send; (5) the 
introduction of, or change to, requirements, conditions, or 
restrictions to send, receive, or view trading interest; (6) a change 
to the interaction of trading interest (including, for example, 
procedures related to how participants send, receive, respond to, 
counter, and firm-up trading interest) and priority

[[Page 15535]]

procedures; (7) any change to ATS functionalities or procedures that 
affect pricing of trading interest; (8) a change that would impact a 
subscriber's ability to send or interact with trading interest, 
including a change to the segmentation of orders and participants; (9) 
a change to the manner in which the Covered ATS displays or makes known 
trading interest, including to limit or expand the trading interest 
that subscribers can view or interact with; (10) a change of a service 
provider to the operations of the Covered ATS that has access to 
subscribers' confidential trading information; and (11) a change to 
introduce or stop routing or sending away trading interest. A Covered 
ATS that notifies subscribers, or certain subscribers, about potential 
changes to ATS operations or ATS activities of the broker-dealer 
operator or its affiliates in advance of filing a Form ATS-N amendment 
demonstrates that the ATS determines such information to be important 
to subscribers and may likely be material. In addition, from the 
Commission staff's experience, if a Covered ATS removes an important 
functionality or no longer makes a functionality available to 
subscribers or certain groups of subscribers, the removal of such 
functionality could be a material change.
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    \444\ See NMS Stock ATS Adopting Release, supra note 2, at 
38803.
    \445\ In the Commission's experience, a change in ownership of 
the broker-dealer operator that does not result in the change in the 
registered entity nevertheless may be likely to implicate a material 
change, in that, among other things, it may result in a change to 
the persons who have access to confidential trading information. A 
change in the broker-dealer operator, however, would require the 
Covered ATS to cease operations and file a new Form ATS-N. See infra 
notes 527-528 and accompanying text.
---------------------------------------------------------------------------

    This list is not intended to be exhaustive, and does not mean to 
imply that other changes to the operations of a Covered ATS or the 
activities of the broker-dealer operator or its affiliates would not 
constitute material changes. Further, the Covered ATS should generally 
consider whether the cumulative effect of a series of changes to the 
operations of the Covered ATS or the activities of the broker-dealer 
operator or its affiliates with regard to the Covered ATS is material. 
In addition, in determining whether a change is material, an ATS 
generally should consider whether such change would affect: (1) The 
competitive dynamics among ATS subscribers; (2) the execution quality 
or performance of the orders of any subscriber or category of 
subscribers; (3) the nature or composition of counterparties with which 
any subscriber or category of subscribers interact; and (4) the 
relative speed of access or execution of any subscriber or group of 
subscribers.\446\
---------------------------------------------------------------------------

    \446\ For further discussion, see NMS Stock ATS Adopting 
Release, supra note 2, Section IV.B.1.a. In the NMS Stock ATS 
Adopting Release, the Commission stated that in determining whether 
a change is material, an ATS should generally consider whether such 
change would affect ``the fees that any subscriber or category of 
subscribers would pay to access and/or use the ATS.'' See id. at 
38803. As discussed below, the Commission is proposing a new 
amendment type for fee amendments, and as a result, changes to 
information in the fee disclosure in Part III, Item 18 would not be 
material changes for purposes of Rule 304(a)(2).
---------------------------------------------------------------------------

    The Commission is proposing a new amendment type--fee amendments--
that is not currently provided for under Rule 304(a)(2), but would be 
filed by both NMS Stock ATSs and Government Securities ATSs. The 
Covered ATS would be required to file a fee amendment no later than the 
date it makes a change that makes information reported on Part III, 
Item 18, inaccurate or incomplete.\447\ Part III, Item 18 of Form ATS-N 
would require disclosure of fee-related information, including, among 
other things, a description of the types of fees, structure of fees, 
variables that impact fees, differentiation among fees among types of 
subscribers, the range of fees, and rebates or discounts, for use of 
ATS services or services that are bundled with the subscriber's use of 
non-ATS services or products offered by the broker-dealer operator or 
its affiliates.\448\ Changes that would trigger a fee amendment would 
include, among other things, a change to the range of fees, a change to 
the factors that affect the fees that the ATS charges, or any other 
change to the fee disclosure in Part III, Item 18. In the Commission 
staff's experience reviewing Form ATS-N amendments, NMS Stock ATSs have 
taken varied approaches to the reporting of fees. In some cases, NMS 
Stock ATSs have treated fee changes as material changes, and filed 
amendments on Form ATS-N at least 30 calendar days before implementing 
the changes. In other cases, NMS Stock ATSs have filed updating 
amendments no later than 30 days from the end of the calendar quarter 
in which the ATS implemented the fee change. The Commission believes 
that fee changes should be transparent and that both potential and 
current subscribers and customers of subscribers, generally, should be 
timely informed of a change to a Covered ATS's fees, as required to be 
reported on Form ATS-N. The Commission notes that today, pursuant to 
Section 19(b) of the Exchange Act,\449\ national securities exchanges 
file proposed rule changes with the Commission that may take effect 
upon filing with the Commission if the rule change is ``establishing or 
changing a due, fee, or other charge applicable only to a member,'' no 
matter the materiality of the rule change.\450\ NMS Stock ATSs, which 
compete with national securities exchanges, are not subject to this 
provision to the Exchange Act, and are required to file a material 
amendment to Form ATS-N, and thus wait 30 calendar days before 
implementing a fee change, if the fee change is material. Given this 
difference between national securities exchanges and NMS Stock ATSs, 
the Commission believes that requiring Covered ATSs to file a fee 
amendment no later than the date it makes a change to a fee or fee 
disclosure would provide the public with sufficient notice about a fee 
change while allowing the ATS to act nimbly to make fee changes to 
respond to, for example, competitive pressures from other trading 
venues. The Commission is also making conforming changes in Rule 304 
that would, among other things, allow Covered ATSs to file fee 
amendments to initial Form ATS-N while the initial Form ATS-N is under 
Commission review.\451\
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    \447\ If the Covered ATS files a fee amendment in advance to 
notice a change of a fee, for example, the Covered ATS should 
provide the effective date for the fee so that subscribers can 
understand when the fee will be effective and thus impact them. The 
Covered ATS must subsequently file an updating amendment on Form 
ATS-N to remove the outdated effective date and any fees no longer 
in effect to ensure that the disclosures on Form ATS-N are current 
and accurate.
    \448\ See infra Section IV.D.5.r.
    \449\ 15 U.S.C. 78s(b).
    \450\ 17 CFR 240.19b-4(f)(2).
    \451\ See proposed changes to Rule 304(a)(1)(ii)(B) and Rule 
304(a)(1)(iv)(C). In addition, the Commission is proposing to revise 
the definition of ``Material Amendment'' to state that it would not 
include a fee amendment required to be filed pursuant to Rule 
304(a)(2)(i)(E) and to reorder the language in Rule 304(a)(1)(ii)(A) 
to improve the readability of the provision. See Rule 
304(a)(2)(i)(A). The Commission is also proposing to revise the 
definition of ``Updating Amendment'' to state that it would not 
include a fee amendment. See Rule 304(a)(2)(i)(B).
---------------------------------------------------------------------------

    Like Form ATS-N filed by NMS Stock ATSs, the Commission would, by 
order, declare ineffective any Form ATS-N amendment filed by Government 
Securities ATSs pursuant to Rule 304(a)(2)(i)(A) through (E) if it 
finds that such action is necessary or appropriate in the public 
interest and is consistent with the protection of investors.\452\ 
However, the Commission is proposing to amend Rule 304(a)(2)(ii), which 
currently provides that the Commission would declare any Form ATS-N 
amendment ineffective no later than 30 calendar days from filing with 
the Commission, to permit the Commission to extend the Form ATS-N 
amendment review period by an additional 30 calendar days if the 
Commission finds that a longer period is appropriate. The ability to 
extend the review period for amendments to Form ATS-N by an additional 
30 calendar days would allow the Commission additional time to review 
and discuss the amendment with the filer, and, if necessary, declare 
the Form ATS-N amendment

[[Page 15536]]

ineffective. Based on the Commission staff's experience reviewing Form 
ATS-N amendments, amendments on Form ATS-N vary in length, complexity, 
as well as comprehensibility and clarity. The Commission staff 
frequently engages in extensive discussions with NMS Stock ATSs about 
their disclosures in an amendment, and as a result of these 
discussions, ATSs often amend a filed amendment to address deficiencies 
within the Commission review period. To date, NMS Stock ATSs have 
resolved such deficiencies within the Commission review period, and the 
Commission has not declared a Form ATS-N amendment ineffective. 
However, in several circumstances, NMS Stock ATSs have submitted draft 
amendments to the Commission staff, which has provided the staff and 
NMS Stock ATSs with additional time to resolve potential deficiencies. 
NMS Stock ATSs, however, have no obligation to provide such a draft to 
the Commission, nor does the Commission staff have any obligation to 
review such a draft.
---------------------------------------------------------------------------

    \452\ See Rule 304(a)(2)(ii).
---------------------------------------------------------------------------

    In the event a Covered ATS is unable to address deficiencies within 
the initial 30-day review period, the Commission believes that, rather 
than moving to declare a Form ATS-N amendment ineffective, it would be 
appropriate to extend the review period and allow the filer more time 
to address such deficiencies. The Commission believes that 30 
additional calendar days will give the Covered ATS sufficient time to 
address any such concerns. If the Covered ATS is unable to resolve the 
deficiencies within the extended review period, the Commission will 
declare the Form ATS-N amendment ineffective if it finds that such 
action is necessary or appropriate in the public interest, and is 
consistent with the protection of investors. The Commission is 
therefore proposing that the Commission may extend the Form ATS-N 
amendment review period by an additional 30 calendar days if the 
Commission finds that a longer period is appropriate, or to any 
extended review period to which a duly-authorized representative of the 
ATS agrees in writing. The Commission is also proposing to amend Rule 
304(a)(2)(i)(A) to provide that a Covered ATS may not implement a 
material change before the end of the 30 calendar day review period or 
the length of any extended review period under proposed Rule 
301(a)(2)(ii)(A).\453\ Today, an NMS Stock ATS may not implement a 
material change until the expiration of the 30-calendar day Commission 
review period. Likewise, as a result of the proposed change, in the 
event of an extension of the Commission review period, the Covered ATS 
would therefore not implement the material change until the review 
period has expired. As discussed below, the Commission would 
disseminate the material amendment following the expiration of the 
review period or any extended review period.\454\
---------------------------------------------------------------------------

    \453\ See proposed Rule 304(a)(2)(i)(A) (stating that a Covered 
ATS shall amend a Form ATS-N at least 30 calendar days, or the 
length of any extended review period pursuant to Rule 
304(a)(2)(ii)(A), prior to the date of implementation of a material 
change (other than a correcting amendment) to the operations of the 
Covered ATS or to the activities of the broker-dealer operator or 
its affiliates that are subject to disclosure on the Form ATS-N).
    \454\ See infra note 463 and accompanying text.
---------------------------------------------------------------------------

    The Commission is also re-proposing to apply current Rule 304(a)(3) 
to require a Government Securities ATS to notice its cessation of 
operations on a Form ATS-N at least 10 business days prior to the date 
it will cease to operate as a Government Securities ATS.\455\ Filing 
such a notice would cause the Form ATS-N to become ineffective on the 
date designated by the Government Securities ATS. In addition, the 
Commission is re-proposing to apply Rule 304(a)(4) to Government 
Securities ATSs, which would allow the Commission to order to suspend 
(for a period not exceeding twelve months),\456\ limit, or revoke a 
Covered ATS's exemption pursuant to Rule 3a1-1(a)(2) if the Commission 
finds, after notice and opportunity for hearing, that such action is 
necessary or appropriate in the public interest.\457\ Rule 
304(a)(4)(ii) would provide that if the exemption for a Government 
Securities ATS is suspended or revoked pursuant to Rule 304(a)(4)(i), 
the Government Securities ATS would be prohibited from operating 
pursuant to the Rule 3a1-1(a)(2) exemption.\458\ If the exemption for a 
Government Securities ATS is limited pursuant to Rule 304(a)(4)(i), the 
Government Securities ATS shall be prohibited from operating in a 
manner otherwise inconsistent with the terms and conditions of the 
Commission order.
---------------------------------------------------------------------------

    \455\ See Rule 304(a)(3).
    \456\ The proposed limitation on the time frame for suspension 
is consistent with Federal securities law provisions pursuant to 
which the Commission may suspend the activities or registration of a 
regulated entity. See, e.g., Exchange Act Section 15(b)(4) (15 
U.S.C. 78o(b)(4)) and 15B(c)(2) (15 U.S.C. 78o-4(c)(2)). See NMS 
Stock ATS Proposing Release, supra note 29, at 81031 n.322.
    \457\ See proposed Rule 304(a)(4)(i).
    \458\ See Rule 304(a)(4). In making a determination as to 
whether suspension, limitation, or revocation of a Government 
Securities ATS's exemption is necessary or appropriate in the public 
interest, and is consistent with the protection of investors, the 
Commission would, for example, take into account whether the entity 
no longer meets the definition of Government Securities ATS under 
Rule 300(l), does not comply with the conditions to the exemption 
(in that it fails to comply with any part of Regulation ATS, 
including Rule 304), or otherwise violates any provision of Federal 
securities laws. For further discussion of such examples as applied 
to NMS Stock ATSs, see NMS Stock ATS Proposing Release, supra note 
29, at 81032.
---------------------------------------------------------------------------

    In addition, Rule 304(a)(4) would provide that prior to issuing an 
order suspending, limiting, or revoking a Government Securities ATS's 
exemption pursuant to Rule 304(a)(4)(i), the Commission will provide 
notice and opportunity for hearing to the Government Securities ATS, 
and make the findings specified in Rule 304(a)(4)(i) described above, 
that, in the Commission's opinion, the suspension, limitation, or 
revocation is necessary or appropriate in the public interest and is 
consistent with the protection of investors.\459\
---------------------------------------------------------------------------

    \459\ Pursuant to the Commission's current information sharing 
practices with the Department of the Treasury, the Commission 
expects to provide the Department of the Treasury with prompt notice 
in certain cases, such as when the Commission is declaring a Form 
ATS-N ineffective under Rule 304(a)(1)(iii)(b), or suspending, 
limiting, or revoking the exemption of a Government Securities ATS 
under Rule 304(a)(4).
---------------------------------------------------------------------------

Request for Comment
    61. Should Government Securities ATSs be required to file Form ATS-
N, as revised, instead of Form ATS? Should Government Securities ATSs 
be required to file a form different from Form ATS-N?
    62. As an alternative to requiring Government Securities ATSs to 
file Form ATS-N, should Form ATS, or parts thereof, for Government 
Securities ATSs be made available to the public? If made available to 
the public, is current Form ATS sufficient to provide information to 
the public about the operations of Government Securities ATSs?
    63. Do commenters believe that broker-dealers operators of ATS that 
trade only government securities or repos might choose to modify their 
business models so that they would not be required to comply with 
enhanced regulatory or operational transparency requirements for 
Government Securities ATSs?
    64. Should Government Securities ATSs be subject to Rule 304(a), in 
whole or in part?
    65. Should Rule 304(a) be amended to provide that an initial Form 
ATS-N be made effective by Commission order or any other means instead 
of upon publication by the Commission?
    66. Should Rule 304(a) only apply to Government Securities ATSs 
that trade a certain type of government security

[[Page 15537]]

(e.g., U.S. Treasury Securities, Agency Securities)? If so, to which 
type of Government Securities ATS should Rule 304 apply (e.g., 
Government Securities ATSs that trade U.S. Treasury Securities or 
Government Securities ATSs that trade Agency Securities)?
    67. Should the Commission require a Currently Exempted Government 
Securities ATS to file Form ATS-N and comply with the requirements of 
Rule 304 to qualify for the exemption from the definition of exchange?
    68. Would the proposal to require a Currently Exempted Government 
Securities ATS or Covered Newly Designated ATS to file Form ATS-N by 
the date 90 calendar days after the effective date of any final rule 
provide the ATS sufficient time to transition to compliance with 
Regulation ATS and the proposed requirements under Rule 304? If the 
Commission were to provide more time for a Covered Newly Designated ATS 
and/or Currently Exempted Government Securities ATS to file Form ATS-N, 
should the Commission require the Covered Newly Designated ATS and/or 
Currently Exempted Government Securities ATS to file an initial 
operation report on Form ATS to provide notice of its operations to the 
Commission before it is required to file a Form ATS-N? Would the 
proposal to require a Current Government Securities ATS to file a Form 
ATS-N by the date 90 calendar days after the effective date of any 
final rule provide the ATS sufficient time to transition to compliance 
with Rule 304?
    69. Should the Commission be permitted to extend the initial Form 
ATS-N review period if it finds that it is appropriate to extend such 
review period?
    70. Should a Legacy Government Securities ATS or Covered Newly 
Designated ATS be allowed to continue operations during the 
Commission's review of its initial Form ATS-N?
    71. Should the Commission require amendments to Part III, Item 18 
of Form ATS-N to be filed no later than the date that the information 
on such item becomes inaccurate or incomplete? Or should the Commission 
require amendments to Part III, Item 18, or any specific required 
disclosure on such Item to be required in advance of implementation of 
the change? And if so, how far in advance of implementation and why? 
Alternatively, should the Commission allow Covered ATSs more or less 
time to file a fee amendment?
    72. Should the rule provide that the Commission may extend the Form 
ATS-N amendment review period by an additional 30 calendar days if the 
Commission finds that a longer period is appropriate? Should such 
extended review period be longer or shorter? Should the Commission only 
extend such review period under certain circumstances? If so, under 
what circumstances should the Commission extend the review period for a 
Form ATS-N amendment?
    73. Are there any aspects of Rule 304(a)(2) relating to the filing 
and review of amendments that should be modified specifically for Form 
ATS-N amendments filed by Government Securities ATSs?
    74. What changes or types of changes to a Covered ATS's operations 
or the activities of the broker-dealer operator or its affiliates do 
commenters believe are particularly likely to be material so as to 
require a material amendment to Form ATS-N?
    75. Should the Commission consider any other factors in determining 
whether a Form ATS-N filed by a Government Securities ATS should become 
effective or ineffective? If so, what are they and why?
    76. Should the Commission adopt the current process for the 
Commission to suspend, limit, or revoke an NMS Stock ATS's exemption 
from the definition of ``exchange'' for Government Securities ATSs?

B. Public Disclosure of Form ATS-N for Government Securities ATSs and 
Related Commission Orders

    The Commission would make public certain Form ATS-N reports filed 
by Government Securities ATSs pursuant to Rule 304(b).\460\ Commission 
orders related to the effectiveness of revised Form ATS-N would also be 
publicly posted on the Commission's website. The Commission would apply 
to Government Securities ATSs the same rules regarding public 
disclosure that are currently applicable to NMS Stock ATSs. Applying 
existing Rule 304(b) to Government Securities ATSs would mandate 
greater public disclosure of the operations of these ATSs through the 
publication of Form ATS-N and related filings available on the 
Commission's website. Accordingly, the Commission is proposing that 
Form ATS-N filed by Government Securities ATSs would be subject to the 
following:
---------------------------------------------------------------------------

    \460\ See Rule 304(b)(1) (providing that every Form ATS-N filed 
pursuant to Rule 304 shall constitute a ``report'' within the 
meaning of Sections 11A, 17(a), 18(a), and 32(a) and any other 
applicable provisions of the Exchange Act).
---------------------------------------------------------------------------

     Every Form ATS-N filed pursuant to Rule 304 shall 
constitute a ``report'' within the meaning of Sections 11A, 17(a), 
18(a), and 32(a) and any other applicable provisions of the Exchange 
Act.\461\
---------------------------------------------------------------------------

    \461\ See Rule 304(b)(1).
---------------------------------------------------------------------------

     The Commission will make public via posting on the 
Commission's website, each: (1) Effective initial Form ATS-N, as 
amended; (2) order of ineffective initial Form ATS-N; (3) Form ATS-N 
amendment to an effective Form ATS-N; (4) order of ineffective Form 
ATS-N amendment; (5) notice of cessation; and (6) order suspending, 
limiting, or revoking the exemption for a Government Securities ATS 
from the definition of an ``exchange'' pursuant to Exchange Act Rule 
3a1-1(a)(2).\462\
---------------------------------------------------------------------------

    \462\ See Rule 304(b)(2).
---------------------------------------------------------------------------

    The Commission is proposing to make amendments to current Rule 
304(b), which would apply to all Covered ATSs. As the Commission is 
proposing to amend Rule 304(a)(2)(i)(A) to allow extensions of the 
Commission review period, the Commission is proposing to amend Rule 
304(b)(2)(iii) to state that material amendments would be made public 
following the expiration of the review period ``or any extended review 
period.'' \463\ As a result, the entire Form ATS-N amendment would not 
be made public until the review period has expired, at which time the 
ATS may implement the change described in the amendment. The Commission 
is also proposing to amend Rule 304(b)(2)(iii)(B) to provide that fee 
amendments would be made public by the Commission upon filing, 
consistent with the treatment of updating, correcting, and contingent 
amendments, all of which are intended to describe the ATS as it 
currently operates.
---------------------------------------------------------------------------

    \463\ See proposed Rule 304(b)(2)(iii).
---------------------------------------------------------------------------

    The Commission received several comments on the 2020 Proposal 
supporting public disclosure of Form ATS-G and amendments thereto.\464\ 
For example, one commenter stated that public disclosure could improve 
investors' ability to select trading venues and as a result, lower 
trading costs and increase execution quality.\465\ Another commenter, 
however, stated that Government Securities ATSs should not be required 
to make public commercially sensitive information on Form ATS-G, and 
that similar investor protection benefits can be achieved without 
negative impact by requiring a

[[Page 15538]]

Government Securities ATS to make such information available upon 
request to subscribers, potential subscribers, and the Commission.\466\ 
The Commission believes that the vast majority of information 
responsive to Form ATS-N would not be proprietary or commercially 
sensitive for ATSs to disclose.\467\
---------------------------------------------------------------------------

    \464\ See, e.g., SIFMA Letter at 3-4; BrokerTec Letter at 2; 
AFREF Letter at 3; Bloomberg Letter at 7; Healthy Markets 
Association Letter at 7; MFA Letter at 5 (stating that any 
alternative that would limit disclosure requirements would be 
detrimental to achieving the Commission's transparency goals and 
that requiring different levels of disclosure among Government 
Securities ATSs based on their trading volume could result in a 
complex and confusing system of disclosure).
    \465\ See FINRA Letter at 2.
    \466\ See Tradeweb Letter at 11.
    \467\ In the Commission staff's experience reviewing disclosures 
on current Form ATS-N for NMS Stock ATSs and discussing ATS 
operations and the requirements of the form with NMS Stock ATSs, the 
Commission staff has observed that the information responsive to the 
form is not proprietary or commercially sensitive. In the NMS Stock 
ATS Adopting Release, the Commission stated that it designed Form 
ATS-N to not seek disclosure of certain information that could be 
proprietary or commercially sensitive. See NMS Stock ATS Adopting 
Release, supra note 2, at 38812. In response to commenter concerns 
regarding disclosure of proprietary or commercially sensitive 
information, the Commission revised the wording of relevant requests 
in originally proposed Form ATS-N to mitigate such concerns or 
provided guidance regarding the scope of certain disclosure requests 
and to require ``summary'' information. See id. at 38825. The 
Commission stated that, in a vast majority of cases, the level of 
detail required by Form ATS-N should not require the public 
disclosure of commercially sensitive information. See id. at 38825. 
See also, e.g., infra Section IV.D.4.d (describing that Form ATS-N 
requires a ``summary'' narrative of products and services to avoid 
disclosure of commercially sensitive information).
---------------------------------------------------------------------------

    The Commission is re-proposing to make Form ATS-N publicly 
available for all Government Securities ATSs, regardless of their 
volume. The Commission believes that most market participants have 
limited access to information to adequately assess ATSs that trade 
government securities and understand how different ATSs operate. Today, 
Government Securities ATSs that are currently subject to Regulation ATS 
file a Form ATS that is deemed confidential when filed under Rule 
301(b)(2)(vii) of Regulation ATS,\468\ and Currently Exempted 
Government Securities ATSs are not subject to Regulation ATS and not 
required to file a Form ATS. The only information the Commission 
currently makes publicly available regarding Government Securities ATSs 
that are currently subject to Regulation ATS is a monthly list of the 
names and locations of ATSs with a Form ATS on file with the 
Commission.\469\ In the case Government Securities ATSs make 
information about their operations voluntarily available, such 
information is limited, and the lack of uniformity or standardization 
makes it difficult to compare disclosures across ATSs. Accordingly, 
through Form ATS-N, the Commission is proposing disclosures that will 
provide information that market participants can use to evaluate an ATS 
as a potential trading venue. Requiring public disclosure, rather than 
Government Securities ATSs responding to individual disclosure requests 
from subscribers or potential subscribers, will help to ensure 
uniformity and standardization of the information Government Securities 
ATSs make available.
---------------------------------------------------------------------------

    \468\ See 17 CFR 240.301(b)(2)(vii).
    \469\ See Alternative Trading System List, https://www.sec.gov/foia/docs/atslist.htm.
---------------------------------------------------------------------------

    As proposed, Government Securities ATSs would also be subject to 
Rule 304(b)(3), which would require each Government Securities ATS that 
has a website to post a direct URL hyperlink to the Commission's 
website that contains the documents enumerated in Rule 304(b)(2), which 
would include the Government Securities ATS's Form ATS-N filings.\470\
---------------------------------------------------------------------------

    \470\ Unlike the 2020 Proposal, the Commission is not proposing 
to amend Rule 304(b)(3) to require each Covered ATS to post on its 
website the most recently disseminated Form ATS-N within one 
business day after publication on the Commission's website.
---------------------------------------------------------------------------

Request for Comment
    77. Should the requirements of Rule 304(b) apply to Form ATS-N 
reports filed by Government Securities ATSs, in whole or in part? 
Should the Commission modify Rule 304(b) in any way for all Covered 
ATSs?
    78. Should Rule 304(b) only apply to Government Securities ATSs 
that trade a type of government securities (e.g., U.S. Treasury 
Securities, Agency Securities)? If so, to which type of Government 
Securities ATS should Rule 304 apply?
    79. Are there any other requirements that should apply to making 
public a Form ATS-N report filed by a Government Securities ATS? Please 
support your arguments, and if so, please list and explain such 
procedures in detail.
    80. Should Rule 304(b) apply to Form ATS-N reports filed by a 
Currently Exempted Government Securities ATS? If not, which aspects of 
Rule 304(b) should not apply and why?

C. Form ATS-N Requirements

    The Commission is not re-proposing the use of Form ATS-G for 
Government Securities ATSs but is proposing that all Covered ATSs file 
Form ATS-N as revised. The Commission believes that, instead of 
proposing Form ATS-G for Government Securities ATSs, given the 
significant overlap between proposed Form ATS-G and existing Form ATS-
N, it is appropriate to require all Covered ATSs to file Form ATS-N, 
and thus limit the number of unique forms and simplify filing 
requirements. Accordingly, the Commission is proposing to apply 
existing Rule 304(c) to Government Securities ATSs, which would require 
Government Securities ATSs to file a Form ATS-N, as revised, in 
accordance with the form's instructions. The Commission is proposing to 
revise the current Form ATS-N instructions by including references to 
Government Securities ATSs or Covered ATSs, as applicable, replacing 
references to order display and fair access amendments with references 
to contingent amendments, revising the relevant compliance dates, 
adding instructions related to fee amendments, and revising the 
instructions regarding describing the applicability of amendments. The 
instructions require, among other things, that a Covered ATS provide 
all the information required by Form ATS-N, including responses to each 
Item, as applicable, and the Exhibits, and disclose information that is 
accurate, current, and complete.\471\ Given that the Commission expects 
market participants to use Form ATS-N to decide which trading venue is 
best for them, it is important that Form ATS-N filings comply with the 
instructions and that the information provided on Form ATS-N is 
accurate, current, and complete. As it is today, Form ATS-N \472\ would 
be required to be filed electronically through EDGAR.
---------------------------------------------------------------------------

    \471\ See Item A.3 of the Instructions to Form ATS-N (as 
revised).
    \472\ See NMS Stock ATS Adopting Release, supra note 2, Section 
VII.
---------------------------------------------------------------------------

    The Commission is proposing to apply Rule 304(c)(2) to Government 
Securities ATSs, which provides that any report required under Rule 304 
shall be filed on a Form ATS-N, and include all information as 
prescribed in the Form ATS-N and the instructions to Form ATS-N. Rule 
304(c)(2) would provide that a Form ATS-N be executed at, or prior to, 
the time the Form ATS-N is filed and shall be retained by the 
Government Securities ATS in accordance with Rules 302 and 303, and the 
instructions in Form ATS-N. In the Regulation ATS Adopting Release, the 
Commission stated that the requirements to make and preserve records 
set forth in Regulation ATS are necessary to make and keep certain 
records for an audit trail of trading activity and permit surveillance 
and examination to help ensure fair and orderly markets.\473\ Expanding 
Rule 304(c) to encompass Government Securities ATSs would further these 
goals.
---------------------------------------------------------------------------

    \473\ See Regulation ATS Adopting Release, supra note 31, at 
70877-78.

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[[Page 15539]]

Request for Comment
    81. Should Rule 304(c) be applied, in whole or in part, to 
Government Securities ATSs?
    82. Should Rule 304(c) only apply to Government Securities ATSs 
that trade a certain type of government security (e.g., U.S. Treasury 
Securities, Agency Securities)? If so, to which type of Government 
Securities ATS should it apply and why?

D. Form ATS-N Disclosures

    Form ATS-N is a public report that provides detailed information 
about the ATS-related activities of the broker-dealer operator and its 
affiliates and the manner of operations of the ATS. Because the 
Commission is proposing to require Government Securities ATSs to file a 
Form ATS-N instead of previously proposed Form ATS-G,\474\ the 
Commission is proposing amendments to Form ATS-N to solicit disclosures 
that may be most relevant to market participants that trade government 
securities on these markets. In addition, because the Commission is 
amending Exchange Act Rule 3b-16 to include Communication Protocol 
Systems, the Commission is proposing to amend Form ATS-N to solicit 
disclosures about unique operational aspects to those systems. The 
Commission believes that it is important to revise Form ATS-N to 
provide investors with important information about the operations of 
all ATSs that trade NMS stocks and, as proposed, government securities.
---------------------------------------------------------------------------

    \474\ See 2020 Proposal, supra note 4.
---------------------------------------------------------------------------

    The Commission is proposing that the amendments to Form ATS-N be 
applicable to both NMS Stock ATSs and Government Securities ATSs, and 
any differences between how the form requirements would apply to these 
ATSs are noted below. Given the similar level of complexity/
sophistication between NMS Stock ATSs and Government Securities ATSs, 
the Commission believes that requiring both types of ATSs to file Form 
ATS-N is appropriate; however, as described below, certain requests 
have been tailored for the differences between NMS Stock ATSs and 
Government Securities ATSs. The Commission is proposing to revise Form 
ATS-N to include information it previously proposed on Form ATS-G, 
including a question requiring information about interaction with 
related markets.\475\ The Commission is also proposing to reorganize 
certain questions on Form ATS-N and to require disclosure about any 
surveillance and monitoring that is conducted with respect to the 
ATS.\476\ In response to the 2020 Proposal, one commenter stated that 
the proposed Form ATS-G disclosures were similar to those on Form ATS-
N, in that they would be categorized in a more standardized manner than 
Form ATS, which would allow for better comparisons between ATSs, and 
enhance the Commission's and SRO's regulatory oversight of Government 
Securities ATSs.\477\ The proposed revisions to Form ATS-N would 
continue to allow such comparisons, and applying Form ATS-N to 
Government Securities ATSs would better help enable market participants 
to compare Government Securities ATSs.
---------------------------------------------------------------------------

    \475\ See infra Section IV.D.5.k.
    \476\ See infra Section IV.D.5.i.
    \477\ See FINRA Letter at 4.
---------------------------------------------------------------------------

    The Commission is proposing certain amendments to Form ATS-N that 
would apply globally to Form ATS-N unless otherwise noted below. First, 
as Form ATS-N would be applicable to both Government Securities ATSs 
and NMS Stock ATSs, the Commission is proposing to replace references 
to ``NMS Stock ATSs'' throughout the form to ``Covered ATSs'' or 
``ATSs.'' \478\ Second, the Commission is proposing to replace 
references to ``orders'' throughout Form ATS-N to reference ``trading 
interest,'' which would encompass non-firm trading interest.\479\ 
Third, Form ATS-N would include an instruction at the beginning of Part 
III to require that the Covered ATS identify and explain any 
differences among and between subscribers, persons whose trading 
interest is entered into the ATS by a subscriber or the broker-dealer 
operator, the broker-dealer operator, and any affiliates of the broker-
dealer.\480\ Because this disclosure would be integrated in each Item, 
the Commission is proposing to delete the separate sub-questions in 
Part III that ask about whether services and functionalities and 
conditions or requirements related to such services and functionalities 
are the same for all subscribers and the broker-dealer operator.\481\ 
Fourth, the Commission is proposing to change references to ``Trading 
Centers'' to ``trading venues,'' which would include trading centers, 
but also include venues relevant to the trading of government 
securities and repos and Communication Protocol Systems.\482\ The term 
``trading venue'' encompasses a broader group of entities that could, 
for example, result in an execution or affect the handling of a 
subscriber's trading interest. The Commission explains below each 
requirement of Form ATS-N and why the Commission is proposing to apply 
that requirement to Government Securities ATSs. To the extent that the 
Commission is proposing a change to the requirement of Form ATS-N that 
would affect the reporting obligation of an NMS Stock ATS, the 
Commission identifies that change and the information the NMS Stock ATS 
would be required to disclose. In addition, to use consistent 
terminology throughout Form ATS-N, the Commission is proposing to 
change certain references to activity ``in'' the ATS to activity ``on'' 
the ATS.\483\
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    \478\ The Form ATS-N Cover Page (Type of Covered ATS), Part I, 
Item 8.a, and Part III, Items 23, 24(a), and 24(d)(i) will refer to 
``NMS Stock ATSs'' because such requests are applicable only to NMS 
Stock ATSs.
    \479\ See infra note 496 and accompanying text. See proposed 
revisions to Form ATS-N, Part II, Items 1(a), 1(c), 2(a), 2(c), 
3(a), 3(b), 4(a), 5(a), and 5(c); Part III, Items 4, 5(a), 5(b), 
10(a), 12, 13(a), 13(c), 13(d), 14(a), 15, 16(a), 16(b), 17, and 22.
    \480\ See supra notes 563-564 and accompanying text.
    \481\ See infra note 565.
    \482\ See infra note 497 and accompanying text. See proposed 
revisions to Form ATS-N Part II, Item 4 and Part III, Item 7.
    \483\ See proposed changes to Part II, Items 1 and 2 and Part 
III, Items 4(a), Item 22(a), Item 24(d)(ii).
---------------------------------------------------------------------------

    The Commission believes that Form ATS-N's public disclosures would 
provide important information to market participants that would help 
them better understand these operational facets of Covered ATSs and 
select the best trading venue based on their needs. The Commission 
believes that the vast majority of responsive information in Form ATS-
N, as proposed to be revised, would not be proprietary or commercially 
sensitive.\484\
---------------------------------------------------------------------------

    \484\ See infra Section IV. See also supra note 467.
---------------------------------------------------------------------------

1. Amendments to Form ATS-N for NMS Stock ATSs
    If the revisions to Form ATS-N were adopted and become effective, 
an NMS Stock ATS with an effective Form ATS-N or a Form ATS-N that is 
under Commission review would be required to file an amendment to its 
Form ATS-N so that its disclosures, as amended, meet all the 
requirements of Form ATS-N, as revised. If the proposed revisions to 
Form ATS-N become effective, a NMS Stock ATS would be required, in 
accordance with the instructions of the form, to amend its Form ATS-N 
so that it is complete.\485\ An NMS Stock ATS is required, pursuant to 
Rule 304(a)(2)(B), to file an updating amendment no later than 30 days 
after the end of each calendar quarter to correct information that has 
become inaccurate or incomplete for any reason. Specifically,

[[Page 15540]]

an NMS Stock ATS with an effective Form ATS-N, or an NMS Stock ATS 
whose Form ATS-N is under Commission review, would be required to, 
among other things, amend its Form ATS-N to disclose new identifying 
information and types of securities traded required by Part I, and to 
provide information responsive to new requests regarding new categories 
of types of subscribers (Part III, Item 1), monitoring and surveillance 
(proposed Part III, Item 9), interaction with related markets (proposed 
Part III, Item 11), the identity of liquidity providers (Part III, Item 
12), and post-trade processing (proposed Part III, Item 21).
---------------------------------------------------------------------------

    \485\ See Instruction A.3 of Form ATS-N (requiring that a Form 
ATS-N filing is accurate, current, and complete).
---------------------------------------------------------------------------

    In addition, the NMS Stock ATS would be required to amend its Form 
ATS-N to reorganize responses, including, among others, to move 
disclosures related to the activities of employees of the broker-dealer 
operator or its affiliates that service the operations of the ATS and 
another business unit of the broker-dealer operator or affiliate to 
proposed Part II, Item 7(a), and move discussion of after-hours use of 
orders from current Part III, Item 18 to proposed Part III, Item 4(b)-
(c). In addition, the NMS Stock ATS would be required to separately 
discuss information relevant to trading facilities or rules for 
bringing together orders of buyers and sellers in proposed Part III, 
Item 7 and information related to use of non-firm trading interest in 
proposed Part III, Item 8. The NMS Stock ATS would also be required to 
amend its responses to disclose any differences in treatment among 
subscribers, persons whose trading interest is entered into the ATS by 
a subscriber or the broker-dealer operator, the broker-dealer operator, 
and any affiliates of the broker-dealer operator as relevant throughout 
the responses to Part III rather than disclosing differences in 
treatment between any subscribers and the broker-dealer in specific 
sub-parts of Part III, as required by current Form ATS-N.
2. Definitions
    The Commission is proposing to amend certain definitions in the 
instructions to Form ATS-N. The Commission is re-proposing to replace 
the current definition of ``person'' in Form ATS-N, which is provided 
by the Investment Advisers Act of 1940 (``Advisers Act'') \486\ with 
the different definition of ``person'' as defined under the Exchange 
Act.\487\ Because Regulation ATS is a Commission regulation under the 
Exchange Act, the Commission believes that it is more appropriate to 
apply the definition of ``person'' under the Exchange Act than the 
Advisers Act, which is not applicable to ATSs. Although the definitions 
are not identical, the Commission believes the differences between the 
definitions are unlikely to result in differences to the disclosures 
required by Form ATS-N.\488\ To the extent ATSs might have found 
ambiguous the Commission's use of the Advisers Act definition in the 
context of an Exchange Act rule, the Commission believes that this 
proposed change will mitigate any such concerns.
---------------------------------------------------------------------------

    \486\ 15 U.S.C. 80a-2(a)(28) (defining ``person'' as ``a natural 
person or a company'').
    \487\ 15 U.S.C. 78c(a)(9) (defining the term ``person'' as a 
natural person, company, government, or political subdivision, 
agency, or instrumentality of a government).
    \488\ The Exchange Act's inclusion of a ``government, or 
political subdivision, agency or instrumentality of a government'' 
under the definition of ``person'' is unlikely to result in any 
changes to the disclosures required by the items in Form ATS-N that 
use the word ``Person'' as, in the Commission's experience, these 
entities are generally not involved in the operations of ATSs as 
subscribers or otherwise.
---------------------------------------------------------------------------

    The Commission is also proposing to change the definition of ``NMS 
Stock ATS'' in the instructions to the form to conform to the proposed 
changes to the definition in Rule 300 and state that NMS Stock ATSs 
shall not trade securities other than NMS stocks.\489\ The Commission 
is also proposing to add definitions of ``Agency Security,'' \490\ 
``Government Security,'' \491\ ``Government Securities ATS,'' \492\ 
``Legacy Government Securities ATS,'' \493\ and ``Trading Interest'' 
\494\ and conform the definition of ``Broker-Dealer Operator'' to the 
proposed revisions in Rule 301(b)(1).\495\ As proposed, the term 
``Trading Interest'' would be the same definition provided in proposed 
Rule 300(q) and Rule 3b-16(e), which would include both orders as 
defined under Rule 3b-16(c) and non-firm trading interest.\496\ In 
addition, the Commission is proposing to replace the term ``Trading 
Center'' with ``trading venue.'' A ``trading venue'' would mean a 
national securities exchange or national securities association that 
operates an SRO trading facility, an ATS, an exchange market maker, an 
OTC market maker, a futures or options market, or any other broker- or 
dealer-operated platform for executing trading interest internally by 
trading as principal or crossing orders as agent.\497\ The proposed 
definition of ``trading venue'' would encompass ``trading centers'' as 
defined under 17 CFR 242.600(b)(78) (Rule 600(b)(78) of Regulation 
NMS), futures and options markets, which the Commission believes may be 
relevant to the trading of government securities and repos, and also 
would encompass broker- or dealer-operated platforms for executing 
trading interest by trading as a principal or crossing orders as an 
agent.\498\
---------------------------------------------------------------------------

    \489\ See supra note 254 and accompanying text.
    \490\ See supra note 242 and accompanying text.
    \491\ See supra note 259 and accompanying text.
    \492\ See id.
    \493\ See supra note 256 and accompanying text.
    \494\ See supra Section II.C.1.
    \495\ See supra note 273 and accompanying text.
    \496\ See proposed Rule 3b-16(e) and Rule 300(q).
    \497\ See revised Form ATS-N, Explanation of Terms.
    \498\ This is broader than the definition of ``trading center'' 
under Rule 600(b)(78), which includes ``any other broker or dealer 
than executes orders internally by trading as principal orders as 
agent.''
---------------------------------------------------------------------------

3. Cover Page and Part I; Information About the Broker-Dealer Operator
    To make clear that the Commission would not be conducting a merit-
based review of Form ATS-N disclosures filed with the Commission, the 
Form ATS-N cover page states that the Commission has not passed upon 
the merits or accuracy of the disclosures in the filing. On the cover 
page of Form ATS-N, the Covered ATS would be required to identify 
whether it is an NMS Stock ATS or a Government Securities ATS. To 
indicate whether the ATS is subject to the transitional rules for 
Legacy Government Securities ATSs and Newly Designated ATSs,\499\ the 
ATS would be required to disclose whether it is a Legacy Government 
Securities ATS or Newly Designated ATS.\500\ In addition, the Covered 
ATS would indicate the type of filing by marking the appropriate 
checkbox.\501\
---------------------------------------------------------------------------

    \499\ See Rule 304(a)(1)(iv), as proposed to be revised.
    \500\ The Commission is proposing to delete the checkbox on the 
cover page of Form ATS-N that requires an NMS Stock ATS to select 
whether the NMS Stock ATS currently operates pursuant to a Form ATS. 
Rules 304 and 301(b)(2)(viii) required an NMS Stock ATS to file a 
Form ATS-N no later than January 7, 2019. After January 7, 2019, 
this checkbox became obsolete.
    \501\ The proposed cover page for Form ATS-N would provide that 
a filing may be an initial Form ATS-N, or a Form ATS-N material 
amendment, updating amendment, correcting amendment, contingent 
amendment, or fee amendment. The Commission is proposing to rename 
``order display and fair access amendments'' to ``contingent 
amendments'' throughout the form. In addition, the Commission is 
proposing a new fee amendment type. See supra Section IV.A.
---------------------------------------------------------------------------

    If the Covered ATS is filing an amendment, the ATS would be 
required to indicate the Part and Item number of the Form ATS-N that is 
the subject of the change(s), provide a brief summary of the substance 
of the change(s), and state whether or not the change(s) applies to (1) 
all subscribers and the

[[Page 15541]]

broker-dealer operator; (2) only the broker-dealer operator; (3) only 
subscribers; (4) only certain subscribers, subsets of subscribers, or 
customers of subscribers and the broker-dealer operator; or (5) only 
certain subscribers, subsets of subscribers, or customers of 
subscribers.\502\ In addition, the Covered ATS would be required to 
provide the EDGAR accession number for the Form ATS-N filing to be 
amended so that market participants can identify the filing that is 
being amended. Pursuant to Rule 304(b)(2)(iii), the Commission would 
make public the cover page of a filed Form ATS-N material amendment 
upon filing and then make public the entirety of the material amendment 
following the expiration of the review period pursuant to Rule 
304(a)(2)(ii). For updating, correcting, contingent, and fee 
amendments, which would be made public upon filing, the Commission 
believes that the information in the narrative could assist market 
participants in understanding the general nature of the change that the 
Covered ATS is implementing.
---------------------------------------------------------------------------

    \502\ See Instruction A.7.h of Form ATS-N. If a change subject 
to the amendment would equally apply to all subscribers and the 
broker-dealer operator, the Covered ATS would indicate that the 
change applies to all subscribers and the broker-dealer operator 
equally. If a change would apply differently among subscribers or 
types of subscribers, between subscribers and the broker-dealer 
operator, or between the broker-dealer operator and its affiliates 
(which may be subscribers to the ATS), the Covered ATS would state 
so and describe the differences in treatment. This is the same as 
how NMS Stock ATSs currently describe in Form ATS-N and would be 
required to describe in Form ATS-N whether or not a change applies 
to all subscribers and the broker-dealer operator in amendments on 
Form ATS-N. As required by the instruction, a filer must provide a 
brief summary of all changes to the form. Such summary should enable 
market participants to understand the nature of the changes being 
made. For example, if the ATS is adding a new order type, the ATS 
should state that it is adding a new order type and provide a brief 
description of unique aspects of the order type. The Commission is 
proposing to clarify in Instruction A.7.h that changes made in Part 
IV of Form ATS-N should not be described, as Part IV is non-public. 
See infra Section IV.D.6.
---------------------------------------------------------------------------

    If the filing is a cessation of operations, the cover page of Form 
ATS-N would require the Covered ATS to provide the date that the ATS 
will cease to operate. The cover page includes a checkbox where the ATS 
could indicate whether it wishes to withdraw a previously-filed Form 
ATS-N filing and provide the EDGAR accession number for the filing to 
be withdrawn. The instructions to Form ATS-N state that an ATS may 
withdraw an initial Form ATS-N or an amendment before the end of the 
applicable Commission review period. In addition, a Covered ATS could 
withdraw a notice of cessation of operations at any time before the 
date that the ATS indicated it intended to cease operating.\503\
---------------------------------------------------------------------------

    \503\ See Instruction A.9 of Form ATS-N.
---------------------------------------------------------------------------

    Part I of revised Form ATS-N would be substantively the same as 
that for current Form ATS-N with certain exceptions, as described 
below. Form ATS-N would require a Covered ATS to identify the 
registered broker-dealer that operates the ATS and state whether the 
filer is a broker-dealer registered with the Commission. The Commission 
is proposing new Part I, Item 1(b) of Form ATS-N to require the Covered 
ATS to indicate whether the registered broker-dealer is authorized by a 
national securities association to operate an ATS under the rules of 
the national securities association. Proposed Part I, Item 1(b) would 
facilitate compliance with and Commission oversight of the requirement 
that an ATS must register as a broker-dealer and become a member of an 
SRO.\504\ The Commission is also proposing that the Covered ATS provide 
the name of the registered broker-dealer or government securities 
broker or government securities dealer for the ATS (i.e., the broker-
dealer operator), as it is stated on Form BD, in Part I, Item 2 of Form 
ATS-N.\505\
---------------------------------------------------------------------------

    \504\ See 15 U.S.C. 78o(b)(8). See also NMS Stock ATS Adopting 
Release, supra note 2, at 38773.
    \505\ As discussed above, Rule 301(b)(1) currently requires that 
the ATS register as a broker-dealer under Section 15 of the Exchange 
Act. As proposed, Rule 301(b)(1) would require an ATS to register as 
a broker-dealer under Exchange Act Section 15 or a government 
securities broker or government securities dealer under Exchange Act 
Section 15C(a)(1)(A). See supra note 273 and accompanying text.
---------------------------------------------------------------------------

    To the extent that a commercial or ``DBA'' (doing business as) name 
or names are used to identify the Covered ATS to the public, the 
Commission, or its SRO, or if a registered broker-dealer operates 
multiple Covered ATSs, Form ATS-N would require the full name(s) of the 
Covered ATS under which business is conducted, if different, in Part I, 
Item 3 of Form ATS-N. Part I, Item 4 of Form ATS-N would require the 
Covered ATS to provide the broker-dealer operator's SEC File Number and 
Central Registration Depository (``CRD'') Number.
    In addition, the Commission is proposing to require Covered ATSs to 
provide the broker-dealer operator's Legal Entity Identifier (``LEI'') 
in Part I, Item 4, if the broker-dealer operator has an LEI.\506\ If a 
broker-dealer operator of the ATS has an LEI, the information may be 
useful to market participants as a globally standardized identifier. 
The Commission, however, is not proposing to require broker-dealer 
operators that do not have an LEI to obtain such an identifier. In 
addition, the Commission is proposing to add a question to Part I, Item 
4(d) that would require the ATS to provide the MPID of its broker-
dealer operator. Although Part I, Item 5(c) of Form ATS-N requires the 
ATS to disclose the MPID of the ATS, the Commission is also requiring 
the ATS to provide the MPID of the broker-dealer operator because a 
broker-dealer operator may have a unique MPID. Because the broker-
dealer operator could potentially use such a unique MPID to conduct 
trading and routing activity that affects the ATS, it would be useful 
to market participants and regulators to require the ATS to state the 
broker-dealer operator's MPID as it will help them identify the broker-
dealer operator and better understand the scope of activities of the 
broker-dealer operator.\507\
---------------------------------------------------------------------------

    \506\ Current Form ATS-N does not include this Item, and as 
proposed, NMS Stock ATSs would also be subject to this proposed 
requirement. An LEI is a 20-character reference code that uniquely 
identifies legally distinct entities that engage in financial 
transactions and is used by numerous domestic and international 
regulatory regimes. See Securities Act Release No. 10425, 82 FR 
50988, 51005 (November 2, 2017) (stating that LEIs are intended to 
improve market transparency by providing clear identification of 
participants). Although several existing ATS broker-dealer operators 
currently have an LEI, not all broker-dealer operators have an LEI. 
In the 2020 Proposal, the Commission asked commenters whether they 
believe a Government Securities ATS should be required to disclose 
the broker-dealer operator's LEI. One commenter supported requiring 
disclosure of the LEI on Form ATS, Form ATS-R, Form ATS-N, and 
previously proposed Form ATS-G, stating, among other things, that it 
is a global standard for legal entity identification and that it 
enables publicly accessible information about an entity's ownership 
structure. This commenter stated that LEI should not replace the 
CRD, which serves a purpose in identifying broker-dealers and their 
affiliates, but should serve as a complimentary identifier. See 
letter from Stephan Wolf, CEO, Global Legal Entity Identifier 
Foundation, dated March 1, 2021 (``GLEIF Letter''). Another 
commenter stated that the utility of asking brokers to obtain 
another identification number is unclear if the LEI does not replace 
FINRA assigned identification numbers. See Bloomberg Letter at 7.
    \507\ The Commission understands that, in certain instances, a 
broker-dealer operator for an ATS may use the ATS MPID in connection 
with its routing activities when the routing functionality is within 
the ATS. See FINRA Trade Reporting Guidance, Example 7, available at 
https://www.finra.org/sites/default/files/ATS%20OATS%20and%20Trade%20Reporting%20Guidance%209-2-14_0_0_0_0.pdf. To the extent that the 
broker-dealer uses the ATS MPID in connection with its routing 
activities, or its routing functionality is inside the ATS, such 
activities and functionality would be subject to Regulation ATS, 
including the disclosure requirements of Form ATS-N.
---------------------------------------------------------------------------

    Part I, Item 5 of Form ATS-N would require the Covered ATS to 
provide the full name of the national securities association of which 
the broker-dealer operator is a member, the effective date of the 
broker-dealer operator's membership with the national securities

[[Page 15542]]

association, and the MPID of the ATS. Pursuant to FINRA rules, each ATS 
is required to use a unique MPID in its reporting to FINRA, such that 
its volume reporting is distinguishable from other transaction volume 
reported by the broker-dealer operator of the ATS, including volume 
reported for other ATSs or trading desks operated by the broker-dealer 
operator.\508\ The broker-dealer operator would provide the unique MPID 
for the Covered ATS and assess the functionalities related to trading 
under that MPID and describe them, as applicable, in response to the 
information requests on Form ATS-N. Providing the name of the Covered 
ATS or DBAs and its MPID would identify the ATS to the public and the 
Commission. The name, identity of the broker-dealer operator, any 
``DBA'' name, and the ATS's MPID are basic information critical to 
market participants for identifying the ATS and should be disclosed.
---------------------------------------------------------------------------

    \508\ See FINRA Rules 6160, 6170, 6480, and 6720.
---------------------------------------------------------------------------

    Proposed Part I, Item 6 of Form ATS-N would require the Covered ATS 
to provide a URL address for the website of the ATS. Proposed Part I, 
Item 7 of Form ATS-N would require the ATS to provide the primary 
physical street address of the ATS matching system and indicate whether 
the ATS has a secondary matching system that may be used in the event 
that the primary matching system is not available. If yes, the ATS 
would be required to provide the secondary address of the matching 
system.
    To inform market participants about the types of securities that a 
Covered ATS makes available for trading, the Commission is proposing to 
require a Covered ATS to disclose in Part I, Item 8 of Form ATS-N the 
types of securities it trades. Part I, Item 8(a) would require an NMS 
Stock ATS, but not a Government Securities ATS, to indicate whether the 
ATS makes available for trading all NMS stocks.\509\ If not, the ATS 
would identify the securities or types of securities that it does not 
make available for trading.\510\ Part I, Item 8(b) would require a 
Government Securities ATS, but not an NMS Stock ATS, to select the 
categorical types of government securities the ATS trades (i.e., U.S. 
Treasury Securities, Agency Securities, repos, or other).\511\ If the 
Government Securities ATS trades U.S. Treasury Securities, it would be 
required to select whether it trades bills,\512\ notes,\513\ 
bonds,\514\ TIPS,\515\ STRIPS,\516\ and/or floating rate notes \517\ 
and indicate whether each type of security traded is on-the-run, off-
the-run, and/or when-issued.\518\ If the Government Securities ATS 
trades Agency Securities, it would be required to indicate whether it 
trades Agency Mortgage-Backed Securities \519\ and/or Federal Agency 
Securities.\520\ In addition, if the Government Securities ATS trades 
repos, the ATS would indicate whether it trades triparty \521\ and/or 
bilateral repos,\522\ and whether such securities are repurchase 
agreements or reverse repurchase agreements and are centrally cleared 
\523\ or non-centrally cleared.\524\ If the Government Securities ATS 
trades any other government securities, it would be required to mark 
``other'' via checkbox and identify the types of government securities 
that the ATS makes available for trading. Requiring a Covered ATS to 
publicly disclose the types of securities that it trades would identify 
to potential subscribers and regulators the securities that the ATS 
offers for trading and help potential subscribers decide whether they 
would want to engage the ATS.
---------------------------------------------------------------------------

    \509\ If the NMS Stock ATS suspends trading in securities under 
certain circumstances, the ATS should indicate so under Part III, 
Item 19. See infra Section IV.D.5.r.
    \510\ The Commission notes that most, if not all, NMS Stock ATSs 
currently disclose whether they trade all NMS stocks in Part III, 
Item 11(a) of Form ATS-N.
    \511\ The types of securities traded would be limited to 
government securities (15 U.S.C. 78c(a)(42)) and repos. See proposed 
Rule 300(l).
    \512\ Treasury bills are short-term securities that mature in 
one year or less from their issue date. Bills are purchased for a 
price less than or equal to their par (face) value, and when they 
mature, Treasury Department pays their par value. See 
TreasuryDirect, The Basics of Treasury Securities, available at 
https://www.treasurydirect.gov/instit/research/faqs/faqs_basics.htm#tbills (last visited September 15, 2021).
    \513\ Treasury notes are securities that pay a fixed rate of 
interest every six months until the security matures, which is when 
Treasury Department pays the par value. Treasury notes mature in 
more than a year, but not more than 10 years from their issue date. 
See id.
    \514\ Treasury bonds are securities that pay a fixed rate of 
interest every six months until the security matures, which is when 
Treasury Department pays the par value. Bonds mature in more than 10 
years from their issue date. See id.
    \515\ Treasury Inflation-Protected Securities (``TIPS'') pay 
interest every six months and the principal value of TIPS is 
adjusted to reflect inflation or deflation as measured by the 
Consumer Price Index. The semi-annual interest payments and maturity 
payment are calculated based on the inflation-adjusted principal 
value of the security. See id.
    \516\ See supra 191.
    \517\ A floating rate note security that has an interest payment 
that can change over time. As interest rates rise, the security's 
interest payments will increase. Similarly, as interest rates fall, 
the security's interest payments will decrease. This security makes 
use of an index (or reference) rate (in this case, tied to the most 
recent 13-week bill rate, prior to the lockout period) and spread 
(determined at auction) to calculate an interest rate. The index 
rate changes periodically, in this instance every week, causing the 
interest rate to change or ``float.'' The notes may be of varying 
original maturities. See TreasuryDirect, Frequently Asked Questions, 
available at https://www.treasurydirect.gov/indiv/help/TDHelp/faq.htm.
    \518\ A ``when-issued'' transaction is a transaction in a U.S. 
Treasury Security that is executed before the issuance of the 
security.
    \519\ Agency Mortgage-Backed Securities include (i) a type of 
securitized product issued in conformity with a program of a U.S. 
executive agency, as defined in 5 U.S.C. 105 or a government-
sponsored enterprise, as defined in 2 U.S.C. 622(8), for which the 
timely payment of principal and interest is guaranteed by the 
executive agency or GSE, representing ownership interest in a pool 
(or pools) of mortgage loans structured to ``pass through'' the 
principal and interest payments to the holders of the security on a 
pro rata basis; and (ii) a type of securitized product backed by a 
securitized product described in (i). See also FINRA Rules 6710(m), 
6710(v), 6710(dd).
    \520\ Federal Agency Securities include all Agency Securities 
except Agency Mortgage-Backed Securities. See supra note 519.
    \521\ A triparty repo involves a third party, which is a 
clearing bank that provides support to both parties in the trade by 
settling the repo on its books and ensuring that the details of the 
repo agreement are met. See Viktoria Baklanova, Adam Copeland & 
Rebecca McCaughrin, Federal Reserve Bank of New York Staff Reports, 
Reference Guide to U.S. Repo and Securities Lending Markets 
(September 2015) at 5-6, 8-10, available at https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr740.pdf (``New York Fed Staff Report'').
    \522\ A bilateral repo involves two parties agreeing on the 
terms of trade, including the principal amount of the repo, the 
interest rate paid by the collateral provider, the type of 
securities delivered, the haircut to be applied for the collateral 
pledged, and the maturity of the repo, and each counterparty's 
custodian bank clears and settles the trade. See New York Fed Staff 
Report, supra note 521, at 5-7.
    \523\ Centrally cleared would mean any transaction that uses a 
central counterparty, as defined in 17 CFR 240.17Ad-22(a)(2) (Rule 
17Ad-22(a)(2) under the Exchange Act).
    \524\ Non-centrally cleared would mean any transaction that does 
not use a central counterparty, as defined in Rule 17Ad-22(a)(2) 
under the Exchange Act. See id.
---------------------------------------------------------------------------

    Proposed Part I, Items 9 and 10 \525\ would require a Covered ATS 
to attach the most recently filed or amended Schedule A of the broker-
dealer operator's Form BD disclosing information related to direct 
owners and executive officers, and the most recently filed or amended 
Schedule B of the broker-dealer operator's Form BD disclosing 
information related to indirect owners as Exhibits 1 and 2, 
respectively. In lieu of attaching those schedules, the Covered ATS can 
indicate, via a checkbox, that the information under those schedules is 
available on its website and is accurate as of the date of the filing 
of the Form

[[Page 15543]]

ATS-N.\526\ The Commission is proposing to include in Part I, Items 9 
and 10 that, if the ATS selects to make the information available on 
its website in lieu of attaching it to its filing, the ATS will 
maintain its website in accordance with the rules for amending Form 
ATS-N pursuant to Rule 304(a)(2)(i) to reflect any changes to Schedule 
A or Schedule B, as applicable, to the Form BD of the broker-dealer 
operator. This would require an ATS checking the box to update its 
website as if it were Form ATS-N, and therefore, to update the 
information no later than 30 calendar days after the end of any 
calendar quarter in which its broker-dealer operator's Schedule A or 
Schedule B of Form BD becomes inaccurate or incomplete.
---------------------------------------------------------------------------

    \525\ These items are numbered as Part I, Items 8 and 9 in 
current Form ATS-N, but would be renumbered as Items 9 and 10.
    \526\ Part I, Items 9 and 10 and Part III, Item 25 (see infra 
Section IV.D.5.y) are the only requests for information that would 
allow a Covered ATS to cross-reference to information on the ATS's 
website instead of providing it in the form disclosures. Form ATS-N 
disclosures would be the vehicle for disseminating to the public 
information about the operations of the ATS and the ATS-related 
activities of the broker-dealer operator and its affiliates under 
Rule 304, which are required to be kept current, accurate, and 
complete by the ATS. Accordingly, ATSs would be required to provide 
information required by the form in the Form ATS-N disclosures and 
not cross-reference to other sources.
---------------------------------------------------------------------------

    When an ATS is purchased by another entity and operated by a 
broker-dealer that is not the ATS's current broker-dealer operator, the 
new broker-dealer typically commences operating the ATS using its 
personnel, processes, and procedures. To avoid disruptions to 
operations of the ATS or its subscribers, the existing Covered ATS 
would file a Notice of Cessation at least 10 business days prior to the 
official change of broker-dealer operator (e.g., the date of closing 
for an acquisition) pursuant to Rule 304(a)(3) \527\ and the new 
broker-dealer operator would file an initial Form ATS-N in advance of 
the Notice of Cessation, which must become effective before it may 
operate the Covered ATS pursuant to Rule 304(a)(1)(i).\528\
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    \527\ See supra note 455 and accompanying text.
    \528\ See supra Section IV.A. To facilitate the review of the 
initial Form ATS-N for the new Covered ATS, the broker-dealer 
operator for the new ATS may provide a draft initial Form ATS-N to 
the staff for consideration.
---------------------------------------------------------------------------

    In addition, Part I, Item 11 of Form ATS-N would require the 
Covered ATS, for filings made pursuant to Rule 304(a)(2)(i) (i.e., Form 
ATS-N amendments), to attach as Exhibit 3 a marked document to indicate 
changes to ``yes'' or ``no'' answers and additions or deletions from 
any Item in Part I, Part II, and Part III, as applicable.\529\ The 
Commission is proposing to revise Part I, Item 11 to state that the ATS 
must include in such marked document any changes to Exhibits 1, 2, and 
5. The requirement for the ATS to provide a marked document or 
``redline'' showing changes helps market participants and regulators 
easily review changes the ATS is making in an amendment. The Commission 
is not proposing Form ATS-N to require a marked document showing 
changes to Exhibit 4, which includes aggregate platform-wide order flow 
and execution statistics of the ATS, because such statistics may 
frequently change, and showing such changes could be burdensome for 
ATSs and would not be particularly useful for market participants or 
regulators. However, the ATS should be required to provide a marked 
document to show changes to the list and explanation of categories or 
metrics for such aggregate platform-wide order flow and execution 
statistics on Exhibit 5, as highlighting such changes would be useful 
for market participants in understanding any aggregate platform-wide 
order flow and execution statistics the ATS provides. In addition, to 
ensure the changes in the marked document are clear and readily 
identifiable, the Commission is proposing to clarify that the ATS must 
indicate the Part and Item number for all Items that are changing.
---------------------------------------------------------------------------

    \529\ This Item is currently numbered as Part I, Item 10, but 
would be renumbered as Item 11. The Commission proposes to make a 
minor change to this Item to clarify that ``II'' refers to Part II.
---------------------------------------------------------------------------

Request for Comment
    83. Should Covered ATSs be required to provide any additional 
identifying information on Part I of Form ATS-N? Are the proposed 
information requests on Part I of Form ATS-N necessary, or are certain 
information requests not necessary and why?
    84. Should the Commission require Covered ATSs to provide types of 
securities that they trade (or do not trade) in Part I, Item 8 of Form 
ATS-N? Would the proposed categories and classifications of government 
securities in Part III, Item 8(b) be helpful to market participants? 
What, if any, additional or alternative categories or classifications 
would commenters suggest? Is there any other information about types of 
securities an ATS trades that should be required by Form ATS-N?
4. Part II: Broker-Dealer Operator and Its Affiliates Activities
    The Commission believes that the disclosures on Form ATS-N about 
the conflicts of interest that might arise from the business structures 
of the Covered ATS and the ATS-related activities of the broker-dealer 
operator and its affiliates are designed to help participants protect 
their interests when using the services of the ATS.\530\ As the 
Commission has previously stated, the broker-dealer operator controls 
all aspects of the ATS's operations and the broker-dealer operator's 
non-ATS and ATS functions may overlap.\531\ Currently, market 
participants have limited information about conflicts of interest that 
might arise from the non-ATS activities of the broker-dealer operator 
of a Government Securities ATS or a Communication Protocol System, and 
different classes of participants may have different levels of 
information about the operations of the ATS or the Communication 
Protocol System.\532\ Because of potential overlap between a broker-
dealer's ATS operations and its other operations, there is a risk of 
information leakage of subscribers' confidential trading information to 
other business units of the broker-dealer operator or its affiliates. 
The Commission believes that some market participants would want to 
consider the trading activity of the broker-dealer operator, or its 
affiliates, when evaluating potential conflicts of interest on a 
Covered ATS and may also want to be aware of the range of services and 
products that the broker-dealer operator or its affiliates offer for 
use in the ATS because such services or products may have an impact on 
access to, or trading on, the ATS. In addition, disclosures on Form 
ATS-N would better inform the Commission and other regulators about the 
activities of Covered ATSs and their role in the government securities 
and NMS stock markets, which would facilitate better oversight of these 
ATSs to the benefit of investors.
---------------------------------------------------------------------------

    \530\ See infra Section IV.D.4.
    \531\ See NMS Stock ATS Proposing Release, supra note 29, at 
81010, 81041.
    \532\ See id. at 81010.
---------------------------------------------------------------------------

    The Commission continues to believe that the interests of the 
broker-dealer operator or its affiliates can sometimes compete against 
the interests of those that use the Covered ATS's services. These 
competing interests, at times, may give rise to conflicts of interest 
for the broker-dealer operator and its affiliates or the potential for 
information leakage of subscribers' confidential trading information. 
For example, trading by the broker-dealer operator or its affiliates on 
a Covered ATS controlled and operated by the broker-dealer operator 
presents a conflict of interest whereby the broker-dealer operator has 
the opportunity to place its interest ahead of participants

[[Page 15544]]

trading in the ATS that the broker-dealer controls and operates. Part 
II of Form ATS-N is designed to provide market participants with 
information about these competing interests, and inform them about: (1) 
The operation of the Covered ATS--regardless of the corporate structure 
of the ATS--and of its broker-dealer operator, or any arrangements the 
broker-dealer operator may have made, whether contractual or otherwise, 
pertaining to the operation of its ATS; and (2) ATS-related activities 
of the broker-dealer operator and its affiliates that may give rise to 
conflicts of interest for the broker-dealer operator and its affiliates 
or the potential for information leakage of subscribers' confidential 
trading information. The public disclosure about potential conflicts of 
interest on Covered ATSs would advance the same policy and investor 
protection objectives.
    Furthermore, Part II of Form ATS-N does not require public 
disclosure of activities or affiliate relationships of the broker-
dealer operator that do not relate to the Covered ATS. Many broker-
dealer operators of NMS Stock ATSs, and, to a lesser extent, Government 
Securities ATSs, engage in broker-dealer or other activities that are 
unrelated to their operations of the ATS. The Commission believes that 
Form ATS-N should exclude requests that would solicit information about 
a broker-dealer operator's activities unrelated to its ATS operations.
    The Commission is proposing to use the same definitions of 
``affiliate'' and ``control'' in revised Form ATS-N as are used in 
current Form ATS-N.\533\ These terms are intended to encompass all 
relevant affiliate relationships between the broker-dealer operator and 
other entities that the Commission believes would help market 
participants' evaluation of potential conflicts of interest.\534\
---------------------------------------------------------------------------

    \533\ Form ATS-N would define ``affiliate'' as, with respect to 
a specified person, any person that, directly or indirectly, 
controls, is under common control with, or is controlled by, the 
specified person. ``Control'' would be defined to mean the power, 
directly or indirectly, to direct the management or policies of the 
broker-dealer operator of an alternative trading system, whether 
through ownership of securities, by contract, or otherwise. In this 
proposal, the Commission is proposing to update the definition of 
``person'' for the purposes of Form ATS-N. A ``person'' is presumed 
to control the broker-dealer operator of an alternative trading 
system if that person: Is a director, general partner, or officer 
exercising executive responsibility (or having similar status or 
performing similar functions); directly or indirectly has the right 
to vote 25 percent or more of a class of voting securities or has 
the power to sell or direct the sale of 25 percent or more of a 
class of voting securities of the broker-dealer operator of the 
alternative trading system; or in the case of a partnership, has 
contributed, or has the right to receive upon dissolution, 25 
percent or more of the capital of the broker-dealer operator of the 
alternative trading system. See infra Section V.D.
    \534\ See NMS Stock ATS Adopting Release, supra note 2, at 
38818-19.
---------------------------------------------------------------------------

a. Items 1 and 2: Broker-Dealer Operator and Its Affiliate Trading 
Activities in the Covered ATS
    Part II, Items 1(a) and 2(a) of Form ATS-N are designed to disclose 
information about whether business units of the broker-dealer operator 
or its affiliates,\535\ respectively, are permitted to enter or direct 
the entry of trading interest into the Covered ATS. If the person that 
operates and controls a Covered ATS is also able to trade on that ATS, 
there may be an incentive to design the operations of the ATS to favor 
the trading activity of the operator of the ATS or affiliates of the 
operator. An operator of a Covered ATS that also trades in the ATS it 
operates would likely have informational advantages over others trading 
in the ATS, such as a better understanding of the manner in which the 
system operates or who is trading in the ATS. In the most egregious 
case, the operator of the ATS might use the confidential trading 
information of other traders to advantage its own trading on or off of 
the ATS.\536\
---------------------------------------------------------------------------

    \535\ In Part II, Item 1(a), the Commission is proposing to 
delete examples of trading interest--quotes, conditional orders, and 
indications of interest--as the proposed definition of trading 
interest would encompass these examples.
    \536\ For a further discussion about how a conflict of interest 
related to trading by the broker-dealer operator on its own ATS 
could be harmful to other subscribers, see NMS Stock ATS Adopting 
Release, supra note 2, at 38771, 38824-29.
---------------------------------------------------------------------------

    If a Covered ATS permits the broker-dealer operator or its 
affiliates to enter trading interest in the ATS, whether on an agency, 
principal, or riskless principal basis, the ATS would be required to 
only list the business units or affiliates that actually enter or 
direct the entry of trading interest into the ATS. Part II, Items 1(a) 
and 2(a) of Form ATS-N would require the ATS to list the business unit 
or affiliate if, for example, a trading desk of the broker-dealer 
operator or an affiliate uses a direct connection to the ATS or 
algorithm to submit trading interest into the ATS. Likewise, if an 
affiliated asset manager of the broker-dealer operator uses the 
services of a third-party broker-dealer to direct trading interest to 
the ATS (i.e., the asset manager instructs the third-party broker-
dealer to send its trading interest to the ATS), the ATS would be 
required to list that affiliated asset manager under Item 2(a). 
However, if that affiliated asset manager submits trading interest to a 
third-party broker-dealer, and that third-party broker-dealer, using 
its own discretion, directs the trading interest of the asset manager 
into the affiliated ATS, the ATS would not be required to list the 
affiliated asset manager under Item 2(a); under such circumstances, the 
affiliate would not be ``directing'' trading interest to the ATS 
because the third-party broker-dealer is using its discretion to direct 
the affiliate's trading interest.
    Currently, Part II, Items 1(a) and 2(a) only require an NMS Stock 
ATS to list business units or affiliates, respectively, that enter or 
direct the entry of orders and trading interest into the ATS.\537\ 
Based on the Commission staff's experience, some NMS Stock ATSs have 
opted to list all of the internal business units and affiliates that 
could trade in the ATS and not only the internal business units and 
affiliates that actively enter orders and trading interest into the 
ATS. This additional information can also help market participants 
evaluate the types of potential conflicts of interest on an NMS Stock 
ATS by providing the entire universe of potential contra-side trading 
interest that users of the ATS might view as a conflict of interest. 
Accordingly, while not required to do so, a Covered ATS would meet the 
respective requirements of Part II, Items 1(a) and 2(a) by listing all 
of the internal business units and affiliates that could trade in the 
ATS.
---------------------------------------------------------------------------

    \537\ As explained above, Form ATS-N will remove references to 
``orders,'' and its disclosures will focus on ``trading interest.''
---------------------------------------------------------------------------

    The Commission is proposing that Form ATS-N specify the types of 
information that a Covered ATS must provide with regard to business 
units or affiliates of the broker-dealer operator. Specifically, Item 
1(a) would require the ATS to name and describe each type of business 
unit of the broker-dealer operator that enters or directs the entry of 
trading interest into the ATS (e.g., another Covered ATS, type of 
trading desks, market maker, sales or client desk) and, for each 
business unit, to provide the applicable MPID and list the capacity of 
its trading interest (e.g., principal, agency, riskless principal). 
Item 2(a) would require the Covered ATS to name and describe each type 
of affiliate that enters or directs the entry of trading interest into 
the ATS (e.g., broker-dealers, another Covered ATS, investment 
companies, hedge funds, market makers, PTFs) and, for each of those 
affiliates, provide the applicable MPID and list the capacity of its 
trading interest (e.g., principal, agency, riskless principal). The 
disclosures in Items 1(a) and 2(a) would help market participants 
understand both the types of broker-

[[Page 15545]]

dealer operator business units and affiliates that can trade in a 
Covered ATS, and their trading activities.\538\
---------------------------------------------------------------------------

    \538\ Although the narrative responses to Items 1(a) and 2(a) 
could typically be kept up-to-date via updating amendments to Form 
ATS-N, the Commission also notes that in most cases, if the ``yes'' 
or ``no'' response to Items 1(a) or 2(a) changes (e.g., the Covered 
ATS changes its operations to allow affiliates to trade whereas they 
could not do so prior, or vice versa), the ATS would be required to 
file a material amendment. See NMS Stock ATS Adopting Release, supra 
note 2, at 38826.
---------------------------------------------------------------------------

    In addition to what is required under current Form ATS-N, the 
Commission proposes to add an additional disclosure request to Part II, 
Items 1(a) and 2(a) of Form ATS-N that would require a Covered ATS to 
explain any circumstance when the broker-dealer operator or an 
affiliate, respectively, would be a counterparty to an ATS trade. Based 
on Commission experience, the broker-dealer operator may act as a 
counterparty to both sides of a trade to maintain the anonymity of each 
counterparty or to facilitate clearance and settlement of the trade. To 
the extent the broker-dealer operator or affiliate of the broker-dealer 
operator of a Covered ATS intermediates between two counterparties, the 
ATS should publicly disclose to its subscribers when and how it does so 
and the capacity of the broker-dealer operator or its affiliates.\539\
---------------------------------------------------------------------------

    \539\ Depending on how the Covered ATS operates, it is possible 
that disclosures about the broker-dealer operator's (or its 
affiliate's) role as an intermediary between two other 
counterparties would be required disclosures elsewhere on the Form 
ATS-N (e.g., Part III, Item 7 (Order Types and Sizes; Trading 
Facilities), Part III, Item 21 (Post-Trade Processing, Clearance, 
and Settlement)). Accordingly, the Commission is proposing that this 
information would be required to be publicly disclosed in Part II. 
However, to decrease redundancy in the form, the ATS could note in 
Part II, Item 1(a) and/or 2(a) disclosures that the broker-dealer 
operator or its affiliates could be counterparties to a trade, state 
the capacity in which broker-dealer operator or its affiliate is a 
counterparty to the trade, and provide a more detailed responses to 
other requests for information as required in the form.
---------------------------------------------------------------------------

    Part II, Items 1(b) and 2(b) of Form ATS-N would require a Covered 
ATS to disclose whether the services that the ATS offers and provides 
to the business units or affiliates required to be identified in Item 
1(a) and 2(a), respectively, are the same for all subscribers and 
persons whose trading interest is entered into the ATS by a 
subscriber.\540\ This request would be in the form of a ``yes'' or 
``no'' question, and if the ATS answers ``no,'' it would be required to 
explain any differences in response to the applicable Item number(s) in 
Part III of Form ATS-N and list the applicable Item number(s). If there 
are differences that are not applicable to Part III of Form ATS-N, the 
ATS must explain those differences in detail under Part II, Items 1 and 
2.
---------------------------------------------------------------------------

    \540\ The Commission is proposing to revise Part II, Items 1(b) 
and 2(b) to specifically ask about treatment of persons whose 
trading interest is entered into the ATS by a subscriber or the 
broker-dealer operator. In the Commission's experience, ATS services 
could vary among not only subscribers, but also non-subscriber 
participants to the ATS. The Commission is therefore proposing to 
broaden the scope of these questions to apply to differing treatment 
among non-subscriber participants whose trading interest is entered 
into the ATS by a subscriber or the broker-dealer operator.
---------------------------------------------------------------------------

    Part II, Items 1(c) and 2(c) would require a Covered ATS to 
disclose the broker-dealer operator's or any of its affiliates' role as 
a liquidity provider in the ATS, if applicable. These Items would 
require the ATS to disclose--in the form of a ``yes'' or ``no'' 
response--whether there are any formal or informal arrangements with 
any of the sources of trading interest of the broker-dealer operator or 
affiliates identified in Item 1(a) and Item 2(a), respectively, to 
provide trading interest to the ATS (e.g., undertaking to buy or sell 
continuously, or to meet specified thresholds of trading or quoting 
activity). If the ATS answers ``yes,'' it must identify the business 
unit(s) or affiliate(s) and respond to the Item with information about 
liquidity providers in the ATS.\541\ Based on the Commission staff's 
experience with Form ATS-N filed by NMS Stock ATSs, highlighting 
whether the broker-dealer operator or affiliate acts as a liquidity 
provider on a Covered ATS would help market participants evaluate the 
potential for conflicts of interest or information leakage on the 
trading platform.
---------------------------------------------------------------------------

    \541\ This request is contained in Part III, Item 12. See infra 
Section V.D.5.l.
---------------------------------------------------------------------------

    Finally, the Commission proposes to relocate the Part II, Items 
1(d) and 2(d) disclosure requests to proposed Part III, Item 16(c). 
Currently, these request an NMS Stock ATS to disclose information about 
sending orders and trading interest to a trading center operated or 
controlled by the broker-dealer operator or any of its affiliates, 
respectively in the form of a ``yes'' or ``no'' question. The related 
narrative is currently required to be provided in Part III, Item 16, 
which requires disclosures about external routing from the NMS Stock 
ATS. The Commission continues to believe that this disclosure is 
important when evaluating potential conflicts of interest and how 
trading interest may be handled in the ATS. The Commission originally 
included subpart (d) in Part II, Items 1 and 2 to highlight conflicts 
of interest related to routing. The Commission believes that it would 
be more efficient for market participants and filers to consolidate 
this disclosure with the responses to the request soliciting 
information about the routing or sending of trading interest from the 
ATS. As such, the Commission is proposing to delete Items 1(d) and 2(d) 
from Part II, and relocate the disclosure requirements therein to Part 
III, Item 16(c).
Request for Comment
    85. What information about trading by the broker-dealer operator 
and its affiliates related to Government Securities ATSs is important 
to market participants? Are there any additional relevant points of 
information about NMS Stock ATSs that Form ATS-N does not solicit and 
should be asked?
    86. Are there potential conflicts of interest for broker-dealer 
operators of Government Securities ATSs or their affiliates that may 
justify greater operational transparency for Government Securities ATSs 
than for NMS Stock ATSs, or vice versa?
    87. Should the Commission require separate disclosures for 
different types of trading by the broker-dealer operator on the Covered 
ATS, such as trading by the broker-dealer operator for the purpose of 
correcting error trades executed in the ATS, as compared to other types 
of principal trading? If so, what types of principal trading should be 
addressed separately and why? What disclosures should the Commission 
require about principal trading and why?
    88. Should the Commission limit or expand in any way the proposed 
disclosure requirements to require disclosure of arrangements regarding 
access by the broker-dealer operator or its affiliates to both other 
trading venues and affiliates of those other trading venues?
    89. Should the Commission require ATSs to provide information about 
when the broker-dealer or affiliate of the broker-dealer would be a 
counterparty to an ATS trade? What type of information about such 
arrangements would be useful to market participants?
    90. Form ATS-N currently requires that an NMS Stock ATS name the 
affiliate(s) of the broker-dealer operator permitted to enter or direct 
the entry of trading interest into the ATS. A Government Securities ATS 
would also be required to describe the type of affiliates on Form ATS-
N. Should the Commission continue to require NMS Stock ATSs, but not 
Government Securities ATSs, to disclose the name(s) of affiliate(s) in 
Form ATS-N?
    91. Should the Commission require Covered ATSs to disclose the 
percentage of trading in the ATS attributable to

[[Page 15546]]

each or all of the broker-dealer operator's business units, affiliates 
or both? Should Form ATS-N require a Covered ATS to disclose specific 
trade volume data for its trading with business units of the broker-
dealer operator or its affiliates? If so, how should that volume be 
measured (e.g., executed trades, dollar volume)?
    92. Would the disclosure of information about trading by the 
broker-dealer operator and its affiliates in the Covered ATS be 
sufficient to address potential conflicts of interest? If disclosure 
alone is insufficient, are there other measures the Commission could 
take to mitigate potential conflicts of interest regarding trading? 
Should the Commission prohibit some or all trading by the broker-dealer 
operator and its affiliates in the ATS to address potential conflicts 
of interest?
b. Item 3: Interaction of Trading Interest With Broker-Dealer Operator; 
Affiliates
    Proposed Part II, Item 3 of Form ATS-N is designed to solicit 
information about the interaction of trading interest between 
unaffiliated subscribers to a Covered ATS and trading interest of the 
broker-dealer operator and its affiliates in the ATS. As proposed, Part 
II, Item 3(a) of Form ATS-N would require a Covered ATS to disclose 
whether a subscriber can opt out of interacting with trading interest 
of the broker-dealer operator in the ATS, and Part II, Item 3(b) would 
require the ATS to disclose whether a subscriber can opt out of 
interacting with the trading interest of an affiliate of the broker-
dealer operator in the ATS.\542\ Part II, Item 3(c) of Form ATS-N would 
require the ATS to disclose whether the requirements \543\ of the opt-
out processes for the broker-dealer operator and affiliates required to 
be identified in Items 3(a) and (b) are the same for all subscribers. 
Proposed Part II, Item 3 would be important to unaffiliated market 
participants trading on an ATS because, given the potential for 
informational advantages by the broker-dealer operator or its 
affiliates,\544\ some unaffiliated subscribers may not wish to interact 
with the order flow of the broker-dealer operator or its affiliates. 
This disclosure could also help subscribers understand whether and how 
they may avoid trading with the broker-dealer operator and its 
affiliates should they elect to use the services of the Covered ATS.
---------------------------------------------------------------------------

    \542\ For example, if a broker-dealer operator uses algorithms 
to submit subscriber orders into the Covered ATS, any steps that 
either the broker-dealer operator or the subscriber needs to take so 
that the ATS prevents those orders from trading with the broker-
dealer operator or its affiliates would be required disclosures 
under Items 3(a) and 3(b), respectively.
    \543\ The Commission is proposing to replace the phrase ``terms 
and conditions'' with ``requirements.'' In the Commission staff's 
experience reviewing Form ATS-N and discussing the requirements of 
the form with NMS Stock ATSs, the Commission has observed that some 
NMS Stock ATSs have read ``terms and conditions'' to mean all legal 
or contractual terms, rather than terms relevant to the scope of the 
question (i.e., what is required for a subscriber to opt out). Using 
the term ``requirements'' will clarify that the Item is soliciting 
information specifically related to requirements related to the opt-
out process. Substantively, the Commission does not believe that the 
proposed change would change information that is being solicited in 
this Item.
    \544\ See supra Section IV.D.3.a.
---------------------------------------------------------------------------

Request for Comment
    93. Should Form ATS-N request more or less information about how a 
market participant can limit its interaction on a Covered ATS with the 
broker-dealer operator or its affiliates? If commenters believe Form 
ATS-N should request more information, please provide specific 
information that would be useful along with an explanation of its 
utility.
c. Item 4: Arrangements With Other Trading Venues
    Part II, Item 4 of Form ATS-N is designed to disclose information 
about formal or informal arrangements (e.g., mutual, reciprocal, or 
preferential access arrangements) \545\ between the broker-dealer 
operator or an affiliate of the broker-dealer operator and a trading 
venue (e.g., ATS, broker-dealer, exchange, OTC market maker, futures or 
options market) to access the ATS services (e.g., arrangements to 
effect transactions or to submit, disseminate, or display orders and 
trading interest in the ATS).
---------------------------------------------------------------------------

    \545\ See NMS Stock ATS Adopting Release, supra note 2, at 38831 
nn.769-70 and accompanying text. As the Commission discussed in the 
NMS Stock ATS Adopting Release, the disclosures required by Part II, 
Item 4 of revised Form ATS-N are not so broad as to require the 
Covered ATS to list each unaffiliated subscriber that accesses its 
system. See id. at 38831.
---------------------------------------------------------------------------

    Part II, Item 4 would require a Covered ATS to disclose an 
arrangement between the broker-dealer operator for the ATS or affiliate 
of the broker-dealer operator and a broker-dealer operator of an 
unaffiliated ATS under which the broker-dealer operator would send 
trading interest to the unaffiliated ATS for possible execution before 
sending it to any other destination. Item 4 would also require 
disclosure of the inverse arrangement pursuant to which any subscriber 
trading interest sent out of the unaffiliated Covered ATS would be sent 
first to the ATS before any other trading venue. In addition, Item 4 
would require a summary of the terms and conditions of the arrangement 
such as, for example, whether the broker-dealer operator of the Covered 
ATS is providing monetary compensation or some other brokerage service 
to the unaffiliated ATS.\546\ If a broker-dealer operator has an 
arrangement with another trading venue operated by the broker-dealer 
operator or an affiliate, or an unaffiliated trading venue, market 
participants are likely to consider information about such arrangements 
relevant to their evaluation of an ATS as a potential trading venue and 
such an arrangement may raise concerns about conflicts of interest or 
information leakage. The Commission is therefore proposing disclosure 
of such arrangements in Part II, Item 4 of Form ATS-N.\547\
---------------------------------------------------------------------------

    \546\ In addition, in Part II, Item 4(b) of Form ATS-N, the 
Commission is proposing to delete the phrase ``if yes to Item 
4(a).'' This phrase was included in Form ATS-N in error. The NMS 
Stock ATS would be required to respond to Part II, Item 4(b) 
regardless of its response to Part II, Item 4(a).
    \547\ In the NMS Stock ATS Adopting Release, the Commission 
provided examples of when potential conflicts of interest and 
information leakage could occur as a result of preferential routing 
arrangements (e.g., an affiliate is contractually obligated to route 
all unexecuted orders to ATS) or routing arrangements with 
affiliates (e.g., all orders routed by the NMS Stock ATS must first 
be routed to an the affiliate(s)). Specifically, the former might 
result in information leakage should the arrangement provide that 
all orders not executed by the affiliate are to be sent to the NMS 
Stock ATS and the latter could provide incentive for the NMS Stock 
ATS to route orders to an affiliate instead of trying to execute the 
order in the ATS. These issues could arise in the government 
securities markets, as well, so those examples are also applicable 
to both NMS Stock ATSs and Government Securities ATSs. See id. at 
38831 n.771.
---------------------------------------------------------------------------

Request for Comment
    94. What type of arrangements might a broker-dealer operator of a 
Covered ATS have with a trading venue for government securities or 
repos? Please explain and describe what information, if any, market 
participants may wish to know about such an arrangement.
d. Item 5: Other Products and Services
    Part II, Item 5(a) is designed to disclose whether the broker-
dealer operator offers any products or services for the purpose of 
effecting transactions or submitting, disseminating, or displaying 
trading interest in the Covered ATS (e.g., algorithmic trading products 
that send orders to the ATS, order management or order execution 
systems, data feeds regarding orders and trading interest in, or 
executions occurring on, the ATS, order hedging or aggregation 
functionality, post-trade processing),\548\ and if applicable, to

[[Page 15547]]

indicate whether the requirements of use \549\ for these services or 
products required to be identified in Part II, Item 5(a) are the same 
for all subscribers, persons whose trading interest is entered into the 
ATS by a subscriber or the broker-dealer operator, and the broker-
dealer operator.\550\
---------------------------------------------------------------------------

    \548\ In Part II, Item 5, the Commission is proposing to add 
``order hedging or aggregation functionality'' and ``post-trade 
processing'' as examples of products or services for the purpose of 
effecting transactions or submitting, disseminating, or displaying 
trading interest in a Covered ATS, and which could be particularly 
relevant to Government Securities ATSs. ``Order hedging or 
aggregation functionality'' would include any aggregation 
functionality that, for example, could be used by subscribers to 
interface with the ATS to send or receive orders and trading 
interest to and from other markets, including U.S. Treasury 
Securities markets, over-the-counter spot markets, or futures 
markets. ``Post-trade processing'' would include any functionality 
that could be used by subscribers in connection with post-trade 
processing to manage routing, enrichment, allocations, matching, 
confirmation, affirmation, or notification of ATS trades.
    \549\ The Commission is proposing to replace the phrase ``terms 
and conditions'' with the phrase ``requirements'' throughout this 
Item. See note 543 and accompanying text. The Commission is also 
proposing to require the Covered ATS to disclose any differences in 
treatment as they apply to persons whose trading interest is entered 
into the ATS by a subscriber or the broker-dealer operator. In the 
Commission staff's experience, broker-dealer operators and their 
affiliates may, for example, disclose products and services offered 
to customers of subscribers. See proposed revisions to Part II, 
Items 5(b) and 5(d).
    \550\ For example, if a broker-dealer operator offers 
subscribers alternative algorithms to handle orders, including 
sending such orders to the Covered ATS, and there is a difference in 
the latency in which each of the alternatives transmits information, 
such differences in latency would need to be disclosed in Part II, 
Item 5 of revised Form ATS-N.
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    Customers of a broker-dealer operator could be both subscribers to 
its ATS and customers of the broker-dealer operator and the broker-
dealer operator may offer its customers trading products and services 
in addition to its ATS services. In certain cases, the product or 
service offered might be used by the customer in conjunction with the 
customer's use of the ATS. Broker-dealer operators may, directly or 
indirectly through an affiliate, offer products or services for the 
purpose of, for example, submitting trading interest, or receiving 
information about displayed interest, in the ATS.\551\ The Commission 
is proposing to delete the term ``Subscribers'' from Items 5(a) and 
5(c) so that all products and services that the broker-dealer operator 
or affiliate of the broker-dealer operator offers for the purpose of 
effecting transactions or submitting, disseminating, or displaying 
trading interest in the ATS, would be required to be disclosed on Form 
ATS-N, regardless of whether they are offered to subscribers or non-
subscribers (e.g., customers of ATS subscribers). For example, a 
Government Securities ATS would be required to disclose any aggregation 
functionality that the broker-dealer operator or its affiliate(s) 
offers, which, for example, could be used by subscribers to interface 
with the ATS to send or receive trading interest to and from other 
markets, including U.S. Treasury Securities markets, over-the-counter 
spot markets, or futures markets. The Commission believes that 
participants would be interested in understanding the use of an 
aggregation functionality with the ATS and how it can help achieve 
their trading strategies. If the broker-dealer operator or its 
affiliate offered a product for effecting transactions or submitting, 
disseminating, or displaying trading interest in the Government 
Securities ATS using related financial markets for non-government 
securities (e.g., futures, currencies, swaps, corporate bonds), the ATS 
could summarize the requirements for use of such a product in this Item 
and explain the product's use under proposed Part III, Item 11.\552\
---------------------------------------------------------------------------

    \551\ See NMS Stock ATS Proposing Release, supra note 29, at 
81048. See also NMS Stock ATS Adopting Release, supra note 2, at 
38832 n.779. For example, order hedging functionalities could 
encompass a product or service offered by the broker-dealer operator 
to a customer that the customer may use as a subscriber to the 
broker-dealer operator's ATS to hedge exposures of trading interest 
in or outside the ATS. A broker-dealer operator that offers such a 
functionality for use with the ATS would describe the requirements 
for a subscriber to use the functionality in Part II, Item 5 and 
explain its use with regard to the ATS in Part III of Form ATS-N. 
For example, if the order hedging functionality affects order 
interaction in the ATS, the ATS would explain the functionality in 
proposed Part III, Item 7. If the order hedging functionality 
involves futures and trading interest in the ATS, the ATS would 
explain the related procedures under proposed Part III, Item 11.
    \552\ See infra Section IV.D.5.l.
---------------------------------------------------------------------------

    The Commission believes the information required by Part II, Item 5 
of revised Form ATS-N is important because participants want to know 
the products or services that the broker-dealer operator or its 
affiliates may offer for the purpose of effecting transactions, or 
submitting, disseminating, or displaying trading interest in the ATS 
because such products or services may impact the participants' access 
to, or trading on, the ATS.\553\ In some cases, if subscribers also use 
other products or services that the broker-dealer operator offers, they 
could receive more favorable terms from the broker-dealer operator with 
respect to their use of the ATS. For example, if a participant 
purchases a service offered by the broker-dealer operator of a Covered 
ATS, the broker-dealer operator might also provide that subscriber more 
favorable terms for its use of the ATS than other participants who do 
not purchase the service. Such favorable terms could include fee 
discounts or access to a faster connection line to the ATS. 
Additionally, a broker-dealer operator of a Covered ATS may offer 
certain products and services only to certain participants or may offer 
products and services on different terms to different categories of 
participants. The Commission believes that participants would want to 
know, when assessing a Covered ATS as a potential trading venue, the 
range of services or products that the broker-dealer operator or its 
affiliates offers participants of the ATS, and any differences in 
treatment among participants, because such services or products may 
impact the participants' access to, or trading on, the ATS.
---------------------------------------------------------------------------

    \553\ Services for the purpose of effecting transactions, or 
submitting, disseminating, or displaying trading interest in the ATS 
that are offered by a person other than the broker-dealer operator 
would also be responsive to this Item.
---------------------------------------------------------------------------

    To the extent that a participant on a Covered ATS is offered use of 
products and services by the broker-dealer operator or its affiliate 
for the purpose of effecting transactions or submitting, disseminating, 
or displaying trading interest in the ATS, Part II, Item 5 of Form ATS-
N would require disclosures about those products or services. For 
example, if a broker-dealer operator offers its customers an order 
management system that can also be used by participants to the ATS to 
manage orders in the ATS (e.g., adjust the pricing or size of trading 
interest in relation to trading interest resting in or outside the ATS, 
or modify order instructions to execute or cancel at a specified time 
or under certain market conditions), the ATS would be required to 
identify the order management system, provide a summary of the 
requirements for its use, and identify the Part and Item number in Form 
ATS-N where the order management system is explained. In addition, any 
services offered by the broker-dealer operator for subscribers to 
mitigate risk, such as limits on gross or net notional exposures by a 
subscriber, identification of duplicative orders in the ATS, or other 
checks offered related to order entry or authorizations to trade in the 
ATS, would be identified in this Item and explained further in proposed 
Part III, Items 7(b) and 8(b), as applicable. However, the requests in 
Part II, Item 5 would not encompass trading products or services 
offered by the broker-dealer operator to customers that are not for the 
purpose of effecting transactions or submitting, disseminating, or 
displaying trading interest in the ATS.
    To alleviate any concerns regarding the potential disclosure of 
commercially sensitive information in this disclosure request, the 
proposed disclosure request

[[Page 15548]]

would require only a summary of the requirements for the products and 
services disclosed and an explanation of how the product or service is 
used with the ATS in the applicable Item number in Part III of Form 
ATS-N. The Commission believes that requiring only a summary narrative 
would normally not require the broker-dealer operator to disclose 
commercially sensitive information.
Request for Comment
    95. What types of products and services do broker-dealer operators 
of Covered ATSs or affiliates of broker-dealer operators offer to 
subscribers and how are such products and services used in connection 
with the ATSs?
    96. What information about the products and services offered by 
broker-dealer operators would be helpful to market participants?
    97. Should the Commission expand Part II, Item 5 of Form ATS-N to 
require disclosure of products or services offered by the broker-dealer 
operator or its affiliates to subscribers, but not necessarily offered 
in connection with transacting on the Covered ATS?
    98. Would the information required by Part II, Item 5 require 
disclosure of commercially sensitive information? If so, how could the 
Commission revise the information request to limit the disclosure of 
commercially sensitive information?
e. Item 6: Activities of Service Providers
    Part II, Item 6(a) of Form ATS-N is designed to provide disclosures 
relating to any entity, other than the broker-dealer operator, that 
supports the services or functionalities of the Covered ATS.\554\ 
Information about the roles and responsibilities of service providers 
to the ATS is important because it could inform market participants 
about the potential for information leakage on the ATS.\555\ The 
Commission is not proposing that the third-party service provider 
requests encompass purely administrative items, such as human resources 
support, or basic overhead items, such as phone services and other 
utilities. As it is with Part II, Item 6(b) in current Form ATS-N, the 
information solicited in this disclosure is meant to provide 
information about the extent to which a third party may be able to 
influence or control the operations of the ATS through involvement with 
its operations (such as operating the ATS's proprietary data feeds sent 
to subscribers) and allow the Commission to monitor the third party's 
role and operations in the ATS.\556\ For example, any service provider 
for clearance and settlement of transactions in the ATS, consulting 
relating to the trading systems or functionality, regulatory 
compliance, and recordkeeping for the ATS would be responsive to this 
request.\557\
---------------------------------------------------------------------------

    \554\ As explained further below, the Commission is relocating 
the disclosure request about shared employees in Part II, Item 6(a) 
of current Form ATS-N to Part II, Item 7(a) of revised Form ATS-N. 
Accordingly, Part II, Item 6(a) of revised Form ATS-N corresponds to 
Part II, Item 6(b) of current Form ATS-N.
    \555\ Legacy Government Securities ATSs that operate pursuant to 
a Form ATS on file with the Commission are currently subject to the 
disclosure requirement of Exhibit E of Form ATS, which requires ATSs 
to disclose the name of any entity other than the ATS that will be 
involved in the operation of the ATS, including the execution, 
trading, clearing, and settling of transactions on behalf of the 
ATS; and to provide a description of the role and responsibilities 
of each entity. See Item 7 of Form ATS (describing the requirements 
for Exhibit E of Form ATS). Proposed Part II, Item 6(b) would expand 
upon this requirement.
    \556\ See Bloomberg Letter at 8 (stating, in response to the 
2020 Proposal, that disclosure of outsourced technology provider 
relationships is appropriate for the Commission and FINRA to 
determine that the regulated entity, the broker-dealer operator, is 
monitoring its third-party service provider(s)).
    \557\ If a summary of the role and responsibilities of the 
service provider is disclosed in response to Part III of Form ATS-N, 
the ATS need only list the applicable Item number in response to 
this Item. If there are services or functionalities that are not 
applicable to Part III, the ATS would identify the service provider, 
the services and functionalities, and also provide a summary of the 
role and responsibilities of the service provider in proposed Part 
II, Item 6(a).
---------------------------------------------------------------------------

    The Commission recognizes that an ATS may engage an entity other 
than the broker-dealer operator to perform an operation or function of 
the ATS or a subscriber may be directed to use an entity to access a 
service of the ATS, such as order entry, disseminating market data, or 
display, for example. In such instances, the ATS must ensure that the 
entity performing the ATS function complies with Regulation ATS with 
respect to the ATS activities performed. For example, with respect to 
an ATS that is subject to the Fair Access Rule, if participants are 
required to enter orders in the ATS through an order entry firm or to 
access displayed orders from another entity, the ATS must ensure that 
its written fair access standards address these entities' activities 
because of the affect these entities' activities can have on 
participants' ability to access the ATS services.\558\ Likewise, to the 
extent an entity, such as a service provider, performs a function of 
the ATS, and as a result has access to subscriber confidential trading 
information, the ATS's written safeguards and procedures to protect its 
subscribers' confidential trading information would also include the 
service provider's safeguards and procedures to protect the ATS's 
subscriber confidential trading information that is accessible to the 
service provider.\559\ In addition, as part of the ATS's oversight 
procedures, the ATS must ensure that the service provider, for example, 
follows the service provider's safeguards and procedures to protect the 
ATS's subscriber confidential trading information.
---------------------------------------------------------------------------

    \558\ See Regulation ATS Adopting Release, supra note 31, 63 FR 
70873 n.252. See also infra Section V.A.
    \559\ In such a case, a description of the written safeguards 
and procedures to protect subscribers' confidential trading 
information of the ATS and service provider would be required to be 
disclosed in Part II, Item 7 of Form ATS-N. See infra Section 
IV.D.4.f.
---------------------------------------------------------------------------

    Disclosures about the activities of service providers, for example, 
would inform the Commission about the scope of the ATS's operations and 
therefore the extent to which the ATS's Regulation ATS obligations 
would apply to the service provider's activities. In addition, as 
discussed above, the Commission will consider as part of its review of 
the Form ATS-N whether the entity filing Form ATS-N, or entities 
involved in the operations of the ATS, meets the definition of a 
Covered ATS, including whether the Covered ATS meets the criteria of 
Exchange Act Rule 3b-16.\560\ The information provided on Form ATS-N 
about the role of service providers with regard to the ATS's operations 
would help inform the Commission's review.
---------------------------------------------------------------------------

    \560\ See supra note 109.
---------------------------------------------------------------------------

    Furthermore, the requests under Part II, Items 6(b) through (c) 
would require disclosure about whether any service providers or their 
affiliates use the services of the ATS. If they do, the Covered ATS 
would be required to identify the service providers, the service(s) 
used, and whether there is any disparate treatment between those 
service providers and other subscribers. Thus, for example, a Covered 
ATS would only be required to obtain and disclose information about 
third-party vendors and their affiliates that actively use the services 
of the ATS; the ATS should be aware of all parties that use its 
services under its current recordkeeping obligations. The Commission 
believes that market participants, when analyzing potential conflicts 
of interest or information leakage, would find it very useful to 
understand whether potential counterparties with whom they are trading, 
and who also service the operation of the ATS, have access to different 
or unique ATS-related services. Part II, Item 6(c) of Form ATS-N would 
require the Covered ATS to

[[Page 15549]]

identify and explain any differences in ATS services to a service 
provider and all other subscribers and persons whose trading interest 
is entered into the ATS by a subscriber or the broker-dealer 
operator.\561\ Additionally, depending on the role and responsibilities 
of the service provider, market participants may wish to consider 
evaluating the robustness of the ATS's safeguards and procedures to 
protect confidential subscriber information.
---------------------------------------------------------------------------

    \561\ The Commission is also proposing to require the Covered 
ATS to disclose any differences in services as they apply to persons 
whose trading interest is entered into the ATS by a subscriber or 
the broker-dealer operator (e.g., customers of subscribers). See 
proposed revisions to Part II, Item 6(c).
---------------------------------------------------------------------------

    This request for summary information is designed to provide market 
participants with a general understanding of the types of technology or 
hardware provided by the service provider as part of its 
responsibilities, and how that hardware or technology is used by the 
ATS. The purpose of this disclosure is to provide information that 
subscribers can use to better understand whether the service provider 
might be able to access subscriber confidential trading information, so 
ATSs should draft their disclosure with the goal of conveying such 
information. Simply stating that a third party provides technology or 
hardware to the ATS would not be responsive to the required summary of 
the service provider's role, but, on the other hand, the ATS would not 
have to provide information about the manufacturer of its hardware 
components.
Request for Comment
    99. Are there any critical services or functionalities (e.g., 
matching engine, market data) that, if provided by a third party, 
should be required to be described in a higher level of detail than the 
proposed ``summary'' level? If so, which services and functionalities?
f. Item 7: Protection of Confidential Trading Information
    Part II, Item 7(a) of Form ATS-N is designed to provide information 
about a Covered ATS's written safeguards and written procedures to 
protect the confidential trading information of subscribers to the ATS, 
including, (1) a summary of the roles and responsibilities of any 
persons that have access to confidential trading information, the 
confidential trading information that is accessible by them, the basis 
for the access, and whether any shared employees (defined below) have 
access to confidential trading information; (2) written standards 
controlling employees of the ATS that trade for employees' accounts; 
and (3) written oversight procedures to ensure that the safeguards and 
procedures described above are implemented and followed.
    The protection of confidential trading information is an important 
component of the regulation of ATSs and is essential to ensuring the 
integrity of ATSs as execution venues. The Commission believes that 
disclosures about any employee of the ATS's broker-dealer operator or 
employee of its affiliate that provides services for both the 
operations of the ATS and any other business unit or any affiliate of 
the broker-dealer operator (``shared employee'') with access to 
subscriber confidential trading information would help market 
participants evaluate circumstances when there is the potential for 
information leakage. For example, the Commission believes that market 
participants would likely want to know if an employee of the broker-
dealer operator (or employee of an affiliate of the broker-dealer 
operator) that is responsible for the operations of a system containing 
subscriber confidential trading information from the ATS is also 
responsible for supporting, for instance, the principal trading 
activity of the broker-dealer operator, or another trading venue 
operated by the broker-dealer, or a trading venue that is an affiliate 
of the broker-dealer operator. In addition, if confidential trading 
information is not protected, many of the advantages or purposes for 
which a subscriber may choose to send its trading interest to an ATS 
(e.g., to trade anonymously and/or to mitigate the impact of trading in 
large positions) are eliminated. In cases where the confidential 
trading information of a subscriber is impermissibly shared with the 
personnel of the broker-dealer operator or any of its affiliates, such 
an abuse is also compounded by the conflicting interests of the broker-
dealer operator. That is, in such a case, the broker-dealer operator 
has invited subscribers to trade on its ATS and may have abused that 
relationship to provide itself or its affiliates with a direct 
competitive advantage over that subscriber. Accordingly, the Commission 
believes that disclosures informing market participants about broker-
dealer operators' written safeguards and written procedures to protect 
confidential trading information are necessary so market participants 
can independently evaluate the robustness of the safeguards and 
procedures and decide for themselves whether they wish to do business 
with a particular Covered ATS.
    Part II, Item 7(a) of revised Form ATS-N contains, in part, the 
same disclosure requests as Part II, Item 7(a) of current Form ATS-N. 
The Commission is proposing to amend Part II, Item 7(a) of Form ATS-N 
by adding the disclosure requests in Part II, Items 6(a) and 7(d) of 
current Form ATS-N. Item 6(a) of current Form ATS-N solicits 
information about ``shared employees.'' Part II, Item 7(d) of current 
Form ATS-N requires an ATS to provide a summary of the roles and 
responsibilities of any persons that have access to confidential 
trading information, the confidential trading information that is 
accessible by them, and the basis for the access.
    The Commission is relocating and consolidating these disclosure 
requests based on its experience with Form ATS-N filings by NMS Stock 
ATSs. In the Commission staff's experience, the disclosures in Part II, 
Items 6(a), 7(a), and 7(d) in current Form ATS-N solicit similar 
information and thus, the structure of Form ATS-N often resulted in 
redundant disclosures within these Items. For example, in responding to 
Part II, Item 7(d) of current Form ATS-N, the ATS initially needs to 
describe what it considers to be confidential trading information, such 
as whether only pre-trade order information would be considered 
confidential trading information, or whether post-trade information 
would also be treated as confidential trading information, and for what 
period of time. To explain the basis for the access, the ATS currently 
needs to explain why the person would have access to the confidential 
trading information in Part II, Item 7(d). Similarly, Part II, Item 
6(a) of current Form ATS-N requires the ATS to disclose whether and how 
shared employees can access confidential trading information. The 
Commission believes that consolidating these information requests into 
a single Item request in Part II, Item 7(a) on Form ATS-N would make 
the form easier to use because the reader will be able to find all the 
information previously spread across three items in a single item.
    Part II, Items 7(b) and (c) of Form ATS-N are designed to disclose 
information about whether a subscriber can consent and withdraw 
consent, respectively, to the disclosure of its confidential trading 
information to any person (not including those employees of the ATS who 
are operating the system or responsible for its compliance with 
applicable rules). Subscribers should be

[[Page 15550]]

able to give consent if they so choose to share their confidential 
trading information.\562\ Covered ATSs vary in terms of the types of 
orders, indications of interest (IOIs), or other forms of trading 
interest that are confidential on their systems and what information 
about such trading interest may be shared. For example, an ATS might 
provide that no IOIs submitted by subscribers will be considered 
confidential, but may provide subscribers with the option to restrict 
the information in the IOI message to just the symbol and side (i.e., 
buy or sell). For this example, Part II, Items 7(b) and 7(c) of Form 
ATS-N would require the Covered ATS to describe the means by which a 
subscriber could control some of the information contained in the IOI 
message by providing consent or withdrawing such consent for the 
sharing of its confidential trading information.\563\ For example, a 
subscriber can consent to its open trading interest being displayed to 
certain subscribers that the subscriber believes are less likely to 
misuse or exploit such information, or that have open trading interest 
on the contra side in the same symbol. If the Covered ATS allows 
subscribers to consent in this manner, the ATS would mark ``yes'' to 
Part II, Item 7(b). Continuing the example, if the subscriber can 
subsequently withdraw its consent to this display of its open trading 
interest, the Covered ATS would mark ``yes'' to Part II, Item 7(c).
---------------------------------------------------------------------------

    \562\ See Regulation ATS Adopting Release, supra note 31, at 
70879.
    \563\ See id. The Commission believes that there may be some 
Covered ATSs that might not offer any means by which a subscriber 
could consent to the dissemination of its confidential trading 
information. A Covered ATS would be required to disclose this fact 
pursuant to Item 7(a). See id. at 70891 n.437.
---------------------------------------------------------------------------

Request for Comment--Part II
    100. Should the Commission expand the proposed disclosures in 
proposed Part II, Item 7(a)(i) to other employees, personnel, or 
independent contractors of the broker-dealer operator? If so, which 
employees, personnel, or independent contractors should be included and 
what information about such persons should be solicited?
    101. Should the Commission require Covered ATSs to disclose the 
information in Part II of Form ATS-N? If so, what level of detail 
should be disclosed?
    102. Would Part II of Form ATS-N capture the information that is 
most relevant to understanding the Covered ATS and its relationship 
with the broker-dealer operator and the broker-dealer operator's 
affiliates? Please support your arguments.
    103. Would the proposed disclosures in Part II require broker-
dealer operators of Covered ATSs to reveal too much (or not enough) 
information about their structure and operations?
    104. Is there other information about the activities of the broker-
dealer operator and its affiliates that market participants might find 
relevant or useful in their assessment or use of the Covered ATS? If 
so, describe such information and explain whether or not such 
information should be required to be provided on Form ATS-N.
    105. Should Covered ATSs not be required to provide the proposed 
disclosures in Part II on Form ATS-N due to concerns regarding 
confidentiality, business reasons, trade secrets, burden, or any other 
concerns? If so, what information and why?
    106. Are there ways to obtain the same information as would be 
required from Covered ATSs by Part II other than through disclosure on 
Form ATS-N? If so, how else could this information be obtained and 
would such alternative means be preferable to the disclosures in Part 
II?
    107. Should Covered ATSs be required to publicly disclose in their 
entirety on Form ATS-N their written safeguards and written procedures 
to protect the confidential trading information of subscribers? Should 
the Commission require less information be disclosed about the written 
safeguards and procedures?
    108. Would the information about written safeguards and written 
procedures to protect the confidential trading information of 
subscribers described in Form ATS-N be sufficient for subscribers to 
independently evaluate such safeguards and procedures and thus evaluate 
the ATS as a destination for their orders? Should the Commission 
prohibit the disclosure of confidential subscriber information in some 
circumstances? If so, please describe.
5. Part III: Manner of Operations
    Part III of Form ATS-N is designed to provide public disclosures to 
help market participants understand, among other things, how they may 
use a Covered ATS to buy and sell securities and find a counterparty to 
a trade. The Commission is proposing amendments to Part III that would 
apply to both NMS Stock ATSs and Government Securities ATSs. Government 
Securities ATSs would be required to respond to Part III of Form ATS-N 
in the same manner as NMS Stock ATSs, and the below description 
summarizes the types of disclosures Form ATS-N would solicit for both 
NMS Stock ATSs and Government Securities ATSs.
    As proposed, Form ATS-N would include an instruction at the 
beginning of Part III to require that the Covered ATS identify and 
explain any differences among and between subscribers, persons whose 
trading interest is entered into the ATS by a subscriber or the broker-
dealer operator, the broker-dealer operator, and any affiliates of the 
broker-dealer.\564\ Current Form ATS-N is structured to include 
separate questions throughout the Items that require the ATS to 
identify and explain any differences in the treatment of subscribers 
and the broker-dealer operator. Based on its experience reviewing Form 
ATS-N filed by NMS Stock ATSs, the Commission believes that discussion 
of these differences is integral to the responses to each of the Items, 
and that requiring the discussion to be included in the response to 
each Item, rather than requiring separate, potentially disjointed 
disclosures, would improve the readability of the disclosures. By 
requiring Covered ATSs to disclose differences in treatment of persons 
whose trading interest is entered into the ATS by a subscriber or the 
broker-dealer operator, which would include, for example, sponsored 
access clients of subscribers, and affiliates of the broker-dealer 
operator, market participants will be able to discern any benefit or 
disadvantage they may receive in comparison to a broader, more 
comprehensive group of potential users of the ATS.\565\ The disclosure 
about differences in treatment of subscribers, other persons whose 
trading interest is entered into the ATS by a subscriber or the broker-
dealer operator, the broker-dealer operator, and the broker-dealer 
operator's affiliates is important to market participants and would 
better allow them to decide whether submitting trading interest to the 
Covered ATS aligns with their trading objectives. Accordingly, the 
Commission is proposing to restructure Part III to delete separate 
questions regarding whether subscribers and the

[[Page 15551]]

broker-dealer operator are treated the same, and instead, proposing to 
include the instruction for the Covered ATS to disclose any differences 
in treatment in the applicable responses to Part III. To be clear, this 
proposed change would not relieve Covered ATSs from their obligation to 
disclose any differences in treatment that were required to be 
disclosed in current Form ATS-N.
---------------------------------------------------------------------------

    \564\ For example, in Part III, Item 5, if a Covered ATS 
designed its operations to allow only certain types of subscribers 
to enter trading interest into the ATS through direct means (e.g., 
Financial Information eXchange (FIX) protocol) and other types of 
subscribers to enter trading interest into the ATS through indirect 
means (e.g., SOR or algorithm), the ATS would describe these 
differences in means of entry in Part III, Item 5(a).
    \565\ See current Form ATS-N Part III, Items 2(c), 3(b), 4(b), 
5(b), 5(d), 6(b), 6(d), 6(f), 7(b), 8(b), 8(d), 8(f), 9(b), 10(b), 
10(d), 11(b), 11(d), 13(b), 13(e), 14(b), 15(c), 17(b), 18(c), 
19(b), 21(b), 22(b), and 23(b). The Commission is proposing to 
delete these Items for Form ATS-N and re-number Items throughout 
Part III.
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a. Item 1: Types of ATS Subscribers
    Part III, Item 1 of Form ATS-N is designed to provide information 
on the type(s) of subscribers that can use the Covered ATS services. 
The Item would provide market participants with information about the 
type of trading interest in the Covered ATS based on the types of 
subscribers that use it. Covered ATSs may design their system for 
trading by retail investors, institutional investors, dealers, or any 
other type of market participant.
    The Commission is proposing to revise the list of types of market 
participants in Part III, Item 1 of Form ATS-N that, in the Commission 
staff's experience, are commonly used for Government Securities ATSs 
and NMS Stock ATSs.\566\ The list would include: Retail investors, 
issuers, asset managers, brokers, dealers, investment companies, hedge 
funds, market makers, PTFs, insurance companies, pension funds, 
corporations, and banks. The list is non-exhaustive and a Covered ATS 
would be required to list any type of subscriber that can use the ATS's 
services.\567\ In addition to disclosing its subscribers, a Covered ATS 
may use Part III, Item 1 to disclose any types of participants whose 
trading interest may reach the ATS. For example, for an ATS that only 
allows brokers or dealers as subscribers, the ATS could identify the 
types of customers from which the brokers or dealers send trading 
interest to the ATS.
---------------------------------------------------------------------------

    \566\ In Part III, Item 1 of Form ATS-N, the Commission is 
modifying the checkboxes listing types of subscribers to add 
insurance companies, pension funds, and corporations. The Commission 
believes that adding these checkboxes will provide more granular 
information on the types of subscribers participating on an ATS in 
an easier-to-read format. The Commission is also proposing to remove 
the checkbox ``NMS Stock ATS'' under the list of types of subscriber 
in Form ATS-N. A broker-dealer operator of an NMS Stock ATS seeking 
to access another NMS Stock ATS would involve the broker-dealer 
operator for the NMS Stock ATS becoming a subscriber to the ATS, not 
the ATS that the broker-dealer operates. In this scenario, an NMS 
Stock ATS that accepts a broker-dealer operator for another NMS 
Stock ATS would mark the checkbox for broker and/or dealer in Part 
III, Item 1 on Form ATS-N as appropriate.
    \567\ See NMS Stock ATS Adopting Release, supra note 2, at 
38820-21 (discussing the definition of ``subscriber'' and the 
persons encompassed thereunder).
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Request for Comment
    109. Should Form ATS-N require a Covered ATS to include information 
about the types of subscribers to the ATS? Based on Commission staff 
experience, some ATSs only accept broker-dealers as subscribers to the 
ATS and various types of market participants send trading interest into 
the ATS through the broker-dealer subscriber. Should the Commission 
require the identification of the types of market participants whose 
trading interest may be sent to the ATS, whether directly or 
indirectly, by a broker-dealer subscriber to a Covered ATS? Would this 
information be useful to understanding the type of trading interest in 
the ATS?
    110. Should the Commission add any other categories of subscribers 
commonly applicable to Government Securities ATSs or NMS Stock ATSs, or 
both, to Form ATS-N?
b. Item 2: Eligibility for ATS Services
    Part III, Item 2 of Form ATS-N is designed to provide market 
participants with information about whether the Covered ATS requires 
subscribers to be registered broker-dealers or enter a written 
agreement to use the ATS services, and whether there are any conditions 
that the ATS requires a person to satisfy before accessing the ATS 
services.\568\ This Item would require disclosure of the conditions a 
person must satisfy ``before accessing the ATS services'' (emphasis 
added). On the other hand, Part III, Item 3 of Form ATS-N (discussed 
infra), would require disclosures about any conditions that would 
exclude a subscriber, in whole or in part, from using the Covered ATS 
as a result of subscriber behavior while already actively participating 
in the ATS.\569\
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    \568\ In Part III, Item 2(b), the Commission is proposing to 
delete the word ``other'' and ask whether there any conditions, 
rather than any ``other'' conditions, that the ATS requires a person 
to satisfy before accessing the ATS services. The Commission 
believes it would be accurate to use the phrase ``any conditions'' 
rather than ``any other conditions'' in circumstances where a 
Covered ATS indicates that the ATS does not require subscribers to 
be registered broker-dealers in Part III, Item 2(a).
    \569\ For example, if a Covered ATS has a practice of excluding 
subscribers that do not meet certain percentage thresholds for 
submitting firm-up orders in response to receiving an IOI, 
conditional order, or RFQ sent to them by the ATS, then this 
practice would be subject to disclosure under Part III, Item 3 of 
Form ATS-N (``Exclusion from ATS Services'') and not Part III, Item 
2 (``Eligibility for ATS Services'').
---------------------------------------------------------------------------

    The disclosures required by Part III, Item 2 would allow market 
participants to understand the conditions that they would need to 
satisfy to participate on the Covered ATS. If the Covered ATS indicates 
that it does have conditions that a person must satisfy before 
accessing the ATS services, the request would require the ATS to list 
and provide a ``summary'' of those conditions. Some Covered ATSs may 
only have the eligibility requirement that a person be a client of the 
broker-dealer operator. In that case, any eligibility requirements to 
become a client of the broker-dealer operator would be responsive to 
this Item. For example, if a subscriber must be a customer of the 
broker-dealer operator, the Covered ATS would provide a summary of 
conditions the subscriber, as a customer, would need to satisfy (e.g., 
know your customer) before its trading interest can be entered into the 
ATS. If the Covered ATS requires subscribers to contract with or become 
a member of a third party, for example, for purposes of clearance and 
settlement, such as, for Government Securities ATSs, the Fixed Income 
Clearing Corporation's Government Securities Division, such information 
would be responsive.
Request for Comment
    111. What eligibility requirements to access a Covered ATS are 
important to a potential subscriber or participant to the ATS and why? 
Are there any eligibility requirements that are particularly relevant 
to Government Securities ATSs (inclusive of Communication Protocol 
Systems, as proposed) or Communication Protocol Systems that trade NMS 
stock that should also be required to be disclosed on Form ATS-N?
c. Item 3: Exclusion From ATS Services
    Based on Commission staff's experience, ATSs often disclose rules 
governing subscribers' participation in the ATS, and if a subscriber 
fails to comply with these rules, the ATS may limit or deny access to 
the ATS.\570\ Part III, Item 3 of Form ATS-N would require information 
about whether a Covered ATS can exclude, in whole or in part, any 
subscriber from the ATS services, and if so, to list and provide a 
summary of the conditions for excluding (or limiting) a subscriber from 
using the ATS. The disclosures are designed to provide information 
about when the Covered ATS can exclude, in whole or in part, a 
subscriber from the services of the ATSs and help subscribers 
reasonably anticipate the

[[Page 15552]]

types of activities that may cause them to be excluded (or limited) 
from using the services of the ATS. The question, which allows Covered 
ATSs to provide a ``summary'' of conditions for excluding (or limiting) 
a subscriber, is designed to solicit information to alert subscribers 
about the types of activities that may cause them to be excluded (or 
limited) from using the services of the ATS while protecting sensitive 
information to allow the ATS to reasonably control the activities and 
quality of flow on its platform and prevent subscribers from using the 
disclosures to potentially misuse or game the system. To the extent 
that the ATS monitors and surveils trading activity on the ATS that 
could result in excluding subscribers from ATS services, to avoid 
duplicative disclosures, the response to this Item could reference the 
monitoring and surveillance practices described in response to Part 
III, Item 9.\571\
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    \570\ These limitations can result in some subscribers having 
different levels of functionality or more favorable terms of access 
than others. For example, in the Commission staff's experience, some 
ATSs exclude subscribers that frequently fail to respond with a 
firm-up order after receiving an IOI or request for quote.
    \571\ See infra Section IV.D.5.i.
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Request for Comment
    112. Is there any subscriber behavior for which Covered ATSs, 
particularly Government Securities ATSs (inclusive of Communication 
Protocol Systems, as proposed) or Communication Protocol Systems that 
trade NMS stock, commonly exclude a subscriber in whole or in part? 
What is that behavior(s) and what form of exclusion is commonly 
employed (e.g., disqualification from ATS, limitation of services)?
d. Item 4: Hours of Operations and Trading Outside of Regular Trading 
Hours
    Part III, Item 4 is intended to provide market participants with 
information about the days and hours of operation of the Covered ATS, 
including the times when trading interest can be entered in the ATS, 
and ATS services available outside of the ATS's regular trading hours. 
Part III, Item 4(a) would require a Covered ATS to provide the hours 
when it is operating, which would include functions such as accepting 
trading interest or allowing participants to use communication 
protocols to message other participants.\572\ The disclosure required 
is not limited to only those hours when the ATS matches trading 
interest or allows participants to submit trading interest.
---------------------------------------------------------------------------

    \572\ The Commission is proposing to make minor changes to this 
Item in Form ATS-N to replace ``operation'' with ``operations'' and 
to clarify that ``regular trading hours'' refers to the ATS's 
regular trading hours.
---------------------------------------------------------------------------

    The Commission is proposing to revise Part III, Item 4 to include 
as Part III, Item 4(b) a question about whether the ATS services are 
available outside of the ATS's regular trading hours (e.g., after-hours 
trading) and with respect to services available outside of the ATS's 
regular trading hours, whether there are any differences between the 
services during the ATS's regular trading hours and outside of the 
ATS's regular hours. Part III, Item 4(a) of current Form ATS-N asks 
about hours of operations outside of regular trading hours, and Part 
III, Item 18 of current Form ATS-N asks about whether the ATS conducts 
trading outside of regular trading hours, and whether there are any 
differences between trading outside regular trading hours and trading 
during regular trading hours. The Commission is proposing to streamline 
and combine the current questions, and, recognizing that ATSs, 
including Communication Protocol Systems, may provide other services 
beyond ``conduct[ing] trading,'' to ask about ATS services available 
outside of the ATS's regular trading hours. The Commission believes 
that it is important for market participants and the Commission to 
understand when a Covered ATS operates, when trading interest can be 
entered, including when the ATS will accept trading interest outside of 
its regular trading hours, and whether any other ATS services are 
available outside the ATS's regular hours of operations.
    To the extent that there are differences with respect to any 
services the Covered ATS provides during and outside of its regular 
trading hours, the Covered ATS must describe those differences. Similar 
to Item 17 (requesting differences between any closing session(s) and 
regular trading hours), a Covered ATS would be required to disclose 
differences between trading outside of its regular trading hours and 
during regular trading hours with respect to the relevant information 
disclosed in Part III Items, including, among others, order types and 
sizes, and trading facilities (Item 7), use of non-firm trading 
interest, and communication protocols and negotiation functionality 
(Item 8), segmentation and notice (Item 13), and display and visibility 
of trading interest (Item 15). Many of the disclosures discussed 
elsewhere in Form ATS-N will relate to the ATS's regular trading hours 
so the ATS can simply discuss any differences between trading during 
its regular hours and trading outside its regular trading hours in Part 
III, Item 4(c), if applicable.
e. Item 5: Means of Entry
    Part III, Item 5 of Form ATS-N is intended to disclose the means 
that can be used to directly enter trading interest into the Covered 
ATS and any other means of entering trading interest into the ATS 
(e.g., smart order router, algorithm, order management system, sales 
desk, direct market access, web-enabled system, or aggregation 
functionality). The Commission is proposing to revise Part III, Item 5 
of Form ATS-N to include examples of means of entry that it believes 
may be relevant to Government Securities ATSs, as well as Communication 
Protocol Systems. These examples, which are not exhaustive, would 
include direct market access, web-enabled systems, and aggregation 
functionalities. Part III, Item 5 of Form ATS-N would require the 
Covered ATS to identify and explain means of entering trading interest, 
including whether the means are provided through the broker-dealer 
operator itself, through a third-party contracting with the broker-
dealer operator, or through an affiliate of the broker-dealer 
operator,\573\ and list and provide a summary of the requirements \574\ 
for entering trading interest into the ATS through these means.
---------------------------------------------------------------------------

    \573\ In Part III, Item 5(b), the Commission is proposing to 
make a minor revision to this Item and change the word ``indicate'' 
to ``including,'' so the Covered ATSs would identify and explain the 
means for entering trading interest, ``including'' who provides the 
means, rather than identify and explain the means for entering 
trading interest and ``indicate'' who provides the means. The 
Commission believes identifying and explaining the means for 
entering trading interest encompasses describing who is providing 
the means of entry, and for that reason, this revision would clarify 
what information this Item is requesting. The Commission is also 
proposing to add clarifying text to Part III, Item 5(b) of Form ATS-
N (renumbered from Part III, Item 5(c) of current Form ATS-N) to 
more clearly contrast such question from Part III, Item 5(a). The 
question would read whether there are ``means of entering trading 
interest into the ATS not otherwise disclosed in Part III, Item 
5(a)'' rather than asking whether there are any ``other means for 
entering orders and trading interest into the NMS Stock ATS.''
    \574\ Current Form ATS-N requires a summary of the ``terms and 
conditions'' for entering orders or trading interest into the ATS 
through these means. The Commission is proposing to revise the 
question to require a summary of the ``requirements'' for entering 
trading interest in the ATS. See supra note 543 and accompanying 
text.
---------------------------------------------------------------------------

    Based on Commission staff experience, trading interest may be 
submitted into the Covered ATS both directly and indirectly. A direct 
method of sending trading interest to an ATS, for example, may include 
the use of a direct market access platform or FIX protocol connection, 
which allows subscribers to enter trading interest into the ATS without 
an intermediary. An example of an indirect method of submitting trading 
interest to an ATS could include the use of a smart order

[[Page 15553]]

router (``SOR''), algorithm or similar functionality, website, 
graphical user interface (``GUI''), aggregation interface, or front-end 
system. The means of entry into an ATS (e.g., direct or indirect) could 
impact the speed with which a subscriber's trading interest is handled 
and potentially executed and could increase the risk of information 
leakage. Today, the government securities markets are not 
interconnected markets like those for NMS stocks and therefore SOR 
technology may not be applied in the same manner by broker-dealer 
operators of Government Securities ATSs as it may for broker-dealer 
operators of NMS Stock ATSs. The Commission believes, however, that 
similar functionality may be used to send or receive trading interest 
to and from a Government Securities ATS to reduce latency or send 
trading interest to markets with better prices for certain government 
securities, and to the extent it does, the ATS should be required to 
provide information about that functionality as required.
    The Commission believes that the disclosures regarding the direct 
or indirect means of trading interest entry would inform market 
participants about the functionalities that their trading interest pass 
through on their way to the ATS and help them assess any potential 
advantages that trading interest sent through the broker-dealer 
operator may have as opposed to other methods used by other 
subscribers. A Covered ATS would be required to identify the 
functionality that directly connects to the ATS (e.g., algorithm, GUI, 
aggregation interface) and, if present, any intermediate functionality 
that trading interest passes through on its way to the functionality 
that directly connects to the ATS.\575\ Conversely, if ATS trading 
interest submitted through an algorithm is sent to another intermediate 
functionality, and then submitted to the ATS by that functionality, 
such information would need to be disclosed pursuant to this Item.\576\
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    \575\ If an intermediate application or functionality has access 
to information related to a subscriber's trading interest, the 
Covered ATS must take appropriate measures to protect the 
confidentiality of such information pursuant to Rule 301(b)(10) of 
Regulation ATS. If the ATS arranges for an intermediate application 
to be provided by another party, the Covered ATS's obligations under 
Rule 301(b)(10) would apply to the activities that that party is 
performing for the ATS and the ATS's written safeguards and 
procedures should be designed to protect subscriber confidential 
trading information with regard to that party.
    \576\ If a broker-dealer operator permits subscribers to send 
trading interest to the ATS by excluding all other trading venues 
from where such trading interest could be sent, this procedure in 
effect allows a subscriber to direct an order to the ATS and would 
be responsive to Part III, Item 5.
---------------------------------------------------------------------------

    The proposed disclosure requirements would only require the Covered 
ATS to ``list and provide a summary of the requirements for entering 
trading interest into the ATS'' through these sources. Therefore, the 
Covered ATS would not need to provide a detailed description of the 
programming of the indirect means for entering trading interest that 
could put the ATS at a competitive disadvantage with competitors. 
However, if, for example, an ATS ``throttled'' the number of messages 
allowed for a given type of connection, that information would be 
responsive to this Item.
    Although the Commission is proposing to delete Part III, Items 5(b) 
and 5(d) of current Form ATS-N, which asks the Covered ATS to disclose 
whether the protocols required to be identified in Part III, Item 5 and 
the requirements for any means of entry are the same for all 
subscribers and the broker-dealer operator, a Covered ATS would be 
required to disclose such differences in Part III, Item 5 pursuant to 
the proposed instruction in Part III in Form ATS-N.\577\ For example, a 
Covered ATS would be required to disclose any differences in the 
latency of the alternative means for entering trading interest into the 
ATS. The Commission understands that there might be different latencies 
associated with each alternative. For instance, in some cases, a direct 
connection to the ATS may have reduced latencies as compared to 
indirect means where trading interest passes through an intermediate 
functionality. A broker-dealer operator could also, for example, 
configure the ATS to provide reduced latencies for certain means of 
entry used by itself or its affiliates.\578\
---------------------------------------------------------------------------

    \577\ See supra note 564 and accompanying text.
    \578\ Covered ATSs would not be required to calculate and 
disclose precise latencies for each means of entry for purposes of 
Form ATS-N.
---------------------------------------------------------------------------

    The Commission also believes that it is important for subscribers 
to understand if a means of entry is provided by an affiliate, even if 
it does not provide an advantage to a particular entity.
    Disclosures about a broker-dealer operator's use of its or an 
affiliate's direct or indirect functionality to enter trading interest 
into the Covered ATS are important to market participants to allow them 
to assess the potential for information leakage. The indirect means of 
access (e.g., SOR or algorithm) may obtain information about subscriber 
trading interest that is sent to the ATS (and may now be resting in the 
ATS) and subscriber trading interest that is sent out of the ATS. The 
potential that an indirect means of accessing the Covered ATS could 
lead to leakage of subscribers' confidential trading information 
necessitates disclosure of certain information about the use of such 
indirect means to send subscriber trading interest in or out of the 
ATS. In addition, there may be instances where an ATS uses an 
intermediate functionality or entity as the means to bring together 
buyers and sellers or provide established methods (such as providing 
means to enter, display, communicate, or execute trading interest) and 
that intermediate functionality or entity would be considered part of 
the ATS for purposes of Regulation ATS and Form ATS-N.\579\ For 
example, if the broker-dealer operator arranges for trading interest to 
be entered into the ATS by another party, the activities of that party 
with respect to the ATS would be subject to the disclosure requirements 
of Form ATS-N. Likewise, if an ATS is subject to the Fair Access Rule 
under Regulation ATS and its participants must use an entity other than 
the broker-dealer operator to enter or receive information about 
trading interest in the ATS, the ATS must establish reasonable written 
standards governing the granting, denial, or limitation of access to 
ensure that those participants are not treated in an unfair and 
unreasonably discriminatory manner by the entity.\580\
---------------------------------------------------------------------------

    \579\ See NMS Stock ATS Adopting Release, supra note 2, at 38832 
and 38844. Depending on the activities of the persons involved with 
the market place, a group of persons can together provide, 
constitute, or maintain a market place or facilities for bringing 
together purchasers and sellers of securities and together meet the 
definition of exchange. In such a case, the group of persons would 
have the regulatory responsibility for the exchange.
    \580\ See Regulation ATS Adopting Release, supra note 31, at 
70873. See infra Section V.A.3.a.
---------------------------------------------------------------------------

Request for Comment
    113. Are there any means of entering trading interest into the 
Covered ATS where more or should be required to explain their 
operation? Are there any aspects of those means of entry that are 
particularly important?
f. Item 6: Connectivity and Co-Location
    Part III, Item 6(a) of Form ATS-N would request information about 
whether the Covered ATS offers co-location and related services, and if 
so, would require a summary of the requirements for use of such 
services, including the speed and connection (e.g., fiber, copper) 
options offered. Part

[[Page 15554]]

III, Item 6(b) of Form ATS-N \581\ would require a Covered ATS to 
indicate whether it provides any other means besides co-location and 
related services described in the Item 6(a) to increase the speed of 
communication with the ATS, and if so, to explain the means and provide 
a summary of the requirements for its use. Part III, Item 6(c) would 
require the Covered ATS to indicate whether it offers any means to 
reduce the speed of communication with the ATS and if so, to provide a 
summary of the requirements for its use.\582\
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    \581\ The Commission is proposing to re-number Part III, Item 
6(c) of current Form ATS-N to Item 6(b) and Part III, Item 6(e) of 
current Form ATS-N to Part III, Item 6(c).
    \582\ To clarify that the Commission is soliciting information 
about any requirements the ATS imposes on subscribers or persons 
that submit trading interest to use co-location, related services, 
and other means to increase or reduce the speed of communication 
with the ATS, rather than the legal or contractual terms of such 
services, the Commission is proposing to replace the current 
requirement for a summary of the ``terms and conditions'' with 
``requirements for use'' for such services in Part III, Items 6(a), 
6(b), and 6(c). See supra note 543.
---------------------------------------------------------------------------

    Latency is an important feature of trading in certain government 
securities and NMS stocks, and market participants are interested in 
understanding the functionalities employed by Covered ATSs to influence 
it.\583\ The Item would require a summary of the requirements where a 
trading venue employs mechanisms to increase the latency or the length 
of time for trading interest or other information to travel from a user 
to the system. Users of co-location services can experience faster or 
slower connection speeds to a Covered ATS depending on factors such as 
the distance of the customer servers from the matching engine, or the 
use or non-use of ``coiling'' to its matching engine to equalize 
connection speeds among subscribers, among others. Such differences in 
connection speed or latency would be required to be disclosed under 
Part III, Item 6. If, for example, the ATS offers means that would 
allow certain subscribers a competitive advantage, then the ATS should 
disclose such means on the Form ATS-N. The Commission believes that the 
information disclosed in Item 6 would help market participants 
understand their connectivity options to the ATS and expedite the order 
entry process for subscribers.
---------------------------------------------------------------------------

    \583\ See October 15 Staff Report, supra note 188, at 36-37; 
Treasury Request for Information, supra note 193, at 3928. See also 
Letter from Dan Cleaves, Chief Executive Officer, BrokerTec 
Americas, and Jerald Irving, President, ICAP Securities USA LLC, to 
David R. Pearl, Office of the Executive Secretary, Treasury 
Department, dated April 22, 2016 (``BrokerTec/ICAP Letter''), at 3-
4, available at https://www.treasurydirect.gov/instit/statreg/gsareg/ICAPTreasuryRFILetter.pdf; Letter from C. Thomas Richardson, 
Managing Director, Head of Electronic Trading Service, Wells Fargo 
Securities, and Cronin McTigue, Managing Director, Head of Liquid 
Products, Wells Fargo Securities, to Treasury Department, dated 
April 21, 2016, at 6-7, available at https://www.treasurydirect.gov/instit/statreg/gsareg/RFIcommentWellsFargo.pdf.
---------------------------------------------------------------------------

Request for Comment
    114. Are there any aspects of the means for increasing or reducing 
the speed of communication with Covered ATSs that the Commission should 
specifically require under this Item?
g. Item 7: Order Types and Sizes; Trading Facilities
    Part III, Item 7 of Form ATS-N is designed to disclose whether the 
Covered ATS provides trading facilities or sets rules for bringing 
together orders of buyers and sellers (e.g., crossing system, auction 
market, limit order matching book, click-to-trade functionality). The 
request is intended to capture Covered ATSs that offer the use of firm 
trading interest and a trading facility or rules for buyers and sellers 
to interact and agree upon the terms of a trade. The Commission 
believes that systems that typically offer the use of orders and 
trading facilities and systems that offer the use of non-firm trading 
interest and communication protocols operate distinctively. Systems 
that offer the use of orders and trading facilities typically match 
orders of buyers and sellers pursuant to pre-determined rules 
programmed into an algorithm, while systems that offer the use of 
trading interest and communication protocols allow buyers and sellers 
to interact directly to find a counterparty and negotiate a trade. To 
facilitate market participants' understanding of these systems and 
their unique aspects, the Commission is proposing that Covered ATSs 
disclose information about the use of orders and trading facilities or 
rules in Part III, Item 7 and disclose the use of trading interest and 
communication protocols in Part III, Item 8. These questions would 
apply to both NMS Stock ATSs and Government Securities ATSs. If a 
Covered ATS provides both a trading facility and communication protocol 
(e.g., provides both a limit order book and RFQ protocol), the Covered 
ATS would respond affirmatively to and explain the protocols separately 
under Items 7 and 8. To the extent the trading facility and 
Communication Protocol Systems interact in any way, the Covered ATS 
would explain that interaction in response to each question.
    A Covered ATS that answers affirmatively to Part III, Item 7 of 
revised Form ATS-N would be required to explain the trading facilities 
and rules for bringing together the orders of buyers and sellers in the 
ATS. In this response, the ATS would be expected to disclose the 
information responsive to Part III, Items 7 (Order Types and 
Attributes), 8 (Order Sizes), and 11 (Trading Services, Facilities, and 
Rules) of current Form ATS-N. Based on Commission staff experience 
reviewing Form ATS-N filings, and particularly disclosures related to 
order types, order size, and the ATSs' rules, procedures, and 
facilities to bring buyers and sellers together, ATS are linked and 
intertwined. Allowing the Covered ATS to provide a narrative of these 
topics together in Part III, Item 7 of Form ATS-N would provide for 
more streamlined disclosures for market participants to understand and 
reduce redundancy. This proposed change would result in clearer, more 
readable narrative disclosures, and potentially reduce the burden to 
Covered ATSs of drafting repetitive disclosures in multiple responses 
in the form.
    Part III, Item 7 of Form ATS-N would require that ATSs provide a 
description of each order type offered by the Covered ATS, and provide 
a list of items that the ATS should include in its description. To 
provide transparency to market participants, the Item would require a 
complete and detailed description of the order types available on the 
Covered ATS, their characteristics, operations, and how they are 
handled.\584\ All market participants should have full information 
about the operations of order types available on a Covered ATS to 
comprehensively understand how their orders will be handled and 
executed in the ATS. Order types are a primary means by which users of 
a Covered ATS communicate their instructions to trade on an ATS. Given 
the importance, diversity, and complexity of order types, the 
Commission is proposing to require Covered ATSs to disclose the 
information called for by Part III, Item 7 on Form ATS-N.
---------------------------------------------------------------------------

    \584\ In the instruction to Part III, Item 7 of Form ATS-N, the 
Commission is proposing to make certain changes and clarify the 
examples provided in this Item regarding order types. Particularly, 
the Commission proposes to clarify the example provided regarding 
``how price conditions affect the rank and price at which it can be 
executed'' by replacing ``it'' with ``the order type.'' In addition, 
the Commission is proposing to add ``store orders'' as an example of 
order types designed not to remove liquidity. The Commission 
recognizes that ``store orders'' may be more relevant to Government 
Securities ATSs than to NMS Stock ATSs.
---------------------------------------------------------------------------

    Market participants should have sufficient information about all 
aspects of the operations of order types

[[Page 15555]]

available on a Covered ATS to understand how to use order types to 
achieve their trading objectives, as well as to understand how order 
types used by other market participants could affect their trading 
interest. A detailed description of order type characteristics would 
assist subscribers in better understanding how their orders would 
interact with other trading interest in the ATS. It also would allow 
market participants to see what order types could be used by other 
market participants, which could affect the probability, timing, and 
quality of their own executions. For example, if the time priority of a 
pegged order changes in response to changes in the reference price, 
that would affect the likelihood of execution for such an order. The 
Commission is also proposing to require that Covered ATSs disclose any 
order size requirements (e.g., minimum or maximum size, odd-lot, mixed-
lot, trading increments) and related handling procedures (e.g., 
handling of residual trading interest) in Part III, Item 7 of Form ATS-
N. This incorporates the requirements of Part III, Item 8 of current 
Form ATS-N, with modifications.\585\ This information would inform 
subscribers about the permissible size of orders and trading interest 
that a subscriber could enter in the ATS. For example, if a Covered ATS 
has minimum or maximum order sizes, or a minimum increment size 
requirement for order modifications, those requirements and related 
handling procedures would be responsive to the Item. The Commission is 
also proposing to add the example of how residual or unexecuted orders 
are handled to the types of related handling procedures that a Covered 
ATS would be required to include in Part III, Item 7. Broker-dealer 
operators employ market access and risk management controls and 
procedures that prevent the entry of erroneous orders and orders that 
are above a subscriber's predetermined threshold. If order size 
requirements are imposed on subscribers as part of a risk management 
procedure, an explanation of those procedures as they relate to the ATS 
would be responsive to this Item. An explanation of how a Covered ATS's 
requirements and conditions related to the size of trading interest 
differ among subscribers and persons would also provide a market 
participant with information regarding how its trading interest would 
be handled in relation to other market participants.
---------------------------------------------------------------------------

    \585\ As discussed above, to streamline the format of responses, 
the Commission is proposing to consolidate current Form ATS-N Part 
III, Items 8(a) through (f) in Part III, Item 7 of revised Form ATS-
N. The Commission believes that the information requested is the 
same, and the information requests covered by these sub-items (odd-
lot orders and mixed-lot orders) would be covered in Part III, Item 
7 of revised Form ATS-N.
---------------------------------------------------------------------------

    Covered ATSs may offer the use of various types of trading 
facilities to bring together the orders of buyers and sellers and for 
such orders to interact. These types of systems would be disclosed in 
Part III, Item 7 of Form ATS-N. For example, many Covered ATSs bring 
together multiple buyers and sellers using limit order matching 
systems. Other Covered ATSs offer the use of crossing mechanisms that 
allow participants to enter unpriced orders to buy and sell securities, 
with the ATS's system crossing orders at specified times at a price 
derived from another market.\586\ Some Covered ATSs offer the use an 
auction mechanism that matches multiple buyers and sellers by first 
pausing execution in a certain security for a set amount of time, 
during which the ATS's system seeks out and/or concentrates liquidity 
for the auction; after the trading pause, orders will execute at either 
a single auction price or according to the priority rules for the 
auction's execution. Certain Covered ATSs may use a voice system to 
bring together orders as well, or a combination of voice and electronic 
systems. Part III, Item 7, would require Covered ATSs to provide 
disclosure of how these facilities operate.
---------------------------------------------------------------------------

    \586\ See Regulation ATS Adopting Release, supra note 31, at 
70849 n.37.
---------------------------------------------------------------------------

    In addition, Part III, Item 7 would require a Covered ATS to 
disclose its rules and procedures under which orders interact and 
buyers and sellers agree upon the terms of a trade.\587\ Form ATS-N 
sets forth a non-exhaustive list of such rules and procedures, which 
includes order interaction, priority,\588\ pricing methodologies, 
allocation, matching, and execution of orders and other procedures for 
trading, such as price improvement functionality, price protection 
mechanisms, short sales, functionality to adjust or hedge orders, 
locked-crossed markets, the handling of execution errors, the time-
stamping of messages and executions, and any conditions or processes 
for terminating a counterparty match.\589\
---------------------------------------------------------------------------

    \587\ The Commission is proposing to add examples of 
functionalities used in the government securities market for which a 
Government Securities ATS would be required to explain the ATS's 
rules and procedures, if applicable.
    \588\ The Commission is making a non-substantive change to Part 
III, Item 7 of Form ATS-N to state that a Covered ATS would be 
required to disclose the order type's priority ``in relation to'' 
(rather than ``vis-[agrave]-vis'') other orders on the book due to 
changes in the NBBO or other reference price.
    \589\ This non-exhaustive list is the same as what is in current 
Form ATS-N, Part III, Item 11.
---------------------------------------------------------------------------

    The Commission is also proposing that a Covered ATS disclose 
pricing methodologies used for each type of security traded by the ATS 
under Part III, Item 7.\590\ For example, orders may be priced using 
spreads off a benchmark price, or spreads between two different 
maturities of a security. A Covered ATS may also restrict the allowable 
deviation from a benchmark price, or allow for indicative pricing of 
certain securities. If a transaction has more than one leg, the ATS may 
price both legs according to a price derived from one of the securities 
traded. In response to this request, a Covered ATS would be required to 
describe the ATS's procedures for determining all pricing methodologies 
and to the extent the pricing methodologies differ among subscribers 
and the broker-dealer operator, the ATS must disclose those 
differences.
---------------------------------------------------------------------------

    \590\ Part III, Item 7 would require Government Securities ATSs 
and, to the extent applicable, NMS Stock ATSs, to describe any 
functionality to adjust or hedge orders.
---------------------------------------------------------------------------

    In addition, Item 7 would require Covered ATSs to disclose how 
orders may interact with non-firm trading interest or separate trading 
functionalities within the ATS or offered by the broker-dealer 
operator. Item 7 would also require Covered ATSs to disclose the 
various procedures under which orders interact and match. Some Covered 
ATSs may offer price-time priority to determine how to match orders 
(potentially with various exceptions), while others may offer midpoint-
only matching with time priority. Some Covered ATSs might also take 
into account other factors to determine priority. For example, a 
Covered ATS may assign either a lower or higher priority to an order 
entered by a subscriber in a certain class (e.g., orders of principal 
traders or retail investors) or sent from a particular source (e.g., 
orders sent by an algorithm or similar functionality) when compared to 
an equally priced order entered by a different subscriber or via a 
different source. Also, if applicable, the Item would require an 
explanation of which party to a trade would receive any price 
improvement depending on the priority, order type, and prices of the 
matched orders and the percentage of price improvement the party would 
receive. A broker-dealer operator could also act as the counterparty 
for each side of a transaction that matches on its ATS.
    Pursuant to the proposed instruction at the beginning of Part III, 
Covered ATSs would be required to disclose any differences in treatment 
among subscribers, the broker-dealer, and other participants in the ATS 
as they relate to

[[Page 15556]]

the means and facilities for bringing together the orders of buyers and 
sellers.
Request for Comment
    115. What are the most prevalent order types on Government 
Securities ATSs? Are there more important means than order types for 
subscribers to communicate the handling of their trading interest on 
Government Securities ATSs? Does Form ATS-N capture all of the means 
for subscribers of Government Securities ATSs to communicate the 
handling of their orders? Are there any aspects of order types on 
Government Securities ATSs that should be specifically addressed in the 
Item? If yes, please explain.
    116. Are there any operations or procedures, either of an ATS or a 
broker-dealer operator, which could limit the entry, or size of, a 
subscriber's orders submitted to the ATS? If so, please describe these 
operations or procedures and explain why they are important to 
subscribers.
    117. Are there any specific means or facilities used to bring 
together multiple buyers and sellers on Covered ATSs that should be 
specifically included as an example in this Item? Are there any rules 
and procedures that govern trading of government securities and repos 
that should be specifically included as examples in this Item?
h. Item 8: Use of Non-Firm Trading Interest; Communication Protocols 
and Negotiation Functionality
    As discussed above, the proposed definition of ``exchange'' would 
include systems that make available the use of non-firm trading 
interest and communication protocols to bring together buyers and 
sellers of securities. Form ATS-N currently includes questions about 
NMS Stock ATSs' use of conditional order functionality and indications 
of interest,\591\ which can be forms of communication protocols. 
Current Form ATS-N, however, does not contain comprehensive disclosure 
requests about systems that solely offer the use of non-firm trading 
interest and communication protocols because, as discussed above, such 
systems typically do not fall within the criteria of current Exchange 
Act Rule 3b-16(a) and, therefore, do not operate pursuant to the ATS 
exemption. The Commission is proposing to revise Part III, Item 8 to 
request information about the operations of these systems and the 
requests would be applicable to both NMS Stock ATSs and Government 
Securities ATSs. With respect to conditional orders and indications of 
interest, Part III, Item 8 of revised Form ATS-N incorporates and 
expands on the current disclosure requirements of Part III, Item 9 
(Conditional Orders and Indications of Interest) and Part III, Items 7 
(Order Types) and 8 (Order Sizes) of current Form ATS-N as they relate 
to conditional orders and indications of interest in the ATS.
---------------------------------------------------------------------------

    \591\ Part III, Item 9 of current Form ATS-N asks about 
conditional orders and indications of interest. Part III, Item 8 of 
current Form ATS-N asks about order sizes. The Commission is 
proposing to incorporate the requirements of Part III, Item 8 into 
Part III, Items 7 and 8. In addition, the Commission is proposing to 
incorporate the requirements in Part III, Item 9 of current Form 
ATS-N in Part III, Item 8 of revised Form ATS-N.
---------------------------------------------------------------------------

    Proposed Part III, Item 8 of revised Form ATS-N would require 
Covered ATSs to disclose whether they make available communication 
protocols for buyers and sellers to communicate non-firm trading 
interest, solicit interest to buy or sell a security, discover prices, 
find a counterparty, or negotiate a trade. Such systems could offer, 
for example, RFQ or workup protocols, stream axes, or conditional order 
functionalities.\592\
---------------------------------------------------------------------------

    \592\ See supra Section II.B.2.
---------------------------------------------------------------------------

    If the Covered ATS provides communication protocols and negotiation 
functionalities, it would be required to identify and explain the 
protocols and functionalities in the response to Part III, Item 8. The 
Commission believes that identifying and explaining these 
functionalities would provide transparency regarding how buyers and 
sellers can interact with each other on the system. This would require 
the Covered ATS to provide a narrative description of how participants 
in the ATS send and receive messages, how such messages interact, and 
the rules, procedures, and protocols governing the use of non-firm 
trading interest in the Covered ATS. To facilitate this disclosure, the 
Commission is proposing to include in Form ATS-N a description of the 
types of information that should be explained in this Item. The 
Commission recognizes, however, that each system operates differently 
and may offer unique protocols, and has designed Part III, Item 8 to 
allow ATSs the flexibility to provide a narrative response that will 
help market participants understand the protocols governing their 
systems.
    First, the Covered ATS would be required to explain the use of 
messages in the ATS. Messaging is a primary tool by which Communication 
Protocol Systems bring together buyers and sellers. Use of messaging is 
critical to how buyers and sellers can use the system to find one 
another and negotiate a transaction. The Commission believes that ATSs 
offer diverse types of messaging that facilitate communication and 
negotiation, including non-firm trading interest that subscribers 
expose to other subscribers, communications that subscribers send to 
other subscribers to negotiate transactions, messages that subscribers 
use to communicate to the ATS how they want their trading interest to 
be handled, as well as messages the ATS sends to subscribers to 
communicate the presence of trading interest. The Commission believes 
that this information will help market participants understand how they 
can use messages in the ATS to interact with potential counterparties 
and to communicate how they want their trading interest to be handled 
by the ATS.
    The Commission is proposing to provide a non-exhaustive list of 
what this explanation would include, as applicable to the Covered ATS's 
protocols and functionalities. The Covered ATS would be required to 
describe and explain each type of message the ATS permits participants 
to send and receive and the types of persons that can send and receive 
each type of messages (e.g., the ATS, types of subscribers, specific 
subscribers, customers of subscribers, trading venues). The ATS would 
also be required to disclose the information contained in messages 
(e.g., symbol, price, direction (i.e., buy or sell), or size minimums) 
and any other information that a participant may choose to include in a 
message. If terms in messages can vary based on potential recipients 
(e.g., different subscribers may receive varying priced messages for 
the same security), the Covered ATS would be required to disclose that.
    The Commission is proposing that the Covered ATS disclose whether 
messages are attributed to their sender or anonymous, and whether a 
subscriber may elect to disclose its identity to other participants, 
and if so, what is disclosed and how, when, and to whom. The Commission 
understands that some Communication Protocol Systems allow participants 
to negotiate trades on an attributed basis so that certain 
counterparties may know the identity of other counterparties pre-trade. 
In some cases, subscribers on the ATS have established relationships 
and may choose to share their identity with a pre-selected list of 
potential counterparties or potential counterparties that meet certain 
criteria. Even while the subscriber discloses its identity to others, 
the identity of potential counterparties may be either known or 
anonymous. The Covered ATS would be required to describe when, and 
under what conditions, the subscriber or the

[[Page 15557]]

ATS discloses subscribers' identities and how and when messages are 
transmitted (e.g., order management system, router, or FIX).
    The Covered ATS would be required to describe the processes to 
respond to a message and any parameters around such responses. In the 
Commission's experience, on negotiation systems, a subscriber or the 
Covered ATS makes known the existence of trading interest or an 
interest in negotiation, and potential counterparties have the 
opportunity to respond. For example, a Covered ATS would be required to 
explain how the sender of a message would ``firm-up'' a conditional or 
other non-firm message to execute a trade. The ATS would also be 
required to describe the processes to respond to a request to 
negotiate, and for subscribers who initiate an RFQ to respond to any 
responses. In addition, if the ATS permits the initiating party or 
respondents a final opportunity prior to execution to accept or reject 
the price after the negotiating parties agree to a trading price (i.e., 
a ``last look''), the ATS must describe such processes.
    Part III, Item 8 would require the Covered ATS to describe any time 
parameters that the ATS sets or permits subscribers to set regarding 
sending and receiving messages. This would include time-in-force 
restrictions that a subscriber may place on trading interest in a 
message (e.g., fill-or-kill, day, good-til-cancel). This would also 
include time parameters for updating prices or responding to trading 
interest or requests for negotiation applicable during any negotiation 
process. In the case of an RFQ, subscribers may provide a specific 
price with a ``wire time'' during which such price is actionable. Any 
parameters around such wire times would be required to be disclosed by 
the Covered ATS. Additionally, if the Covered ATS requires that a 
subscriber firm-up its conditional orders within, for example, three 
seconds of receiving a response, the Covered ATS would be required to 
state so. Any time parameters within which an initiator of a message 
would have to respond to responses to its messages would also be 
disclosed under Part III, Item 8.
    The Covered ATS would also be required to provide information 
regarding the contra-party trading interest made available or known on 
the system, including whether a subscriber may elect whether to display 
only part of its trading interest. The instruction in Part III, Item 8 
would state that, if trading interest is made known on the system, the 
ATS would be required to describe it in Part III, Item 15. Part III, 
Item 8 of Form ATS-N would also require a description of the 
circumstances under which messages may be modified, replaced, canceled, 
rejected, or removed from the Covered ATS. The Covered ATS would also 
be required to describe any restrictions or conditions under which the 
message might result in the match of two counterparties, require a 
response, or result in an execution in the Covered ATS (e.g., 
interaction, matching, selection, automatic execution) and any price 
conditions (e.g., how price conditions affect the rank and price at 
which the message can result in an execution).
    The Covered ATS would also be required to describe the limits or 
requirements for multiple messages sent at the same time. For example, 
if the Covered ATS prohibits a subscriber from entering non-firm 
trading interest to buy and sell the same bond or security at the same 
time, entering the same price for a buy and sell order in the same bond 
(i.e., a locked market), or entering a lower-priced sell order than the 
buy order (i.e., inverted market), it should disclose these. In 
addition, the ATS would be required to state whether a message 
containing trading interest is eligible to be sent to destinations 
outside the Covered ATS, and if so, describe it in Part III, Item 16. 
The Covered ATS would also be required to disclose information about 
the availability of message types across all forms of connectivity to 
the ATS. To the extent there are differences in the availability of 
message types across forms of connectivity, the ATS would need to 
describe those differences.
    A Covered ATS would also be required to disclose, with respect to 
non-firm trading interest, any requirements relating to the size of 
trading interest (e.g., minimum or maximum size, odd-lot, mixed-lot, 
trading increments, message controls or throttling). This would include 
the requirements of Part III, Item 8 of current Form ATS-N, and also 
include examples of limitations, such as message controls or 
throttling, that the Commission understands a negotiation system, for 
example, may use to limit the number of messages sent by a subscriber. 
The Covered ATS would also be required to disclose any related handling 
procedures, such as, for example, the handling of residual trading 
interest after an execution on the ATS (e.g., whether it is canceled or 
remains in the system).
    In addition, in its response to Part III, Item 8, the Covered ATS 
would also be required to disclose in its response the procedures 
governing communication protocols. These requirements are currently 
incorporated in Part III, Item 11 of current Form ATS-N. Requiring 
information about such procedures would provide transparency into how 
buyers and sellers may interact, and how non-firm trading interest may 
interact with other trading interest in the ATS. The Commission is 
proposing to require disclosure of how Covered ATSs prioritize and 
permit their subscribers to prioritize trading interest, to provide 
information that market participants can use to choose an appropriate 
venue at which they can interact with other subscribers or send trading 
interest. As applicable, the Covered ATS would be required to provide 
in Part III, Item 8, a description of priority applied to a message 
upon entry and any subsequent change to priority (if applicable, 
whether and when the message can receive a new time stamp, the 
message's priority in relation to other messages in the Covered ATS due 
to a change to any reference price, and any instance in which a message 
could lose execution priority to a later arriving message at the same 
price); whether the Covered ATS permits or provides for subscribers to 
vary pricing based on the identity of other subscribers (e.g., 
preferred pricing feeds or tiered pricing); and whether subscribers can 
select counterparties based on their identity or other factors. If a 
Covered ATS allows subscribers complete discretion to, for example, 
select which counterparty to interact with when the prices such 
counterparties offer are the same, the Covered ATS would be required to 
disclose that.
    In addition, Part III, Item 8 would require a Covered ATS to 
disclose its rules and procedures under which buyers and sellers 
interact and agree upon the terms of a trade. Based on Commission staff 
experience, ATSs disclose various methods, rules, and conditions under 
which subscribers may interact using trading interest. Form ATS-N would 
provide a non-exhaustive list of such rules and procedures, which 
includes those for participant interaction, pricing methodologies, 
allocation, matching, and execution. This question is designed to 
provide transparency to those diverse methods, rules, and conditions so 
that market participants better understand how the ATS will handle non-
firm trading interest and how subscribers may interact with others in 
the ATS. If the Covered ATS auto-executes non-firm trading interest, 
the ATS would also be required to disclose the functionality or 
protocols governing such auto-execution. The

[[Page 15558]]

Covered ATS would be required to disclose, for example, how the ATS or 
a subscriber can designate trading interest as automatically 
executable. Any limitations that subscribers may impose on auto-
execution would be responsive to such request.
    The Covered ATS would also be required to discuss in Part III, Item 
8 how non-firm trading interest may interact with orders or separate 
trading functionalities in the ATS or functionality offered by the 
broker-dealer operator. For example, if an IOI can interact with a firm 
order on the Covered ATS's order book, it should disclose this and any 
policies and procedures for such interaction. To the extent that the 
Covered ATS has disclosed this in Part III, Item 7 in its discussion of 
how firm orders can interact with non-firm trading interest, the ATS 
should describe how the non-firm trading interest may interact with 
firm trading interest and may cross-reference the disclosure in Part 
III, Item 7.
    In the Commission's experience, ATSs have adopted other trading 
procedures governing interaction and execution. The Commission is 
proposing to include examples of such procedures governing 
communication protocols that would be required to be disclosed. This 
would include functionality or protocols that permit the selection of 
displayed non-firm trading interest to trade against. In the 
Commission's experience, negotiation systems may allow subscribers to 
choose the trading interest they interact with; any procedures 
governing such selection should be disclosed in Part III, Item 8. In 
addition, the Commission believes that market participants would 
benefit from transparency regarding procedures that could re-price 
trading interest or prevent it from interacting with other trading 
interest under certain conditions. Accordingly, the Form ATS-N would 
provide a non-exhaustive list of procedures that includes price 
improvement, price protection mechanisms, procedures related to short 
sales, functionality to adjust or hedge trading interest, locked-
crossed markets, the handling of execution errors, platform and trade 
controls (e.g., fat finger checks, whether the ATS can employ a global 
kill switch), the time-stamping of trading interest messages and 
executions, and any conditions or processes for terminating a 
counterparty match.
    In addition, the Covered ATS would be required to disclose what 
information is available to subscribers from the ATS about interaction 
history, counterparty matching, or executions (e.g., pre- and post-
trade data, best execution analysis, transaction cost analysis), when 
such information is made available, the source(s) of such information, 
and the process for subscribers to access this information. The 
Commission believes that requiring such information would allow market 
participants to better assess the information that Covered ATSs 
provide, including allowing them to analyze or evaluate their 
performance, resolve potential disputes, and/or understand how their 
trading interest has historically interacted and been treated in the 
ATS, among other things.
Request for Comment
    118. Are there any aspects of how Covered ATSs permit non-firm 
trading interest to be sent and/or received that are not covered by 
this Item? Are there any aspects of how subscribers interact with each 
other on Covered ATSs by using non-firm trading interest that are not 
covered by this Item? What information about non-firm trading interest 
and the process for transmitting non-firm trading interest would be 
useful to market participants?
i. Item 9: Monitoring and Surveillance of the ATS Market
    The Commission is proposing that Part III, Item 9(a) of Form ATS-N 
require a Covered ATS to disclose information about the activities the 
ATS undertakes to supervise the trading activity that occurs on or 
through the ATS (e.g., supervisory systems and procedures to detect, 
deter, or limit potentially disruptive, manipulative, or non-bona fide 
quoting and trading activities that occur on or through its system and 
to ensure that they are reasonably designed to achieve compliance with 
applicable SRO rules and the Federal securities laws) and to provide a 
summary of any supervision activities that occur on or through the ATS, 
the sources of data the ATS uses to supervise trading activity (e.g., 
internal or external sources), and the activities that the ATS intends 
to detect, deter, or limit.
    As a registered broker-dealer, an ATS must comply with the filing 
and conduct obligations associated with being a registered broker-
dealer, including becoming a member of an SRO, such as FINRA, and 
compliance with SRO rules.\593\ Accordingly, ATSs must comply with SRO 
rules which, among other things, require each member to maintain a 
reasonably designed supervisory system.\594\ For example, FINRA states 
it expects an ATS's supervisory system to be reasonably designed to 
identify ``red flags,'' including potentially manipulative or non-bona 
fide trading that occurs on or through its systems, and that ATSs must 
regularly assess and evaluate their supervisory systems and procedures 
to ensure that they are reasonably defined to achieve compliance with 
applicable FINRA rules and the Federal securities laws.\595\ The 
Commission believes that the information disclosed in response to this 
request would help market participants understand the scope of 
supervision activities that an ATS performs to mitigate potentially 
manipulative and non-bona fide trading that occurs on or through its 
system. This information could also help regulators, including the 
Commission and FINRA, to assess the extent to which an ATS's 
supervision procedures are designed to facilitate investor protection 
over activities occurring in the ATS and comply with the applicable 
rules, including the Exchange Act and FINRA rules.
---------------------------------------------------------------------------

    \593\ Section 15(b)(8) of the Exchange Act requires a broker or 
dealer to become a member of a registered national securities 
association, unless it effects transactions in securities solely on 
an exchange of which it is a member. 15 U.S.C. 78o(b)(8).
    \594\ See Regulatory Notice 18-25, ATS Supervision Obligations, 
August 13, 2018, available at https://www.finra.org/sites/default/files/Regulatory-Notice-18-25.pdf (``FINRA Regulatory Notice'') at 
3. In addition, FINRA Rule 3310 requires FINRA members to, among 
other things: Establish and maintain a system to supervise the 
activities of each associated person that is reasonably designed to 
achieve compliance with applicable securities laws, regulations, and 
FINRA rules; establish, maintain, and enforce written procedures to 
supervise the types of business in which it engages and the 
activities of associated persons that are reasonably designed to 
achieve compliance with applicable securities laws, regulations, and 
FINRA rules; conduct a review, at least annually of the businesses 
in which it engages reasonably designed to assist the member in 
detecting and preventing violations of, and achieving compliance 
with, applicable securities laws, regulations, and FINRA rules and 
retain a written record of the date upon which each review and 
inspection is conducted; and include in its supervisory procedures a 
process for the review of securities transactions that are 
reasonably designed to identify trades that may violate the 
provisions of the Exchange Act, the rules thereunder, or FINRA rules 
prohibiting insider trading and manipulative and deceptive devices 
that are effected for certain accounts. See FINRA Rule 3310.
    \595\ See FINRA Regulatory Notice, supra note 594, at 3.
---------------------------------------------------------------------------

    The Commission is proposing Part III, Item 9(b) of Form ATS-N to 
request disclosures about whether the ATS monitors for certain types of 
trading behaviors or activities that may be detrimental to the ATS 
market place or trading (e.g., anti-gaming technology) and, if so, to 
provide a summary of the ATS's monitoring activities and the trading 
behaviors and explain the

[[Page 15559]]

activities that the ATS intends to detect, deter, or limit. In the NMS 
Stock ATS Adopting Release, the Commission described that, in response 
to the proposal of Form ATS-N, commenters requested that information 
about the monitoring activities the ATS performs be included in Form 
ATS-N.\596\ One commenter suggested that disclosure of certain 
additional trading services should be required, specifically whether 
the ATS employs technology designed to detect and deter price 
manipulation and other disruptive trading practices (i.e., anti-gaming 
technology), and, if so, the ATSs should include a description of this 
technology in the form.\597\ This commenter stated that existence of 
such technology can increase market confidence, particularly for market 
participants that transact in large volumes, such as funds, because it 
shows that a trading venue is committed to providing a fair and 
competitive market.\598\ This commenter further stated that funds 
currently have no mechanism to receive standardized information 
regarding anti-gaming technology or to compare anti-gaming technology 
across different ATSs.\599\ Another commenter stated that anti-gaming 
technology and other subscriber-related safeguards are among the core 
attributes of ATSs that are of particular importance to buy-side 
institutions.\600\
---------------------------------------------------------------------------

    \596\ See NMS Stock ATS Adopting Release, supra note 2, at 
38850.
    \597\ See Letter from David W. Blass, General Counsel, 
Investment Company Institute, dated February 25, 2016, at 9-10.
    \598\ See id.
    \599\ See id.
    \600\ See Letter from Phillip S. Gillespie, Executive Vice 
President, General Counsel, State Street Global Advisors, dated 
February 26, 2016 at 2-3. See also Memorandum from the Office of 
Commissioner Kara Stein regarding a July 26, 2016 meeting with 
representatives of Morgan Stanley (including in a presentation that 
whether an ATS has anti-gaming controls is among the frequently 
asked questions by clients).
---------------------------------------------------------------------------

    The Commission, however, declined to adopt a request related to 
anti-gaming technology and subscriber-related safeguards at that time 
because such descriptions made in a publicly available document could 
serve to undermine those safeguards by disclosing information that 
makes evading those safeguards easier.\601\ However, the Commission is 
now proposing this requirement because it believes that market 
participants would want to know how the ATS may monitor for certain 
trading behaviors or activities that may be detrimental to the ATS 
market place or to the participants that use the ATS's services. In 
addition, the information would help market participants determine 
which ATSs provide better market quality that the market participants 
would be more inclined to effect transactions on. In the Commission 
staff's experience reviewing Forms ATS-N filed by NMS Stock ATSs, some 
NMS Stock ATSs have described information about their surveillance 
procedures and other safeguards, which allow market participants to 
understand their practices, while avoiding the level of detail that 
would help enable market participants to evade them. Accordingly, the 
Commission believes that the requests for information proposed would 
not serve to undermine the ATS's surveillance and monitoring activities 
because the Commission is requesting summary level information, which 
would strike the right balance in requiring these important disclosures 
and avoiding the risk that market participants could use the 
disclosures on Form ATS-N to evade such tools and controls.
---------------------------------------------------------------------------

    \601\ See NMS Stock ATS Adopting Release, supra note 2, 83 FR 
38850.
---------------------------------------------------------------------------

Request for Comment
    119. Would requiring summary disclosure regarding the Covered ATS's 
anti-gaming technology and similar safeguards benefit market 
participants? What other information regarding monitoring and 
surveillance of activity in the ATS would be beneficial? Does the 
proposed summary disclosure strike the right balance in providing 
disclosure and avoiding the risk that market participants could use the 
disclosures to evade the ATS's tools and controls?
j. Item 10: Opening and Reopening
    Part III, Item 10 of Form ATS-N is designed to provide information 
about the use of any special processes and procedures related to 
matching trading interest at the opening, or to set a single opening or 
reopening price to, for example, maximize liquidity and accurately 
reflect market conditions at the opening or reopening of trading. The 
Commission believes that this disclosure requirement is important 
because market participants would likely want to know about any special 
opening or reopening processes, including which types of trading 
interest can participate in the opening or reopening processes or 
whether there are any protocols at the open for buyers and sellers to 
send messages and negotiate a trade. To capture processes related to 
sending, receiving, and viewing trading interest for communication 
protocols and negotiation systems, the Commission is proposing to 
specify in Part III, Item 10 that the ATS should disclose when and how 
trading interest may be sent, received, and viewed at opening, how 
unexecuted trading interest is handled at the time the ATS begins its 
regular trading hours or following a stoppage of trading in a security 
during its regular trading hours, and whether there are any protocols 
at the open for buyers and sellers to send messages and negotiate a 
trade.
    Based on Commission staff experience with Form ATS-N filings, the 
Commission is proposing to amend Form ATS-N to incorporate the 
requirements of Part III, Item 10(c) of current Form ATS-N with the 
requirements of Part III, Item 10(a). In its experience, the Commission 
observed significant overlap in the responses to Part III, Item 10(a), 
which asks about how the ATS opens or re-opens after stoppage, and Part 
III, Item 10(c), which asks how unexecuted trading interest is handled 
at the start of regular trading hours or following a stoppage, as the 
treatment of unexecuted trading interest is an integral part of an 
ATS's opening and re-opening procedures. Because of this overlap, some 
NMS Stock ATSs repeat the disclosures in both current Form ATS-N Part 
III, Items 10(a) and (c). To streamline the disclosure and reduce 
redundancy, the Commission is proposing to specify in Part III, Item 
10(a) of revised Form ATS-N that the Covered ATS describe how 
unexecuted trading interest is handled at the time the ATS begins its 
regular trading hours or following a stoppage of trading in a security 
during its regular trading hours, and to delete the separate disclosure 
requirements of Part III, Item 10(c) of current Form ATS-N.
    Information about when the Covered ATS will price and prioritize 
trading interest during the opening or reopening of the ATS would 
provide market participants with the information they need to plan and 
execute their trading strategies during these periods. The Item would 
also, for example, require disclosure of any processes or procedures to 
match trading interest to set a single opening or reopening price to 
maximize liquidity and accurately reflect market conditions at the 
opening or reopening of trading. For trading interest allowed to be 
submitted before an ATS opens for trading, the Item 10(b) would require 
an explanation of what priority rules would apply to that trading 
interest.\602\ The Commission believes most participants consider 
important the procedures for the pricing and priority of trading 
interest, and the

[[Page 15560]]

types of trading interest allowed because these rules and procedures 
can directly impact their execution price. The disclosures are also 
designed to provide information to subscribers about when they may use 
the systems to send or receive messages or view trading interest at the 
open or reopen, and the status of any messages or orders that may be 
pending before the ATS opens or reopens.
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    \602\ The Commission is renumbering Part III, Item 10(e) of 
current Form ATS-N as Part III, Item 10(b) in revised Form ATS-N. 
The Commission also proposes to clarify in Item 10 that ``regular 
trading hours'' refer to the ATS's regular trading hours.
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Request for Comment
    120. Do Government Securities ATSs have any special opening and 
reopening processes and procedures around Treasury auctions? If so, do 
commenters believe there any aspects of the opening and reopening 
processes for Treasury auctions that should be specifically addressed 
in this Item?
k. Item 11: Interaction With Related Markets
    Proposed Part III, Item 11 of Form ATS-N is designed to provide 
information about any functionality, procedure or protocol used to 
facilitate trading or communication on, or source pricing for, the 
Covered ATS that is offered by the broker-dealer operator or its 
affiliates \603\ using markets for financial instruments related to the 
securities it trades (``Related Markets''). In the 2020 Proposal, the 
Commission proposed to add a similar question to Form ATS-G; the 
Commission is now proposing to add this question to Form ATS-N and to 
make it applicable to both Government Securities ATSs and NMS Stock 
ATSs. Markets for financial instruments related to government 
securities could include those non-government securities markets that 
trade futures, currencies, fixed income, and swaps, for example. 
Markets for financial instruments related to NMS stocks could include, 
for example, non-NMS stock markets that trade futures, options, and 
swaps. If applicable, the Covered ATS would: (1) Identify the 
functionality, procedures, protocols, and source of pricing and the 
Related Market; (2) state whether the functionality, procedures, 
protocols, and source of pricing is provided or operated by the broker-
dealer operator or its affiliate, and whether the Related Market is 
provided or operated by the broker-dealer operator or its affiliate; 
(3) explain the use of the functionality, procedures, protocols, and 
source of pricing with regard to the Related Market and the ATS, 
including how and when the functionality, procedures, protocols, and 
source of pricing can be used, by whom, and with what markets.
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    \603\ Among other things, services to facilitate trading or 
source pricing for the Government Securities ATS using non-
government securities markets that are offered by a third-party by 
arrangement with the broker-dealer operator or affiliates would also 
be required to be disclosed under this Item.
---------------------------------------------------------------------------

    The functionalities, procedures, or protocols required to be 
disclosed would include, for example, offering order types to 
facilitate transactions in the ATS and the Related Market, procedures 
to allow subscribers to perform multi-leg transactions involving 
another market and the ATS, or a protocol to allow a subscriber to 
communicate with other persons to negotiate a trade including, for 
example, a government security and non-government security. A Covered 
ATS could offer, for example, Exchange-for-Physical (``EFP'') 
transactions that can involve markets in addition to the ATS. An EFP 
transaction where ATS subscribers agree to exchange a financial 
product, such as a futures contract on a government security, for the 
underlying related government security or NMS stock, would be 
responsive to this Item. The Commission believes that it would be 
important to participants to understand functionality, procedures, and 
protocols made available to them, as they can impact their experience 
in the ATS.\604\
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    \604\ To the extent that a Government Securities ATS offers a 
functionality, procedure, or protocol using a market for government 
securities (e.g., trading venue for U.S. Treasury Securities or 
options) or an NMS Stock ATS offers a functionality, procedure, or 
protocol using a market for NMS stocks, the Covered ATS would 
disclose information about that functionality, procedure, or 
protocol in Part III, Item 11 of Form ATS-N.
---------------------------------------------------------------------------

    Information about how the ATS uses market data from a Related 
Market, through an aggregator or otherwise, to provide the services it 
offers would also be required by the form.\605\ Among other things, for 
example, the ATS would need to disclose in response to this Item its 
use of such market data to display, price, prioritize, execute, and 
remove trading interest in the ATS.\606\ As part of this explanation, 
the ATS would specify, if applicable, when the ATS may change sources 
of market data to provide its services. In response to proposed Part 
III, Item 11 of Form ATS-N, the ATS would explain how, for example, 
market data from a Related Market is received by the ATS, compiled, and 
delivered to the matching engine. For example, among other possible 
arrangements, the ATS could explain that market data from a Related 
Market is received and assembled by the broker-dealer operator, and 
subsequently delivered to the matching engine, or that market data is 
sent directly to the matching engine, which normalizes the data for its 
use. The ATS would disclose, for example, whether it uses market data 
from the futures market to price and execute EFP transactions and 
describe how it uses that market data under this Item.
---------------------------------------------------------------------------

    \605\ If a Covered ATS uses market data from another market that 
trades government securities, that information would be disclosed 
under Part III, Item 22 of revised Form ATS-N.
    \606\ Disclosure of any market data used by the Covered ATS, 
including market data for options and repos on government 
securities, would be required under Part III, Item 22 of Form ATS-N.
---------------------------------------------------------------------------

    A broker-dealer operator's activities in financial instruments 
related to the securities that the ATS trades or offerings of a Related 
Market, such as a futures exchange, along with its operation of an ATS, 
raise the potential for information leakage of a subscriber's 
confidential trading information, or the broker-dealer operator could 
provide certain advantages to subscribers that use a Related Market 
that it operates. As such, Item 11 would require information about 
whether the functionality, protocols, procedures, and source of pricing 
on the Covered ATS or the Related Markets are provided or operated by 
the broker-dealer operator or its affiliates.
Request for Comment
    121. What are commenters' views on the relationship between markets 
for government securities and Related Markets and between markets for 
NMS stocks and Related Markets and how investors may use these markets 
together with a Covered ATS to achieve their trading objectives?
    122. What aspects of government securities markets or NMS stock 
markets and Related Markets, such as the futures markets, do market 
participants use for trading on a Covered ATS? What information about 
those markets might be useful to a subscriber and why?
l. Item 12: Liquidity Providers
    Part III, Item 12 of Form ATS-N is designed to disclose information 
about arrangements with liquidity providers. Like national securities 
exchanges,\607\ ATSs might engage firms to provide liquidity on both 
sides of the market. The Commission has observed that the overwhelming 
majority of registered national securities exchanges have structured 
programs for market makers, which generally set forth both obligations 
(e.g., continuous quoting at or within the NBBO) and often, some 
benefits (e.g., fee rebates). Similarly, a Covered ATS may want to 
ensure that there is sufficient contra-side liquidity

[[Page 15561]]

available in the ATS in a particular security to incentivize market 
participants to send trading interest in that security to the ATS. To 
do this, the ATS may engage certain market participants to quote in a 
security or trade against orders in the Covered ATS, performing similar 
functions to a market maker on a national securities exchange.\608\
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    \607\ See, e.g., NYSE Guide Rule 104 (Dealings and 
Responsibilities of DMMs), Nasdaq Rules Equity 2, Section 5 (Market 
Maker Obligations).
    \608\ These liquidity providers may quote in a particular 
security in the ATS during trading hours and may receive a benefit 
for performing this function, such as discounts on fees, rebates, or 
the opportunity to execute with a particular type of segmented order 
flow.
---------------------------------------------------------------------------

    To the extent that a Covered ATS and a participant have entered 
into an arrangement under which that participant undertakes obligations 
to display, enter, or trade against trading interest on the Covered 
ATS, the Commission believes that market participants should know both 
the terms and conditions of such an arrangement and the identity of the 
liquidity-provider ATS participant. Form ATS-N currently requires an 
ATS to disclose the terms and conditions of an arrangement with a 
liquidity provider and the names of any liquidity providers that are 
either business units of the broker-dealer operator or affiliates of 
the broker-dealer operator.\609\ When it adopted Form ATS-N, the 
Commission explained that it was requiring disclosure regarding 
liquidity providers because it believed that market participants would 
want to know the identity of such liquidity providers to help evaluate 
potential conflicts of interest or information leakage on the trading 
platform.\610\ The Commission now believes that the names of all 
liquidity providers should be disclosed to evaluate potential conflicts 
of interest and the potential for information leakage. Specifically, if 
a participant is obligated to provide contra-side liquidity and, for 
example, derives a particular benefit in exchange for undertaking such 
an obligation, the Commission believes that other users of the ATS 
should know who that liquidity provider is, how it is expected to trade 
in the ATS, and the benefit that it is receiving. This disclosure would 
be similar to Exhibit M of Form 1, which requires national securities 
exchanges to publicly disclose, among other things, the identity of all 
market makers and liquidity providers. The Commission believes it 
appropriate to require a similar level of disclosure for Covered ATSs 
with regard to the identity of market makers and liquidity providers, 
given the sizable market share of such entities in their respective 
sectors.
---------------------------------------------------------------------------

    \609\ See Part II, Items 1(c) and 2(c) of Form ATS-N.
    \610\ See NMS Stock ATS Adopting Release, supra note 2, at 
38829.
---------------------------------------------------------------------------

    Additionally, the Commission believes that information about 
liquidity providers would be useful to ATS participants who, for 
example, may want their orders to only interact with agency orders (and 
not with those of a liquidity provider), or, conversely, may themselves 
want to become liquidity providers on the Covered ATS. Such arrangement 
could take many forms, and the function of the liquidity provider on an 
ATS could depend on the structure and trading protocols of the ATS. 
This Item could cover, for example, arrangements or agreements between 
the broker-dealer operator and another party to quote or trade on the 
Covered ATS. The Item does not cover agreements with a subscriber that 
has no obligation to buy or sell securities in the ATS. Furthermore, to 
obtain disclosures about activity on Communication Protocol Systems, 
the Commission is proposing to revise Part III, Item 12 of Form ATS-N, 
which asks about whether there are arrangements to ``provide'' orders 
and trading interest, and, instead, to ask about arrangements to 
``display, enter, or trade against'' trading interest.
    Accordingly, the Commission is proposing that Part III, Item 12 
require a Covered ATS to disclose any formal or informal arrangements 
with any person \611\ or the broker-dealer operator to display, enter, 
or trade against trading interest in the ATS (e.g., undertaking to buy 
or sell continuously or to meet specified thresholds of trading or 
quoting activity). This will be in the form of a ``yes'' or ``no'' 
question, and if the ATS answers yes, it must both identify the 
liquidity provider(s) and describe the arrangement(s), including the 
terms and conditions.
---------------------------------------------------------------------------

    \611\ The Commission is proposing to change the current 
requirement to disclose arrangements with any ``Subscriber'' to 
display, enter, or trade against trading interest in the Covered ATS 
to require disclosure of any such arrangements with any ``persons.'' 
In the Commission's experience, arrangements to display, enter, or 
trade against trading interest in a Covered ATS may include 
arrangements with subscribers, non-subscriber participants who 
submit orders through a subscriber or the broker-dealer operator, 
and persons controlling subscribers or participants to the ATS. The 
Commission is therefore proposing to revise the rule text by using 
the term ``person'' to capture arrangements with non-subscribers 
that could impact order flow on the ATS.
---------------------------------------------------------------------------

Request for Comment
    123. Are there any arrangements between Covered ATSs and persons to 
provide trading interest to the Covered ATS that may not be required by 
this Item but should be? If any, what is the nature of those 
arrangements, and why are they important to disclose publicly on Form 
ATS-N?
    124. Should Covered ATSs be required to identify liquidity 
providers on Form ATS-N? Please explain why or why not, including any 
advantages or disadvantages resulting from this disclosure.
m. Item 13: Segmentation; Notice
    Part III, Item 13(a) of Form ATS-N is designed to disclose 
information about how trading interest in the Covered ATS is segmented 
into categories, classifications, tiers, or levels. The Covered ATS 
would be required to explain the segmentation procedures, including how 
and what trading interest is segmented. The Commission is proposing to 
add in Item 13(a) of Form ATS-N a requirement to explain where the 
identification of segmented trading interest is applied (e.g., when ATS 
trading interest is received by the broker-dealer operator or entered 
into the ATS). From the Commission's experience, systems may segment 
trading interest when trading interest enters through the broker-dealer 
(from the SOR or similar functionality), or when the trading interest 
is entered into the ATS. The Commission believes subscribers would want 
to understand where their trading interest is segmented so they can 
assess who is making the decisions about how their trading interest 
will be categorized when entered into the ATS and the level of 
protections their confidential trading information will receive. The 
Covered ATS would also be required to identify and describe any 
categories, classifications, tiers, or levels and the types of trading 
interest that are included in each and provide a summary of the 
parameters for each segmented category and length of time each 
segmented category is in effect. The Commission is proposing to add to 
Item 13(a) that the parameters for each segmented category would 
include when such category is determined, reviewed, and can be changed. 
Item 13(a) also requires disclosure of any procedures for overriding a 
determination of segmented category and would require how segmentation 
can affect trading interest interaction.
    This Item is designed to provide market participants with an 
understanding of the categories of trading interest or types of 
participants with which they may interact. In addition, the information 
provided would allow them to both assess the consistency of a segmented 
group and determine whether the manner in which the trading interest is 
segmented comports with their views of how

[[Page 15562]]

certain trading interest should be categorized. Disclosure of the 
procedures and parameters used to segment categories would allow a 
participant to determine whether its view of what constitutes certain 
trading interest it wants to seek or avoid is classified in the same 
way by the Covered ATS. For example, a subscriber may find it useful to 
understand the standards a Covered ATS uses to categorize high 
frequency trading firms so that it can compare the criteria used by the 
ATS with its view of what constitutes a high frequency trading firm, 
and thus be able to successfully trade against or avoid such trading 
interest. Similarly, information regarding the procedures applicable to 
trading among segmented categories would allow market participants to 
evaluate whether they can successfully trade against or avoid the 
segments of trading interest. In response to the question regarding 
segmentation on previously-proposed Form ATS-G in the 2020 Proposal, 
one commenter stated that, as the fixed income market structure 
continues to develop, types of segmentation options may occur in 
Government Securities ATSs and should be disclosed.\612\
---------------------------------------------------------------------------

    \612\ See Bloomberg Letter at 8.
---------------------------------------------------------------------------

    Some Covered ATSs segment trading interest entered in the ATS 
according to various categories for purposes of trading interest 
interaction. For example, a Covered ATS could elect to segment trading 
interest by type of participant (e.g., buy-side or sell-side firms, 
PTFs, agency-only firms, firms above or below certain assets under 
management thresholds). When segmenting trading interest in the ATS, a 
Covered ATS might look to the underlying source of the trading interest 
such as the trading interest of retail customers. Some Covered ATSs 
segment by the nature of the trading activity, which could include 
segmenting by patterns of behavior, time horizons of traders, or the 
passivity or aggressiveness of trading strategies. Covered ATSs might 
use some combination of these criteria or other criteria altogether. 
The ATS might use these segmented categories to design its trading 
interest interaction rules, allowing only trading interest from certain 
categories to interact with each other.
    The Commission recognizes the concern that describing the precise 
criteria used by the ATS to segment trading interest could result in 
gaming of those criteria by subscribers and thus reduce the 
effectiveness of segmentation as a control. On the other hand, market 
participants are interested in understanding how their trading interest 
is categorized in the ATS and the types of market participants that 
would interact with its trading interest. The Commission believes that 
Part III, Item 13 of Form ATS-N appropriately balances these competing 
interests by soliciting a summary of the parameters for each segmented 
category. By requiring Covered ATSs to provide a summary of these 
parameters on Form ATS-N, rather than a detailed analysis of the 
parameters and how they are calculated, this Item is designed to avoid 
responses that could allow the gaming or manipulation of segmentation 
criteria.
    Based on the Commission's experience, systems that offer RFQs or 
BWIC protocols that bring buyers and sellers together to negotiate may 
apply filtering technology to allow participants to more easily search 
for securities with particular characteristics that comport with the 
participants' needs or exclude securities that do not meet the 
participants' needs. They may also offer counterparty filtering that 
prevents transactions between certain participants (i.e., potential 
counterparties) by prohibiting views of either party's inventory by the 
other party. Such systems may also implement permissioning procedures 
for subscribers to be able to view trading interest of certain other 
subscribers. The Commission believes that market participants would 
benefit from understanding how a Covered ATS controls the counterparty 
interest that they, and their potential counterparties, can view and 
interact with, and accordingly, the Commission is proposing to add new 
Part III, Item 13(b), which would ask if the ATS, in the absence of 
subscriber direction, can prevent a participant or its potential 
counterparties from viewing or interacting with certain trading 
interest (e.g., permissioning, filtering, or blocking).\613\ An ATS 
that has such controls would be required to explain the processes, 
including what a subscriber or counterparty is prevented from viewing 
or interacting with and where this determination is made (i.e., when 
trading interest is received at the broker-dealer operator or the ATS); 
how and when the ATS prevents a subscriber or its potential 
counterparty from viewing or interacting with certain trading interest; 
any categories, classifications, tiers, or levels, and the types of 
trading interest that the ATS uses to determine how subscribers can 
view or interact with other trading interest; a summary of the 
parameters for such processes and the length of time any such parameter 
is in effect; any procedures for overriding a determination of any 
category, classification, tier, or level that the ATS uses to designate 
how subscriber trading interest can interact; how such processes can 
affect trading interest interaction; and how a subscriber can view 
filtered messages and any permissioning process and criteria for a 
subscriber to send, receive, or interact with a message.
---------------------------------------------------------------------------

    \613\ The Commission is proposing to specify that this question 
relates to process implemented ``in the absence of subscriber 
direction.'' The Commission is drawing a distinction from the 
filtering or blocking that a subscriber can do in the ATS, which 
would be disclosed in Part III, Item 14 (Counter-Party Selection). 
If the ATS, on its own, and in the absence of subscriber directions, 
filters certain subscribers from viewing the existence of certain 
trading interest, that would be responsive to Part III, Item 13 of 
Form ATS-N.
---------------------------------------------------------------------------

    The Commission believes that market participants will benefit from 
transparency regarding protocols that Covered ATSs use to limit in any 
way the trading interest that certain subscribers can view or interact 
with based on the identity of the counterparty. The Commission 
recognizes that RFQs and similar systems may establish protocols to 
block or filter participants from viewing or interacting with the 
trading interest of certain potential counterparties. The Commission is 
thus proposing to clarify in Part III, Item 13 of Form ATS-N that the 
scope of the question would extend to ATS protocols involving the ATS 
filtering or blocking trading interest.
    Part III, Item 13(c) would address whether the ATS identifies 
trading interest entered by a customer of a broker-dealer as customer 
trading interest. Disclosing the origin of customer trading interest of 
a broker-dealer could be a form of segmentation because it can 
facilitate users restricting their trading to only certain types of 
market participants and it can contribute to information leakage and 
adverse selection of trading interest of institutional investors, who 
generally trade passively. Accordingly, Part III, Item 13(c) would 
require a Covered ATS to disclose if it identifies trading interest 
entered by a customer of a broker-dealer in the ATS as customer trading 
interest.
    In addition, in Part III, Item 13(d) of Form ATS-N, the ATS would 
be required to state whether it discloses to any person the designated 
segmented or otherwise designated category, classification, tier, or 
level of trading interest and, if so, provide a summary of the content 
of the disclosure, when and how the disclosure is communicated, who 
receives it, and whether and how such designation can

[[Page 15563]]

be contested. This requirement is substantially similar to the current 
requirement of Part III, Item 13(d) of Form ATS-N, but the Commission 
is proposing to amend this request to add designations other than 
segmentation, such as permissioning, filtering, and blocking, that 
would be responsive under proposed Part III, Item 13(b) of Form ATS-N. 
This would provide information to market participants about the notice 
that the ATS provides subscribers about the segmented category to which 
they are assigned, and also, if applicable, who can obtain information 
about the segmented categories of other subscribers.
Request for Comment
    125. What information about the segmentation of trading interest by 
a Covered ATS or any other practices or procedures that allow a Covered 
ATS to control which counterparties view each other's trading interest 
or are able to interact would be important to persons that use the 
services of the ATS?
n. Item 14: Counter-Party Selection
    Part III, Item 14(a) of Form ATS-N is designed to provide 
information about whether trading interest can be designated to 
interact or not interact with certain trading interest in the ATS by an 
ATS participant. The Commission is proposing to make minor 
modifications to this question including new examples of the types of 
designations that a subscriber can make to control both interactions 
with and matching against trading interest or a participant in the ATS. 
These examples would include designations to interact with or execute 
against a specific subscriber's trading interest or prevent the trading 
interest of a subscriber from interacting with or executing against the 
trading interest of that subscriber. If the ATS has such counterparty 
selection available, it would be required to explain the counterparty 
selection procedures, including how counterparties can be selected and 
whether the designation affects the trading rules (e.g., order 
interaction or priority) or communication protocols of the ATS.\614\ To 
analyze whether the ATS is an appropriate venue to accomplish their 
trading objectives, market participants have an interest in knowing 
whether--and how--they may designate their trading interest to interact 
or avoid interacting with specific trading interest or persons in the 
ATS. Part III, Item 14 is designed to require disclosure of such 
information.
---------------------------------------------------------------------------

    \614\ The Commission is proposing minor changes to Form ATS-N, 
Part III, Item 14, which references how the designation affects the 
``interaction and priority of trading interest in the ATS'' to be 
more inclusive of communication protocols.
---------------------------------------------------------------------------

    For instance, the disclosures proposed under this Item would allow 
a participant in the Covered ATS to know whether it can interact with 
certain categories of trading interest in the ATS or can designate 
trading interest submitted to the ATS to interact only with trading 
interest of certain other types of ATS participants. The ATS might 
allow subscribers to choose from categories of trading interest or 
categories of participants that the broker-dealer operator segments in 
the ATS. For example, buy-side or institutional subscribers might seek 
to trade only against other buy-side or institutional trading interest, 
or might seek to avoid trading against PTFs or high frequency trading 
firms. Also, it would also be responsive to this Item for a Covered ATS 
to state whether a subscriber can restrict interacting with its own 
trading interest, whether such restrictions are by default or only upon 
subscriber request, and any applicable limitations on such 
restrictions. This Item would require description of any procedures 
allowing a subscriber to limit its counterparty on an order-by-order 
basis or a participant-by-participant basis, how it would go about 
doing so, and how such selection would affect the interaction and 
priority of trading interest. For example, an ATS would include in its 
response to this Item whether a designation to interact with a specific 
category of counterparty trading interest or participants can be made 
by the subscriber (i.e., by marking its trading interest) or whether 
the designation must be implemented by the broker-dealer, on the 
subscriber's behalf. If the broker-dealer implements the counterparty 
designation, the ATS would also include when such designation would go 
into effect (e.g., on same trading day as the subscriber's selection or 
on a date thereafter).
    The Commission is also proposing to amend Form ATS-N to add a 
requirement that the ATS disclose in Part III, Item 14(b) whether a 
subscriber can designate trading interest that the subscriber or 
potential counterparties can view (e.g., filtering, blocking, 
permissioning). The ATS would be required to explain any such 
processes, including how and when a subscriber can (or cannot) 
designate which trading interest it or a potential counterparty can 
view, any categories, classifications, or levels, and the types of 
trading interest that subscribers are able to designate, a summary of 
the parameters for such processes and the length of time any such 
parameter is in effect, and how such processes can affect how trading 
interest interacts in the ATS. The Commission believes this type of 
functionality may be particularly relevant to communication protocols 
and negotiation systems that may fall within the criteria of Rule 3b-
16(a), as proposed to be amended. From Commission staff's experience, 
ATSs may disclose counterparty filters that could, for example, allow a 
subscriber to prohibit itself from viewing a potential counterparty's 
inventory or to prohibit a potential counterparty from viewing its 
inventory. Under proposed Part III, Item 14(b), an ATS would include in 
its response if, for example, participants in the ATS can choose not to 
view trading interest from certain identified potential counterparties 
or certain types of counterparties, such as those that have failed to 
respond to RFQs in a given amount of time. Similarly, if a participant 
can block certain potential counterparties from viewing its trading 
interest, such functionality would be required to be disclosed in this 
Item as well. Market participants should be aware of how participants 
on the platform can choose not to interact with certain trading 
interest. If, however, the ATS (and not the participant) makes these 
designations and restricts the interactions of potential 
counterparties, such designations and restrictions would be required to 
be disclosed under Part III, Item 13.\615\
---------------------------------------------------------------------------

    \615\ See supra Section IV.D.5.m.
---------------------------------------------------------------------------

Request for Comment
    126. Should Form ATS-N request more or less information about how 
trading interest can be designated to interact or not interact with 
certain trading interest in the Covered ATS? Are there important forms 
of counterparty selection that the Commission should address?
o. Item 15: Display and Visibility of Trading Interest
    The Commission is proposing to restructure Part III, Item 15 so 
market participants can more readily understand information regarding 
trading interest that the Covered ATS displays to the subscribers, the 
public, and any person, including the broker-dealer operator, and what 
information regarding trading interest a subscriber of the ATS can 
display through the ATS. Although, as discussed below, the Commission 
proposes to require Covered ATSs to divide the responses to Part III, 
Item 15(b) of current Form ATS-N into Items 15(a), (b), and (c) in 
revised Form ATS-N, the Commission believes that these questions would 
solicit substantially similar information

[[Page 15564]]

that is required by current Item 15(b) of Form ATS-N, in addition to 
information that is relevant to communication protocols and the use of 
non-firm trading interest.
    Part III, Item 15(a) of Form ATS-N would require a Covered ATS to 
disclose whether the ATS displays trading interest to subscribers or 
the public (e.g., whether the ATS disseminates orders through market 
data feeds or a website or sends invitations or requests to subscribers 
about potential counterparties to trade with). If the ATS displays 
trading interest to subscribers or the public, the ATS would be 
required to explain what information the ATS displays (e.g., security, 
price, size, direction, the identity of the sender, rating information 
based on the sender's past performance in the ATS), how and when such 
information is displayed, to whom such information is displayed (e.g., 
subscribers, public, types of market participant), and how long the 
displayed information is available. In addition, the ATS would also be 
required to indicate whether a subscriber can opt-out of the display of 
its trading interest, and if so, the process for subscribers to do so. 
This Item would also require the ATS to describe differences in 
latencies with which the ATS displays subscribers' trading interest due 
to a functionality of the ATS. For example, if a Covered ATS transmits 
and displays its proprietary data feed to certain subscribers faster 
than to other subscribers as a result of the alternative means offered 
by the ATS to connect, such information would be responsive to this 
Item. In addition, this Item would require an ATS that offers work-ups 
to match trading interest to disclose the information that is displayed 
to all subscribers or certain subscribers in public or private phases 
of the work-up, as well as what characteristics of the trading interest 
are displayed.
    The ATS could display subscriber trading interest in a number of 
ways. For instance, when an ATS sends electronic messages outside of 
the ATS that expose the presence of trading interest in the ATS, it is 
displaying or making known trading interest in the ATS. In Part III, 
Item 15(a), a Covered ATS would be required to disclose the 
circumstances under which the ATS sends these messages, the types of 
market participants that received them, and the information contained 
in the messages, including the exact content of the information, such 
as symbol, price, size, attribution, or any other information made 
known. An ATS may also offer a direct data feed from the ATS that 
contains real-time order information.\616\ Some ATSs have arrangements, 
whether formal or informal (oral or written), with third parties to 
display the ATS's trading interest outside of the ATS, such as IOIs 
from the subscribers being displayed on vendor systems or arrangements 
with third parties to transmit IOIs between subscribers. A Covered ATS 
would be required to include this type of information in its response 
to this Item.
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    \616\ In the case of a Covered ATS offering a direct data feed 
with information about trading interest in the ATS, the ATS would be 
required to disclose under Part III, Item 15 what information the 
data feed provides about the trading interest, the associated timing 
in receiving the feed (e.g., real-time, delayed), how a subscriber 
would receive the feed (e.g., connectivity), and if all subscribers 
are treated the same in receiving the feed, including whether all 
subscribers are eligible to receive it and any differences in 
latency receiving the feed.
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    Part III, Item 15(b) of Form ATS-N would require a Covered ATS to 
disclose whether a subscriber can use the ATS to display or make known 
trading interest to any person (e.g., stream quotes to the subscribers 
or the public or send a request for quote, IOI, conditional order, or 
invitation to negotiate to a subscriber or the broker-dealer operator). 
If yes, the ATS would explain what information the subscriber can 
display through the ATS (e.g., security, price, size, direction, the 
identity of the sender), procedures for subscribers to display such 
information, how and when such information is displayed, to whom such 
information is displayed (e.g., subscribers, public, types of market 
participant), and how long the displayed information is available. In 
addition, Communication Protocol Systems may offer functionalities or 
protocols to allow their subscribers, who otherwise do not have the 
ability to display their trading interest, to use the functionalities 
or protocols to display trading interest information. Part III, Item 
15(b) would differ from Part III, Item 15(a) in that Item 15(b) would 
ask what information subscribers can display or make known about their 
trading interest through the ATS whereas Part III, Item 15(a) would ask 
what information regarding trading interest the ATS displays. For 
example, an ATS that receives orders and disseminates top-of-book 
information to subscribers would be required to disclose this in Item 
15(a), while an RFQ system that allows participants to select when, 
how, and to whom to display their trading interest to solicit 
counterparty trading interest would be required to disclose this in 
Item 15(b). The Commission is proposing the disclosure requirements of 
Item 15(b) because it believes that ATS participants would want to know 
whether a particular ATS would provide them with any protocol or 
functionality that would enable them to stream quotes to other 
subscribers or the public or send a request or invitation to negotiate 
to another subscriber or the broker-dealer operator. The disclosures 
regarding whether subscribers can display or make known their trading 
interest and the types of information that the subscribers can display 
would help market participants understand the extent to which potential 
information leakage may occur on the ATS.
    Part III, Item 15(c) of Form ATS-N would require a Covered ATS to 
disclose whether any trading interest bound for the ATS is made known 
to any person--not including employees of the ATS who are operating the 
system. Many market participants are sensitive to precisely how and 
when the ATS displays or otherwise makes known their trading interest 
both inside and outside the ATS as such information could result in 
other market participants trading ahead of their positions, and thus 
possibly causing inferior execution prices for the participants whose 
trading interest is displayed or otherwise made known. These 
participants could use these disclosures to evaluate whether sending 
trading interest to a particular ATS would achieve their trading 
strategies. In particular, subscribers that use the services of Covered 
ATSs, including customers of the broker-dealer operator, have limited 
information about the extent to which their trading interest sent to 
the ATS could be displayed outside the ATS.
    For example, trading interest directed to the ATS could pass 
through the broker-dealer operator's non-ATS systems or functionalities 
such as an algorithm or a SOR, before entering the ATS. Such non-ATS 
systems and functionalities could be used to support the broker-dealer 
operator's other business units, including any trading venues.\617\ It 
would be responsive to this Item to identify the recipient of displayed 
information by identifying the functionality of the broker-dealer 
operator (e.g., SOR, algorithm, trading desk), third party, or the type 
of market participant \618\ that receives the displayed information. 
If, for instance, the ATS displays orders to the broker-dealer 
operator's SOR or trading desk, the ATS would indicate ``yes'' to this

[[Page 15565]]

question. If the answer is ``yes'' to either of these questions, the 
ATS would be required to explain what information is displayed (e.g., 
security, price, size, direction, the identity of the sender), how and 
when such information is displayed, to whom such information is 
displayed (e.g., algorithm, SOR, trading desk, third party), and how 
long the displayed information is available. If, for instance, trading 
interest bound for the ATS passes through the broker-dealer operator's 
common gateway or algorithm, the ATS would need to disclose these 
functionalities as the trading interest was displayed to a 
functionality of the broker-dealer operator that would likely be 
outside the ATS. If trading interest resting in the ATS is displayed to 
one or more of the broker-dealer operator business units, the ATS would 
need to identify the business units of the broker-dealer operator by 
type of market participant (e.g., institutional investors, PTFs, market 
makers, affiliates, trading desks at the broker-dealer operator, market 
data vendors, clearing entities, and potential subscribers, among 
others). This Item is designed to ensure that the ATS discloses any 
display of trading interest bound to the ATS or residing in the ATS not 
otherwise captured in Part III, Items 15(a) and (b). Consistent with 
the discussion above, the Commission believes that market participants 
should have a full understanding of how and when their trading interest 
becomes known to any person, particularly when the information is made 
known to the broker-dealer operator's non-ATS-systems and 
functionalities. The Commission further believes that information 
required under this Item would help market participants assess the 
potential for information leakage of subscribers' confidential trading 
information to the broker-dealer operator's non-ATS systems and 
functionalities.
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    \617\ The broker-dealer operator typically controls the logic 
contained in these systems or functionality that determines where 
trading interest that the broker-dealer operator receives will be 
handled or sent.
    \618\ See Part III, Item 1 of Form ATS-N (providing examples of 
types of market participants).
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    The proposed Item would not require information about employees of 
the ATS in non-trading related roles, such as technical, quality 
assurance, compliance, or accounting roles, among others, that support 
the ATS's operations and to whom trading interest are made known in the 
performance of their duties.\619\
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    \619\ Covered ATSs, as proposed, would be subject to the 
requirements of Rule 301(b)(10) and would be required to establish 
adequate safeguards and procedures to protect subscribers' 
confidential trading information, which must include: Limiting 
access to the confidential trading information of subscribers to 
those employees of the ATS who are operating the system or 
responsible for its compliance with these or any other applicable 
rules; and implementing standards controlling employees of the ATS 
trading for their own accounts. See 17 CFR 242.301(b)(10).
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    Part III, Item 15(d) of Form ATS-N would require the ATS to 
indicate whether it is an Electronic Communication Network (``ECN'') as 
defined in Rule 600(a)(31) of Regulation ATS.\620\ NMS Stock ATSs that 
are also ECNs may differ in how and where trading interest are 
displayed. NMS Stock ATSs that indicate ``yes'' to this Item would also 
be required to provide information in response to Part III, Items 
15(a), (b), or (c) to inform market participants how ECNs display 
trading interest.
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    \620\ Part III, Item 15(d) of revised Form ATS-N (which is 
currently included in Part III, Item 15(a) of current Form ATS-N) 
would be applicable only to NMS Stock ATSs because Rule 600(a)(31) 
only applies to systems that trade NMS stocks. A Government 
Securities ATS would select ``no'' in response to this question. The 
Commission is also correcting a typo referencing Rule 600(a)(23) and 
replacing the reference with Rule 600(a)(31).
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Request for Comment
    127. What information involving NMS stocks, government securities, 
and repos do ATSs or Communication Protocol Systems display? Are there 
levels of displayed information that a system may offer to market 
participants? If so, what are the levels and are there any specific 
requirements for a market participant to access that information? For 
instance, do ATSs or Communication Protocol Systems have different 
mechanisms or functionalities for displaying trading interest depending 
on the subscriber? What functionalities does the system use to display 
information in government securities and repos? Please explain the 
purpose and operation of any such functionality.
    128. For ATSs or Communication Protocol Systems that display 
trading interest both on the system and outside the system, what is the 
process for market participants to submit trading interest to interact 
with the trading interest that is displayed outside the system?
    129. Are there any aspects of display of trading interest on 
Government Securities ATSs that should be specifically addressed in the 
Item? Are there any aspects of display that are unique to Communication 
Protocol Systems?
p. Item 16: Routing
    Part III, Item 16 is designed to provide information about whether 
trading interest in the ATS can be routed or sent to a destination 
outside the ATS. As proposed, Part III, Item 16 would apply to both NMS 
Stock ATSs and Government Securities ATSs. In the Commission's 
experience, routing of government securities among trading venues is 
not as prevalent as in the market for NMS stocks. To the extent it is 
inapplicable, a Government Securities ATS would check ``no'' on Form 
ATS-N. However, Government Securities ATSs may have mechanisms to send 
trading interest outside the ATS. Accordingly, the Commission is 
proposing to require Covered ATSs to disclose whether they route or 
otherwise ``send'' trading interest outside of the ATS. If the Covered 
ATS permits trading interest to be routed or sent to a destination 
outside of the ATS, the ATS would be required to indicate whether 
affirmative instructions from a subscriber must be obtained before its 
trading interest can be routed or sent from the ATS, and provide a 
description of the affirmative instruction and explain how the 
affirmative instruction is obtained. If the ATS is not required to 
obtain an affirmative instruction to route or send trading interest, 
the ATS would be required to explain when trading interest can be 
routed or sent from the ATS (e.g., at the discretion of the broker-
dealer operator). The Commission believes that such disclosures provide 
ATS participants with the ability to gauge how their trading interest 
would be handled by the ATS. Subscribers might, for example, have 
concerns about the leakage of confidential trading information when 
their orders are routed to other trading venues. The Commission 
believes the disclosures in Part III, Item 16 would provide relevant 
information for ATS participants to evaluate the potential for leakage 
of their confidential trading information.
    The Commission is also proposing to relocate Part II, Items 1(d) 
and 2(d) of current Form ATS-N to Part III, Item 16(c) of revised Form 
ATS-N.\621\ Specifically, proposed Item 16(c) of revised Form ATS-N 
would request whether trading interest in the ATS can be routed or sent 
to a destination operated or controlled by the broker-dealer operator 
or an affiliate of the broker-dealer. If yes, the ATS would be required 
to identify the destination and when and how trading interest is routed 
or sent from the ATS to the destination. The Commission believes that 
such information would help market participants evaluate whether the 
Covered ATS sending trading interest to a trading venue operated or 
controlled

[[Page 15566]]

by the broker-dealer operator or its affiliates poses a conflict of 
interest and is consistent with its trading objectives.
---------------------------------------------------------------------------

    \621\ As discussed above, the Commission believes it would be 
more efficient for market participants and filers to consolidate the 
current disclosure in Part II, Items 1(d) and 2(d) to proposed Part 
III, Item 16(c). See supra Section IV.D.4.a.
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Request for Comment
    130. Do Government Securities ATSs (inclusive of Communication 
Protocol Systems, as proposed) and Communication Protocol Systems that 
trade NMS stocks send trading interest to destinations away from the 
system? If so, how and under what circumstances? Are there any aspects 
about how trading interest is sent away from a Covered ATS that should 
be addressed by Form ATS-N? Have the mechanisms for routing to a 
destination outside an NMS Stock ATS changed in any way since the 
adoption of Form ATS-N for NMS Stock ATSs? If so, do commenters believe 
that the Commission should require Covered ATSs to provide additional 
information in Part III, Item 16 to reflect such change?
q. Item 17: Closing
    Part III, Item 17 of Form ATS-N is designed to provide information 
about differences between how trading interest is treated on the ATS 
during the ATS's closing session(s) \622\ and during regular trading 
hours established by the ATS. The Item is designed to provide market 
participants with information about processes the Covered ATS uses to 
transition to the next trading day, including whether the ATS offers 
any particular order types during a closing session(s) or has different 
procedures for closing trading for a particular trading session and 
transitioning trading to the next trading day. The vast majority of 
requests in Part III of revised Form ATS-N relate to trading during the 
Covered ATS's regular trading hours. Therefore, when discussing 
differences between trading during the Covered ATS's closing session(s) 
and during regular trading hours set by the ATS, the Covered ATS would 
be required to discuss differences as compared to relevant information 
disclosed in Part III Items, including, among others, order types and 
sizes and trading facilities (Item 7), use of non-firm trading interest 
and communication protocols and negotiation functionality (Item 8), 
segmentation and notice (Item 13), and display and visibility of 
trading interest (Item 15). The Commission believes this information 
would be important for market participants to understand the closing 
procedures around a particular trading session, if any, to carry out 
their trading objectives.\623\
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    \622\ The Commission is proposing to revise Item 17 of Form ATS-
N to clarify that the question relates to the ATS's closing 
session(s), and that ``regular trading hours'' refers to the ATS's 
regular trading hours.
    \623\ The Item would, for example, require disclosure of any 
procedures to match trading interest to set a single closing price 
to maximize liquidity and accurately reflect market conditions at 
the close of trading in the ATS.
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r. Item 18: Fees
    Part III, Item 18 of Form ATS-N \624\ would require a Covered ATS 
to provide information on any fees or charges for use of the ATS's 
services, including any fees or charges for use of the ATS's services 
that are bundled with the subscriber's use of non-ATS services or 
products offered by the broker-dealer operator or its affiliates, and 
any rebate or discount of fees or charges. The Commission believes that 
disclosures regarding fees on Form ATS-N are necessary and important, 
and should not be voluntary for Covered ATSs. Fee disclosures on Form 
ATS-N are designed to allow all market participants to analyze the fee 
structures across Covered ATSs in an expedited manner and decide which 
ATS offers them the best pricing according to the characteristics of 
their order flow, the type of participant they are (if relevant), or 
any other aspects of an ATS's fee structure that serves to provide 
incentives or disincentives for specific market participants or trading 
behaviors. Requiring disclosures of ATS fees is warranted as, in the 
Commission's experience, fees can be a primary factor for market 
participants in deciding where to send their trading interest.
---------------------------------------------------------------------------

    \624\ As discussed above, the Commission is proposing to delete 
current Part III, Item 18 of Form ATS-N (Trading Outside of Regular 
Trading Hours) to combine such disclosure requests with Part III, 
Item 4 (Hours of Operations). As a result of this deletion, the 
Commission is proposing to re-number Part III, Items 19 through 26 
of current Form ATS-N. The discussion herein refers to the Items as 
proposed to be re-numbered.
---------------------------------------------------------------------------

    Part III, Item 18 would request that Covered ATSs include in their 
descriptions the types of fees, the structure of the fees, variables 
that impact the fees, and differentiation among types of subscribers, 
and whether the fee is incorporated into the price displayed for a 
security, and the Commission would provide examples of responsive 
information in a parenthetical in the text of each subpart.\625\ The 
Item also would require a range for each type of fee (e.g., 
subscription, connectivity, and market data) charged on the Covered 
ATS.
---------------------------------------------------------------------------

    \625\ The Commission is including non-exhaustive lists of 
examples of responsive information in parentheticals in the text of 
the Item. For instance, for the description of the structure of the 
fees, the Commission is providing as examples fixed, volume-based, 
and transaction-based fee structures. For the description of 
variables that impact the fees, the Commission is providing as 
examples: The types of securities traded, block orders, and the form 
of connectivity to the ATS. For the description of the 
differentiation among types of subscribers for the fee, the 
Commission is providing as examples the types of subscribers: 
Broker-dealers, institutional investors, and retail investors.
---------------------------------------------------------------------------

    The Commission is proposing to add the term ``market data'' to the 
examples listed in Part III, Item 18 of the types of fees that a 
Covered ATS must disclose. For example, if a Covered ATS distributed a 
market data feed and charged a fee for it, the ATS would be required to 
provide the information responsive to Item 18 regarding that fee. The 
Commission believes this example may be relevant to Government 
Securities ATSs, which are primarily lit venues that offer market data 
to subscribers. While most NMS Stock ATSs do not disseminate market 
data, a description of an NMS Stock ATS's market data fees is currently 
required by the Item, which requires disclosure of ``any'' fee or 
charge for use of the ATS services. Adding the example could assist 
Covered ATSs in responding comprehensively to the Item.
    The Commission recognizes that the fee structures of Covered ATSs 
can vary and that not all Covered ATSs apply set tiers or categories of 
fees for subscribers; however, the Commission believes that a market 
participant should have sufficient information to understand the fees 
for using the services of the Covered ATS. Recognizing the various fees 
that can be charged by Covered ATSs, the Commission is specifying in 
the fee request the types of information that a Covered ATS must 
provide in response to the Commission's proposed request to describe 
its fees (e.g., the structure of the fees, variables that impact each 
fee, differentiation among types of subscribers, and the range of 
fees). With regard to the variables that impact the fees set, ATSs 
would be required to be specific and delineate how a given variable 
would likely impact the fee level (e.g., higher or lower). In addition, 
the Commission is proposing to add a new requirement not included in 
current Form ATS-N that the Covered ATS must disclose whether the fee 
is incorporated into the price displayed for a security (e.g., markups, 
markdowns). For example, the price displayed by the security may be 
higher (or lower) than the market price, and the broker-dealer would be 
compensated by the difference between the displayed price and the 
market price. The Commission believes that, in particular, such fees or 
charges may be relevant to communication protocols that would be

[[Page 15567]]

included under the proposed definition of ``exchange.''
    These disclosures are designed to provide market participants with 
more insight regarding the fees charged so that they can better 
understand how fees may apply to them and assess how such fees may 
impact their trading strategies. Although the fees charged for Covered 
ATS services may be individually negotiated between the broker-dealer 
operator and the subscriber, the disclosures about the type of fees 
charged by the Covered ATS are designed to help market participants 
discern how the ATS's fees are organized and compare that information 
across Covered ATSs, which could reduce the search costs of market 
participants in deciding where to send their trading interest. The 
Commission believes that Covered ATSs should be required to disclose 
differences in the treatment among ``types of subscribers'' (e.g., 
broker-dealers, institutional investors, retail). This information 
would allow subscribers to observe whether a Covered ATS is offering 
preferential treatment for certain types of subscribers with respect to 
fees.
    Part III, Item 18(a) would cover charges to subscribers for their 
``use of the ATS services'' \626\ and would not request information on 
fees charged for non-ATS services by a third party not in contract with 
the broker-dealer operator.\627\ Part III, Item 18(b) would require a 
description of any bundled fees, including a summary of the bundled 
services and products offered by the broker-dealer operator or its 
affiliates, the structure of the fee, variables that impact the fee 
(including, for example, whether the particular broker-dealer services 
selected would impact the fee), differentiation among types of 
subscribers, and range of fees. Part III, Item 18(b) is designed to 
allow market participants to better evaluate fees for bundled services 
and products that include access to the Covered ATS. Covered ATSs would 
be required to provide information, including the relevant services and 
products offered by the broker-dealer operator and its affiliates for 
each bundled fee offered, that will provide context to market 
participants with which to assess how bundled fees could apply to them 
as subscribers.\628\
---------------------------------------------------------------------------

    \626\ The Covered ATS services generally include those services 
used for the purpose of effecting transactions in securities, or for 
submitting, disseminating, or displaying trading interest in the 
ATS. See 17 CFR 242.300(b).
    \627\ See NMS Stock ATS Adopting Release, supra note 2, at 38858 
(discussing what fees should be categorized as for use of the ATS's 
services).
    \628\ See NMS Stock ATS Adopting Release, supra note 2, at 38858 
(discussing responses to current Item 19(b) (proposed Item 18(b)) 
depending on whether there is an explicit fee for the ATS as part of 
any bundled services).
---------------------------------------------------------------------------

    The disclosure requests under Part III, Item 18 would contain a 
stand-alone Item--Item 18(c)--which requests information about rebates 
and discounts of fees that are identified in subparts (a) and (b) of 
Item 18. Item 18(c) would require information about rebates and 
discounts that is similar to information required for fees (e.g., type 
of rebate or discount, structure of the rebate or discount, variables 
that impact the rebate or discount, differentiation among types of 
subscribers, and range of rebate or discount).
Request for Comment
    131. What fees should the Commission require a Covered ATS subject 
to the Fair Access Rule to disclose on Form ATS-N? Are there any fees 
disclosures that are unique to NMS Stock ATSs or Government Securities 
ATSs and, if so, what information about those fees should be disclosed 
on Form ATS-N?
    132. What disclosures about bundled fees would be relevant and 
useful to potential and current subscribers to the ATS?
    133. What fees should the Commission require a Communication 
Protocol System that operates as a Covered ATS to disclose on Form ATS-
N?
s. Item 19: Suspension of Trading
    Part III, Item 19 of Form ATS-N would require a Covered ATS to 
provide information about any procedures for suspending or stopping 
trading in the ATS, including the suspension of trading in an NMS 
stock, U.S. Treasury Security, or an Agency Security.\629\ This Item is 
designed to, for example, inform market participants of whether, among 
other things, a Covered ATS will continue to accept trading interest 
after a suspension or stoppage occurs, whether the ATS cancels, holds, 
or executes trading interest that was resting in the ATS before the 
suspension or stoppage was initiated, and what type of notice the ATS 
provides to subscribers regarding a suspension or stoppage. Examples of 
system disruptions would include, but are not limited to, internal 
software problems that prevent the Covered ATS's system from opening or 
continuing trading,\630\ a significant increase in volume that exceeds 
the ability of the trading system of the ATS to process incoming 
trading interest,\631\ and the failure of the trading system of the ATS 
to receive external pricing information that is used in the system's 
pricing methodology. Information regarding a Covered ATS's procedures 
about how trading interest might be handled by the ATS during a 
suspension or stoppage of trading would be useful to market 
participants because an ATS's procedures might require the cancelation 
of existing trading interest or preclude the acceptance or execution of 
trading interest during a suspension, both of which would impact a 
subscriber's trading interest or its ability to trade in the ATS. This 
information would better inform a subscriber's trading decisions at the 
time of such an event and thus help that subscriber accomplish its 
trading objectives. If a Covered ATS establishes different procedures 
for suspending or stopping trading in the ATS depending on whether the 
source of the disruption is internal or external, a description of both 
procedures would be responsive to this request. In addition, this Item 
would require disclosure of procedures whereby a Covered ATS suspends 
trading in NMS stocks, U.S. Treasury Securities, or Agency Securities 
so that it does not cross the volume thresholds, as proposed herein, 
that may subject the ATS to certain Federal securities laws, including 
the order display and execution access rule (Rule 301(b)(3)), Fair 
Access Rule, or Regulation SCI. Information regarding the procedures 
for how a Covered ATS would handle trading interest during a suspension 
of trading or system disruption or malfunction would help the 
Commission better monitor the securities markets.
---------------------------------------------------------------------------

    \629\ The Commission is proposing to revise Form ATS-N, Part 
III, Item 19 of revised Form ATS-N (numbered as Item 20 in current 
Form ATS-N) to reference trading in U.S. Treasury Securities and 
Agency Securities.
    \630\ See Regulation SCI Adopting Release, supra note 3, at 
72254-55 n.28.
    \631\ See id. at 72255 n.29.
---------------------------------------------------------------------------

Request for Comment
    134. Should Form ATS-N request information about any procedures for 
suspending or stopping trading that is particularly relevant to 
Government Securities ATSs (inclusive of Communication Protocol 
Systems, as proposed) or Communication Protocol Systems that trade NMS 
stock?
t. Item 20: Trade Reporting
    Part III, Item 20 of Form ATS-N would require a Covered ATS to 
provide information on any procedures and material arrangements for 
reporting

[[Page 15568]]

transactions in the ATS.\632\ For Government Securities ATSs, FINRA 
member firms are required to report transactions in U.S. Treasury 
Securities and Agency Securities to TRACE.\633\
---------------------------------------------------------------------------

    \632\ This question is substantially the same as Part III, Item 
21 of current Form ATS-N.
    \633\ See supra notes 228-229 and accompanying text.
---------------------------------------------------------------------------

    Part III, Item 20 would require a Covered ATS to disclose its trade 
reporting procedures for reporting transactions in the ATS to an SRO or 
any alternative trade reporting destinations, if applicable. For 
example, it would be responsive to Item 20 for a Covered ATS to 
disclose whether the ATS has a specific procedure for reporting 
transactions to the SRO at different times based on, for example, a 
subscriber's use of a particular order type, or the type of subscriber 
involved in the transaction. Covered ATSs would also be required to 
disclose ``material'' arrangements for reporting transactions in the 
ATS. The Commission recognizes that there could be arrangements 
relevant to trade reporting, such as the specific software used to 
report, that play a minor role in the ATS's trade reporting and need 
not be disclosed. On the other hand, if a Covered ATS uses another 
party to report transactions occurring in the ATS or has a backup 
facility that it uses for trade reporting, that information is likely 
to be responsive as a material arrangement. Requiring reporting only of 
material arrangements would limit potential burdens on Covered ATSs 
while providing market participants with sufficient information to 
understand how their trade information will be reported. Also, the 
proposed disclosure of the trade reporting procedures would allow the 
Commission to more easily review the compliance of the Covered ATS with 
its applicable trade reporting obligations as a registered broker-
dealer as proposed herein.
u. Item 21: Post-Trade Processing, Clearance, and Settlement
    Part III, Item 21 is designed to provide information on any 
procedures and material arrangements undertaken as a result of the 
contractual agreements between the broker-dealer operator for the 
Covered ATS \634\ and the ATS's participants to manage the post-trade 
processing, clearance, and/or settlement of transactions on the Covered 
ATS. The Commission is proposing revisions to Part III, Item 21 that 
would request information about post-trade processing, which covers the 
steps taken after execution to prepare a trade for clearance and/or 
settlement. These steps include, but are not limited to, routing trade 
information to relevant parties; enrichment of trade details with 
supplemental information (such as counterparty account information) 
required to effect settlement; performing allocations whereby a block 
trade is broken down into various client accounts; comparing the terms 
of a trade submitted by each counterparty (performing matching) to 
reconcile the terms so as to generate an affirmed confirm; performing 
sequential affirmation and confirmation processes; or sending 
notifications to interested parties, such as custodians. These types of 
activities can be performed both manually (with trading desk, middle 
office, or back office personnel completing the steps) or through 
automated activity processes (which seek to achieve the goal of 
straight-through processing whereby trade information passes through 
the necessary steps to effect settlement in an automated manner).
---------------------------------------------------------------------------

    \634\ The contractual obligations of the ATS are ultimately 
those of the broker-dealer operator. Because an ATS must register as 
a broker-dealer, the broker-dealer operator controls the ATS and is 
legally responsible for all operational aspects of the ATS and for 
ensuring that the ATS complies with applicable Federal securities 
laws and the rules and regulations thereunder. See NMS Stock ATS 
Adopting Release, supra note 2, at 38819.
---------------------------------------------------------------------------

    The proposed revisions to Part III, Item 21 provide some specific 
examples of the types of procedures and material arrangements that 
should be described by a Covered ATS under this Item, such as whether 
the broker-dealer operator, or an affiliate of the broker-dealer 
operator becomes a counterparty; submits trades to a registered 
clearing agency; requires subscribers to have arrangements with a 
clearing firm, or terminates trades. These examples are intended to be 
illustrative and not the only types of material arrangements that may 
exist. From Commission staff's experience reviewing Form ATS-N, the 
Commission understands that broker-dealer operators have different 
arrangements and contractual obligations that are important to 
understanding the clearance and settlement of transactions in the ATS.
    A Covered ATS would also be required to describe any user 
requirements for such procedures and material arrangements, including 
the type and extent of connectivity (e.g., FIX), and whether the 
connectivity is to an order management system (OMS), execution 
management system (EMS), end-of-month expirations (EOMS), 
clearinghouse/custodian, or other system.
    The integrity of the trading markets depends on the prompt and 
accurate post-trade processing, clearance, and/or settlement of 
securities transactions. For example, counterparties to a trade face 
counterparty credit risk, regardless of whether they choose to clear 
and settle bilaterally or through a central counterparty, and therefore 
knowledge of any specific arrangements that are required by an ATS as 
part of the clearing process promotes market integrity.\635\ The 
Covered ATS's procedures or material arrangements that address post-
trade processing, clearance, and/or settlement are critical to ensuring 
that a buyer receives securities and a seller receives proceeds in 
accordance with the agreed-upon terms of the trade by settlement date. 
The disclosures required by this Item are intended to cover each of the 
steps in the post-trade process from the time of execution (including 
whether the broker-dealer operator or an affiliate of the broker-dealer 
operator is a counterparty to a transaction and whether the obligations 
of a counterparty are ever assigned or novated), through trade matching 
or affirmation/confirmation, and then through clearing procedures 
(including whether the Covered ATS requires its participants to be a 
member of a registered clearing agency, whether participants have any 
particular clearing obligations, and whether transactions are--wholly 
or partially--submitted to a registered clearing agency or cleared 
bilaterally using clearing banks or clearing agents), until settlement 
of the transaction (including whether counterparties make use of 
custodians, settlement banks, or a registered clearing agency). If the 
Covered ATS has adopted post-trade processing, clearing, and/or 
settlement processes or imposes any obligations on its participants in 
the event of a disruption (for example, a failure to deliver 
securities, a liquidity shortfall, or a counterparty default), this 
proposed Item should include a discussion of these processes and any 
resulting participant obligations.
---------------------------------------------------------------------------

    \635\ See Treasury Market Practices Group (TMPG), White Paper on 
Clearing and Settlement in the Secondary Market for U.S. Treasury 
Securities (July 12, 2018), available at https://www.newyorkfed.org/medialibrary/Microsites/tmpg/files/CS-DraftPaper-071218.pdf. ``The 
TMPG found that many market participants do not understand the role 
of the [interdealer brokers] platform in terms of who their 
counterparty credit risk was to and the roles of various market 
participants in settlement and clearing.'' Id. at 27.
---------------------------------------------------------------------------

    The Item requires the disclosure of ``material'' arrangements to 
manage the post-trade processing, clearance, and/or settlement of 
transactions on the Covered ATS. For example, an arrangement under 
which another party would have a role in clearance or settlement may 
constitute a material

[[Page 15569]]

arrangement that could trigger the disclosure requirement under Part 
III, Item 21. Limiting the explanation required to material 
arrangements would reduce the burden on Covered ATSs while at the same 
time still allowing market participants to understand and more easily 
compare such arrangements required across Covered ATSs.
    Proposed Part III, Item 21 is also designed to help market 
participants understand the measures the Covered ATS takes to manage 
post-trade processing, clearance, and/or settlement of transactions. 
Market participants should know and be able to understand any 
requirements a Covered ATS places on its subscribers, or other persons 
whose trading interest is sent to the ATS, to receive certain post-
trade processing, clearance, and/or settlement services. The Commission 
believes market participants would likely find the disclosures required 
by this Item to be useful in understanding the measures undertaken by a 
Covered ATS to manage post-trade processing, clearance, and/or 
settlement of subscriber orders in the ATS and allow them to more 
easily compare these arrangements across Covered ATSs as part of 
deciding where to send their trading interest. The Commission believes 
that these disclosures would assist the Commission in better 
understanding the post-trade processing, clearance, and/or settlement 
procedures of Covered ATSs and risks and trends in the market as part 
of its overall review of market structure.
Request for Comment
    135. What aspects of the procedures and material arrangements 
undertaken to manage the post-trade processing, clearance, and/or 
settlement of transactions on Covered ATSs are important for ATSs to 
disclose on Form ATS-N for the benefit of market participants?
v. Item 22: Market Data
    Part III, Item 22 \636\ of Form ATS-N is designed to solicit 
information about the sources of market data used by the Covered ATS 
and how the ATS uses that market data from these sources to provide the 
services that it offers. As the Commission is proposing to apply Form 
ATS-N to Government Securities ATSs, the Commission is proposing to add 
to Part III, Item 22 to include ``feeds from trading venues'' in the 
examples of sources of market data, which may be applicable to 
Government Securities ATSs. Specifically, market participants would 
likely find it useful to know the source and specific purpose for which 
the market data is used by the Covered ATS, as the market data received 
by the ATS might affect the price at which trading interest is 
prioritized and executed, including trading interest that is pegged to 
an outside reference price. An NMS Stock ATS, for example, would be 
required to provide the names of national securities exchanges from 
which the ATS receives direct market data feeds, either from a vendor 
or directly from the exchange, in addition to the specific types of 
market data received from each source. In addition, a Covered ATS would 
be required to provide information about how the ATS uses market data 
to provide the services it offers. To avoid duplicative disclosure, 
market data reflecting options traded on government securities that is 
used by the ATS could be discussed in response to proposed Part III, 
Item 11. The Commission is proposing to include determining the best 
bid or offer (BBO) as an example of how the ATS uses market data, which 
could be applicable to Government Securities ATSs. Among other things, 
Part III, Item 22 requires the disclosure of the use of market data to 
display, price, prioritize, execute, and remove trading interest. As 
part of this explanation, the Covered ATS would be required to specify, 
if applicable, when the ATS may change sources of market data to 
provide its services. A Covered ATS would also be required to explain 
how market data is received by the ATS, compiled, and delivered to the 
matching engine. For example, among other possible arrangements, a 
Covered ATS could explain in response to the Item that market data is 
received and assembled by the broker-dealer operator, and subsequently 
delivered to the matching engine, or that market data is sent directly 
to the matching engine, which normalizes the data for its use.
---------------------------------------------------------------------------

    \636\ This Item is currently numbered as Part III, Item 23 of 
current Form ATS-N.
---------------------------------------------------------------------------

Request for Comment
    136. What are the sources of market data in NMS stocks, government 
securities, and repos that are available to market participants as well 
as to Covered ATSs and how do market participants and ATSs use this 
information? What disclosures about an ATS's use of market data would 
be important to market participants?
w. Item 23: Order Display and Execution Access
    Part III, Item 23 is designed to provide information about whether 
an NMS Stock ATS is required to comply with Rule 301(b)(3)(ii) of 
Regulation ATS.\637\ The Commission is not proposing to make changes to 
this Item, other than specifying that this Item would be applicable to 
NMS Stock ATSs, as the order display and execution access provisions 
under Rule 301(b)(3) only apply to an ATS's NMS stock activities.\638\
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    \637\ Part III, Item 23 of revised Form ATS-N (currently 
numbered as Part III, Item 24 of current Form ATS-N) would be 
required only for NMS Stock ATSs, as the associated rule is 
inapplicable to government securities. See also NMS Stock ATS 
Adopting Release, supra note 2, at Section V.D.24.
    \638\ 17 CFR 242.301(b)(3).
---------------------------------------------------------------------------

x. Item 24: Fair Access
    Part III, Item 24 of Form ATS-N would provide a mechanism under 
which a Covered ATS would notify market participants whether it has 
triggered the proposed fair access threshold and, if so, whether the 
ATS is subject to the Fair Access Rule. As described above, the 
Commission is proposing to require Government Securities ATSs to comply 
with the Fair Access Rule if they meet the applicable thresholds.\639\ 
As a result, Part III, Item 24 would be applicable to both NMS Stock 
ATSs and Government Securities ATSs that meet the applicable 
thresholds. Pursuant to proposed Rule 301(b)(5)(ii), a Covered ATS 
would aggregate the trading volume for a security or category of 
securities for ATSs that are operated by a common broker-dealer, or 
ATSs that are operated by affiliated broker-dealers for the purpose of 
calculating the volume thresholds.\640\ In connection with proposed 
Rule 301(b)(5)(ii), the Commission is proposing to require the Covered 
ATS to indicate in Part III, Item 24(a) through (c) if the ATS crossed 
the volume thresholds ``whether by itself or aggregated pursuant to 
Rule 301(b)(5)(ii).''
---------------------------------------------------------------------------

    \639\ See supra Section III.D.
    \640\ The Commission is proposing changes to the Fair Access 
Rule, which are discussed in detail below. See infra Section V.A.2.
---------------------------------------------------------------------------

    If a Covered ATS crosses the fair access thresholds, proposed Rule 
301(b)(5)(iii)(A) \641\ requires the ATS to establish and apply 
reasonable written standards for granting, limiting, and denying access 
to the services of the ATS.\642\ If subject to the Fair Access Rule, 
the Covered ATS would be required to describe the reasonable written 
standards for granting, limiting, and denying access to the services of 
the ATS pursuant to Rule 301(b)(5)(iii) of

[[Page 15570]]

Regulation ATS (as proposed to be applied herein).\643\ A description 
of the Covered ATS's reasonable written standards in response to Part 
III, Item 24 should be clear and comprehensive and should explain, 
among other things, the objective and quantitative criteria upon which 
the ATS's reasonable written standards are based, any differences in 
access to the services of the ATS by applicant and current 
participants, and why the standards including any differences in access 
to the services of the ATS) are fair and not unreasonably 
discriminatory. To the extent another person performs a function of the 
ATS, the ATS would be required to provide reasonable written standards 
for granting, limiting, or denying access to the services performed by 
such person. In addition, an NMS Stock ATS must provide the ticker 
symbol for each NMS stock for which the NMS Stock ATS has exceeded the 
fair access threshold during each of the last 6 calendar months.
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    \641\ See infra Sections V.A.3 through V.A.4.
    \642\ See 17 CFR 242.301(b)(5)(iii)(A). The Commission is 
proposing that any change in a Covered ATS's response to Item 24 
would be filed as a contingent amendment. See supra note 440 and 
accompanying text.
    \643\ The Commission is proposing revisions to Part III, Item 24 
(currently numbered as Part III, Item 25) to conform to the proposed 
rule text of the Fair Access Rule, including rule re-numbering, 
describing the required written standards as ``reasonable,'' and to 
reference standards limiting and denying access to the services of 
the ATS.
---------------------------------------------------------------------------

    The Commission believes that the proposed disclosures would 
facilitate its oversight of Covered ATSs and their compliance with Rule 
301(b)(5) as proposed herein. In addition, the proposed disclosures 
would allow market participants to assess whether fair access is, in 
fact, being applied by a Covered ATS that meets the fair access 
threshold, in part by making publicly available a description of the 
ATS's written standards for granting access.
Request for Comment
    137. Is there other information that market participants might find 
important or useful regarding the reasonable written standards for 
granting, denying, and limiting access to the services of a Covered ATS 
that is subject to the Fair Access Rule? If so, describe such 
information and explain whether, and if so, why, such information 
should be required to be provided on Form ATS-N.
y. Item 25: Aggregate Platform-Wide Data; Trading Statistics
    Part III, Item 25 of Form ATS-N \644\ is designed to make public 
aggregate, platform-wide statistics that a Covered ATS already 
otherwise collects and publishes, or provides to one or more 
subscribers to the ATS. The purpose of Item 25 is to place subscribers 
on a level playing field with regard to aggregate, platform-wide 
statistics about the Covered ATS that the ATS makes available.
---------------------------------------------------------------------------

    \644\ This Item is currently numbered as Part III, Item 26 of 
current Form ATS-N.
---------------------------------------------------------------------------

    As explained above, the Commission is proposing to amend Form ATS-N 
to solicit information about the use of non-firm trading interest in 
the ATS, which relates to the proposed changes to Exchange Act Rule 3b-
16.\645\ Consistent with those proposed revisions, the Commission also 
proposes to change the request for information on Part III, Item 25 to 
require statistics beyond solely platform-wide order flow and execution 
statistics. Specifically, the Commission proposes that Part III, Item 
25 require a Covered ATS to disclose all aggregate, platform-wide 
statistics that it publishes or provides to one or more subscribers. 
Such statistics would include the order flow and execution data that is 
currently solicited in Form ATS-N. In addition, the proposed disclosure 
request would require a Covered ATS to disclose statistics related to 
use of non-firm trading interest. On an RFQ system, such statistics 
might include the percentage or total number of timed-out inquiries 
(i.e., when a participant receives no prices or other responses after 
posting an inquiry). With the use of a conditional order protocol, such 
statistics could include market participants' firm-up rates (e.g., the 
ATS sends a firm-up request to participants after their conditional 
orders are matched).
---------------------------------------------------------------------------

    \645\ See supra Section II.C.
---------------------------------------------------------------------------

    While the Commission proposes to expand the scope of information 
that this Item would solicit, the proposed disclosure request does not 
require a Covered ATS to create, maintain, or publish any specific type 
of statistic. As is the case with the current requirement, this 
disclosure request only requires a Covered ATS to publicly disclose any 
statistics within the scope of the question that it already discloses 
to one or more subscribers. If a Covered ATS compiles a particular 
statistic without distributing it (i.e., only uses it internally), it 
would not be required to provide that statistic on Form ATS-N. Finally, 
as with current Part III, Item 26 (proposed to be renumbered to Item 
25), the proposed disclosure request does not require a Covered ATS to 
provide on Form ATS-N any data that is otherwise required by Rule 605 
of Regulation NMS.\646\ A Covered ATS may choose to create and publish 
or provide to one or more subscribers or persons aggregate, platform-
wide statistics for different reasons. To the extent that a Covered ATS 
has made a determination to create and publish or provide to 
subscribers certain aggregate platform-wide data, the Commission 
believes that others may also find such information useful when 
evaluating the ATS as a possible venue for their trading interest.
---------------------------------------------------------------------------

    \646\ See 17 CFR 242.605.
---------------------------------------------------------------------------

    As with the current disclosure request, the proposed disclosure 
request would not require a Covered ATS to amend its Form ATS-N every 
time it receives a subscriber data request. To comply with the proposed 
requirements under Part III, Item 25, Form ATS-N only requires a 
Covered ATS to update its disclosures for Part III, Item 25 on a 
quarterly basis.\647\ For instance, if a participant were to request 
updated or new aggregate platform-wide statistics in January, the 
Covered ATS would not be required to immediately file an updating 
amendment containing these statistics after complying with the 
participant's request. Rather, the ATS would need to file an updating 
amendment within 30 days following the end of March. That updating 
amendment must contain the most recently distributed version of these 
statistics, as well as the most recently distributed version of all 
other aggregate platform-wide data that was provided during that 
quarter. The Commission notes that communications associated with the 
responsive statistics are not required to be publicly filed. In the 
prior example, for instance, if the statistics provided in the 
quarterly amendment are the ones provided in January (i.e., those are 
the latest version of those aggregate platform-wide statistics the ATS 
distributed), the ATS would not (and should not) also attach to Form 
ATS-N the participant's email requesting the statistics.
---------------------------------------------------------------------------

    \647\ If, for example, a Covered ATS publishes or provides a 
particular statistic on a daily basis, the ATS would include in 
Exhibit 4 of Form ATS-N the statistic that was published or provided 
to one or more subscribers on the last trading day of the calendar 
quarter (e.g., the statistic published or provided on June 30th or 
last trading day prior to June 30th). If a Covered ATS publishes or 
provides a particular statistic weekly, the ATS would be required to 
include in Exhibit 4 of Form ATS-N the statistic that was published 
or provided to one or more subscribers at the end of the week prior 
to the end of the calendar quarter (e.g., the statistic published 
for the last full week of June).
---------------------------------------------------------------------------

    Furthermore, Part III, Item 25 of Form ATS-N would only require a 
Covered ATS to publicly disclose aggregate platform-wide data. As such, 
a Covered ATS would not be required to disclose individualized or 
custom reports containing data relating to that participant's specific 
usage of the ATS. For example, an individual participant's trade 
reports, order and execution quality statistics, and other statistics

[[Page 15571]]

specific to a participant's trading in the ATS would not be covered by 
the disclosure request in Part III, Item 25. A Covered ATS would need 
to independently evaluate any statistics that it compiles and 
distributes to determine whether they are responsive to this disclosure 
request.
    Part III, Item 25 would require the Covered ATS to attach both the 
responsive statistics and its explanation of the categories or metrics 
of the statistics and the criteria or methodology used to calculate 
those statistics as Exhibits 4 and 5, respectively. Also, in lieu of 
filing Exhibits 4 and 5, the Covered ATS could certify that the 
information requested under Exhibits 4 and 5 is available at the 
website provided in Part I, Item 6 of the form and is accurate as of 
the date of the filing. The Commission is proposing to add to the 
instruction that if the ATS selects the checkbox, the ATS will maintain 
its website in accordance with the rules for amending Form ATS-N 
pursuant to Rule 304(a)(2)(i) to reflect any changes to such 
information. This would require an ATS checking the box to update its 
website as if it were Form ATS-N, and therefore, to update the 
information, as appropriate pursuant to the Commission's rules for 
amending Form ATS-N.
Request for Comment
    138. Does Part III of Form ATS-N capture the information that is 
most relevant to understanding the operations of the Government 
Securities ATS and the use of non-firm trading interest on 
Communication Protocol Systems? Are there any Items that commenters 
believe are unnecessary? If so, why?
    139. Should the Commission expand what Covered ATSs must disclose 
on Form ATS-N? Is there other information that market participants 
might find relevant or useful regarding the operations of Covered ATSs 
that should be publicly disclosed? If so, describe such information and 
explain whether, and if so, why, such information should be required to 
be provided under Form ATS-N.
    140. Is there any information related to repos that Form ATS-N 
should require?
    141. Is there any information related to options on government 
securities that Form ATS-N should require?
    142. Is there any information that would be required by Part III of 
Form ATS-N that a Covered ATS should not be required to disclose due to 
concerns regarding confidentiality, business reasons, trade secrets, 
commercially sensitive information, burden, or any other concerns?
    143. Should the Commission adopt a more limited or expansive 
definition of ``affiliate'' for purposes of Part III? \648\
---------------------------------------------------------------------------

    \648\ See supra note 533 for the definition of affiliate under 
Form ATS-N.
---------------------------------------------------------------------------

    144. Would the disclosures under Part III of Form ATS-N help market 
participants better evaluate trading opportunities and decide where to 
send trading interest to reach their trading objectives?
    145. Would the proposed disclosures in Part III of Form ATS-N 
require a Government Securities ATS to reveal too much (or not enough) 
information about its structure and operations?
    146. Are there ways to obtain the same information as would be 
required from Government Securities ATSs by Part III of Form ATS-N 
other than through disclosure on Form ATS-N? If so, how else could this 
information be obtained?
    147. Could the proposed requirement to disclose the information 
that would be required by Part III of Form ATS-N impact innovation in 
Government Securities ATSs?
    148. Are there any aggregate platform-wide statistics of the 
Covered ATS that should not be required to be disclosed under Item 25?
    149. Has Form ATS-N allowed market participants to better evaluate 
trading venues? If so, how? How do commenters believe the manner in 
which NMS Stock ATSs currently disclose information on Form ATS-N could 
be improved? Is the level of detail required appropriate? Are there any 
aspects of Form ATS-N on which the Commission should provide further 
guidance?
6. Part IV: Contact Information, Signature Block, and Consent to 
Service
    Part IV of Form ATS-N would require a Covered ATS to provide 
certain basic information about the point of contact for the ATS, such 
as the point of contact's name, title, telephone number, and email 
address. Part IV would also require the Covered ATS to consent to 
service of any civil action brought by, or any notice of any proceeding 
before, the Commission or an SRO in connection with the ATS's 
activities. The Commission is proposing that Form ATS-N would be filed 
electronically and require an electronic signature.\649\ The signatory 
to each Form ATS-N filing would be required to represent that the 
information and statements contained on the submitted Form ATS-N, 
including exhibits, schedules, attached documents, and any other 
information filed, are current, true, and complete. Given that market 
participants would use information disclosed on Form ATS-N to evaluate 
potential venues, and that the Commission intends to use the 
information to monitor developments of Covered ATSs, it is important 
that Form ATS-N contain disclosures that are current, true, and 
complete, and therefore the Commission is proposing to require that the 
signatory to Form ATS-N make such an attestation.
---------------------------------------------------------------------------

    \649\ To avoid confusion, the Commission is proposing to delete 
language in the signature block in Part IV of Form ATS-N that refers 
to the signatory as ``duly sworn.'' The Commission notes that unlike 
Form ATS, Form ATS-N filings, which are submitted to EDGAR, are not 
required to be notarized; instead, they are subject to the rules 
governing electronic signatures set forth in Rule 302 of Regulation 
S-T. See 17 CFR 232.302.
---------------------------------------------------------------------------

V. Proposed Amendments to Form ATS, Form ATS-R, and Other Conditions to 
Regulation ATS

A. Proposed Amendments to the Fair Access Rule for all ATSs

    In addition to the amendments to the Fair Access Rule for 
Government Securities ATSs,\650\ the Commission is proposing several 
amendments to the Fair Access Rule that would apply to all ATSs that 
are subject to the rule. The proposed amendments are discussed below.
---------------------------------------------------------------------------

    \650\ See supra Section III.B.4.
---------------------------------------------------------------------------

1. Rule Text Clarifications
    The Commission is re-proposing to amend the Fair Access Rule, as 
well as the Capacity, Integrity, and Security Rule under Rule 
301(b)(6), to specify the use of volume to calculate the relevant 
thresholds under the rule. For purposes of determining whether an ATS 
crossed the average daily volume thresholds for compliance with the 
Fair Access Rule, Rule 301(b)(5)(i) does not specify whether the ATS's 
transaction volume in an NMS stock or an equity security that is not an 
NMS stock and for which transactions are reported to an SRO is 
calculated using the dollar or the share volume.\651\ In the Regulation 
ATS Adopting Release, when discussing the Fair Access Rule, the 
Commission stated that for these two types of securities, the test 
should be based on the share volume.\652\ Similarly, Rules 301(b)(5)(i) 
and (b)(6)(i) do not specify whether, for purposes of determining 
compliance with the Fair Access Rule and the

[[Page 15572]]

Capacity, Integrity, and Security Rule, the volume for municipal 
securities or corporate debt securities is calculated based on the 
dollar or the share volume.\653\ In the Regulation ATS Adopting 
Release, the Commission intended the test applicable to debt securities 
to be based on the dollar volume.\654\ To mitigate any potential 
confusion, the Commission is adding these terms to Rules 301(b)(5)(i) 
and (b)(6)(i) to align the rule text with the Regulation ATS Adopting 
Release.\655\
---------------------------------------------------------------------------

    \651\ 17 CFR 242.301(b)(5)(i)(A)-(B).
    \652\ See Regulation ATS Adopting Release, supra note 31, at 
70873 (``Accordingly, if an [ATS] accounted for twenty percent or 
more of the share volume in any equity security, it must comply with 
the fair access requirements in granting access to trading in that 
security.'') (emphasis added).
    \653\ 17 CFR 242.301(b)(5)(i)(C)-(D); 17 CFR 
242.301(b)(6)(i)(A)-(B).
    \654\ See Regulation ATS Adopting Release, supra note 31, at 
70873, 70875 (requiring compliance with the Fair Access Rule and the 
Capacity, Integrity, and Security Rule if an ATS accounted for more 
than 20 percent of the total ``share volume'' in a security with 
respect to equity securities, and for more than 20 percent of the 
``volume'' in a security with respect to debt securities). While 
Form ATS-R requires an ATS to report total volume in terms of both 
units and dollars for equity securities, it requires an ATS to 
report the total settlement value only in dollar terms for municipal 
securities and corporate debt securities. See id. at 70878.
    \655\ See proposed Rule 301(b)(5)(i)(A)-(D); proposed Rule 
301(b)(6)(i)(A)-(B).
---------------------------------------------------------------------------

    The Commission is also re-proposing to amend Rules 301(b)(5)(i)(C) 
and (D) to clarify that the average daily dollar volume in municipal 
securities is provided by the SRO to which such transactions are 
reported and average daily dollar volume in corporate debt securities 
is provided by the SRO to which such transactions are reported.\656\ 
When Regulation ATS was adopted, transaction reporting plans for 
municipal securities and corporate debt securities were being 
developed.\657\ Today, transactions in municipal securities are 
reported to the MSRB and transactions in corporate debt securities are 
reported to FINRA. These two SROs provide the information that can be 
used by ATSs to determine whether the ATS is subject to the Fair Access 
Rule for these two categories of securities.\658\ This amendment will 
add clarity to the rule given the established transaction reporting 
regimes for municipal securities and corporate debt securities.
---------------------------------------------------------------------------

    \656\ To the extent transactions are reported to multiple SROs, 
the volume of transactions reported to such SROs would be combined 
for the purpose of calculating whether the transactions meet the 
threshold.
    \657\ See Regulation ATS Adopting Release, supra note 31, at 
70873.
    \658\ See MSRB Rule G-14; FINRA Rule 6730. Electronic Municipal 
Market Access (``EMMA''), which is a service operated by the MSRB, 
and FINRA disseminate information on transactions in municipal 
securities and corporate debt securities, respectively. See EMMA 
Information Facility, available at http://www.msrb.org/Rules-and-Interpretations/MSRB-Rules/Facilities/EMMA-Facility.aspx; FINRA Rule 
6750.
---------------------------------------------------------------------------

2. Aggregation of Volume Threshold for Affiliated ATSs
    The Commission is also proposing to amend the Rule 301(b)(5)(ii) of 
the Fair Access Rule to aggregate the trading volume for a security or 
category of securities for ATSs that are operated by a common broker-
dealer, or ATSs that are operated by affiliated broker-dealers, solely 
for the purpose of calculating the average transaction volume under 
Rule 301(b)(5)(i)(A) through (F).\659\ Today, there are single entities 
that may be the registered broker-dealer operator for different types 
of ATSs that trade different categories of securities (e.g., NMS Stock 
ATS and non-NMS Stock ATS), and there are broker-dealers that may 
operate multiple ATSs that trade the same type of securities with 
different matching protocols (e.g., limit order book for one and 
volume-weighted-average-price for the other). Likewise, there are 
entities that control multiple subsidiary broker-dealers, each of which 
operates one or more ATS or Communication Protocol System that trade 
the same or different categories of securities.\660\ In these 
instances, each ATS with a common broker-dealer operator--and each of 
the affiliated Communication Protocol Systems that would be subject to 
Regulation ATS under this proposal--must comply with Regulation 
ATS.\661\
---------------------------------------------------------------------------

    \659\ For Rule 301(b)(5)(ii), the Commission would refer to the 
definition of affiliate used for purposes of Form ATS-N. See NMS 
Stock ATS Adopting Release, supra note 2, at 38818-19. Affiliate was 
defined to mean ``with respect to a specified Person, any Person 
that, directly or indirectly, controls, is under common control 
with, or is controlled by, the specified Person.'' Id. The 
Commission is proposing to include the definition of affiliate in 
proposed Rule 300(c). The currently defined term ``affiliate of a 
subscriber'' in Rule 300(c) is not currently used in Regulation ATS, 
and the Commission is therefore replacing such term with the 
definition of ``affiliate.'' The proposed amended definition of 
``affiliate'' would help ATSs determine whether to aggregate the 
trading volume of ATSs operated by affiliated broker-dealer 
operators. The proposed definition of ``affiliate'' is identical to 
the definition of affiliate in Form ATS-N Explanation of Terms. Like 
the definition of ``affiliate of a subscriber'' under current Rule 
300(c), the proposed definition of ``affiliate'' would include a 
specified person that, directly or indirectly, controls, is under 
common control with, or is controlled by, the specified person, and 
therefore would include employees of the specified person.
    \660\ The term ``control'' is defined in Rule 300(f) of 
Regulation ATS to mean: The power, directly or indirectly, to direct 
the management or policies of the broker-dealer of an alternative 
trading system, whether through ownership of securities, by 
contract, or otherwise. A person is presumed to control the broker-
dealer of an alternative trading system if that person: Is a 
director, general partner, or officer exercising executive 
responsibility (or having similar status or performing similar 
functions); directly or indirectly has the right to vote 25 percent 
or more of a class of voting securities or has the power to sell or 
direct the sale of 25 percent or more of a class of voting 
securities of the broker-dealer of the alternative trading system; 
or in the case of a partnership, has contributed, or has the right 
to receive upon dissolution, 25 percent or more of the capital of 
the broker-dealer of the alternative trading system. 17 CFR 
242.300(f). See also NMS Stock ATS Adopting Release, supra note 2, 
at 38818-19 (discussing definition of control).
    \661\ See Rule 3a1-1(a)(2) (providing that an organization, 
association, or group of persons shall be exempt from the definition 
of ``exchange'' if it is in compliance with Regulation ATS) and Rule 
301(a) (providing that an ATS shall comply with the requirements of 
Rule 301(b)).
---------------------------------------------------------------------------

    In response to the 2020 Proposal, one commenter stated that because 
each ATS is unique, it believed that for purposes of determining 
whether an ATS should be subject to the Fair Access Rule, volume should 
be determined at an individual ATS level and not aggregated across 
commonly controlled ATSs.\662\ The commenter stated that a broker-
dealer may choose to operate separate ATSs based on separate business 
units within the broker-dealer, different technology backbones, or 
different types of functionality, such as anonymous or fully disclosed 
order books or auction-based offerings.\663\
---------------------------------------------------------------------------

    \662\ See ICE Bonds Letter I at 6.
    \663\ See id.
---------------------------------------------------------------------------

    The Commission is concerned, however, that despite differences that 
may exist between ATSs that are operated by a common broker-dealer or 
ATSs operated by affiliated broker-dealers, there is a potential for a 
broker-dealer operator or controlling entity for more than one broker-
dealer to structure its business to avoid triggering the fair access 
thresholds, and thereby circumvent the Fair Access Rule. It could do 
this by establishing multiple ATSs under one broker-dealer, or 
establishing multiple broker-dealers that each operate an ATS, to trade 
the same security or category of securities. The Fair Access Rule is 
designed to ensure that market participants have reasonable access to 
ATS market places that capture a significant percentage of national 
trading volume for a security or type of security. When a single entity 
operates multiple market places, that entity ultimately controls which 
market participants have access to trading across those market places.
    When an organization, such as a broker-dealer, for example, 
provides an exchange market place for the same security or category of 
security but chooses to divide the market place into component parts by 
filing multiple Forms ATS or Forms ATS-N rather than filing a single 
form encompassing all the component market places, that organization is 
still the exchange providing a market place to bring together buyers 
and sellers of securities

[[Page 15573]]

and ultimately controls access to the entire security or category of 
securities that it makes available for trading across its multiple 
ATSs. In the Commission's experience, ATSs under common operation of a 
broker-dealer generally are designed to function as complementary 
products of a single business of the broker-dealer as opposed to 
separate market places competing against each other for order flow in 
the same security or types of securities. In the Commission's 
experience, it is typical for a broker-dealer that operates multiple 
ATSs for the same security or category of securities to use, for 
example, the same operations, technology, and administrative personnel 
for purposes of its ATSs' trading operations. Furthermore, a single 
entity controlling multiple ATSs often applies similar standards for 
granting access across all of its ATSs that trade the same security or 
category of security and applies the same market data, clearance, 
settlement, and trade reporting processes, and procedures for 
protecting subscriber confidential trading information. Even in the 
case of a single parent company, for example, which controls several 
affiliated broker-dealers that each operate an ATS for the same 
category of security, access to each ATS is obtained from the broker-
dealer operator, and each broker-dealer operator is subject to the 
direction of the parent company. Ultimately, those ATSs serve the 
business interests of, and are under common control by, the parent 
company.
    Aggregating trading volume among ATS market places and 
Communication Protocol Systems that would be subject to Regulation ATS 
under this proposal--either operated by a common broker-dealer or by 
affiliated broker-dealers--would help further the vital policy goal of 
ensuring that no single entity is able to restrict fair access to a 
security or type of security. As a result of this proposed change, if, 
for example, a broker-dealer operated two NMS Stock ATSs that each 
accounted for three percent of the average daily volume in an NMS stock 
during at least four of the preceding six calendar months, both NMS 
Stock ATSs would be subject to the Fair Access Rule for that security 
because their aggregated volume exceeds the five percent threshold of 
Rule 301(b)(5)(i)(A).\664\ If, instead, one of the ATSs had six percent 
of the average daily volume for an NMS stock and the other ATS had one 
percent, both NMS Stock ATSs would be subject to the Fair Access Rule 
as a result of their common broker-dealer operator and aggregated 
volume. In another example, if two broker-dealers that are subsidiaries 
of the same parent company each operate an ATS for corporate bonds and 
each ATS accounts for three percent of the average daily volume of 
corporate bonds traded in the United States during at least four of the 
preceding six calendar months, then both ATSs would be subject to the 
Fair Access Rule. This result would be because the ATSs are operated by 
affiliated broker-dealers and their aggregate volume exceeds the volume 
threshold of Rule 301(b)(5)(i)(C).
---------------------------------------------------------------------------

    \664\ Also, if one of the ATSs operated by the common broker-
dealer operator accounted for five percent of the average daily 
volume in an NMS stock for three months and the other ATS accounted 
for five percent of the average daily volume in the same NMS stock 
for the subsequent three months, then both ATSs would be subject to 
the Fair Access Rule for that NMS stock because aggregated they 
would have crossed the volume threshold for more than four of the 
preceding six calendar months.
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3. Reasonable Written Standards
    The Commission is proposing to amend the requirements related to 
reasonable written standards.\665\ The Commission is proposing Rule 
301(b)(5)(iii)(A) to provide that the ATS ``establish and apply 
reasonable written standards for granting, limiting, and denying access 
to the services of the alternative trading system.'' As discussed in 
more detail below, the Commission is proposing to add the word 
``reasonable'' before ``written standards'' to incorporate the concept 
that is part of current Rule 301(b)(5)(ii)(B) (``not unreasonably 
prohibit or limit'') and used in the Regulation ATS Adopting 
Release.\666\ The Commission is also adding in the rule text, for the 
removal of any doubt, that the ATS must ``apply'' the reasonable 
written standards as established. For example, if an ATS establishes a 
written standard that states subscribers' trading interest will not be 
displayed to anyone, but the ATS in practice displays trading interest 
to a subscriber, then the ATS would not be applying its established 
written standards. Establishing the written standard is not sufficient 
if the ATS is not following or applying them.
---------------------------------------------------------------------------

    \665\ These requirements are currently in Rule 301(b)(5)(ii), 
which the Commission is proposing to re-number as Rule 
301(b)(5)(iii).
    \666\ See Regulation ATS Adopting Release, supra note 31, at 
70872. The Commission believes that the addition of ``reasonable'' 
is consistent with its intent as expressed in the Regulation ATS 
Adopting Release. Specifically, in discussing the Fair Access Rule, 
the Commission stated that ``fair treatment . . . is particularly 
important'' when ATSs reach significant volume in a security, and 
the rule would serve to prohibit ``unreasonably'' discriminatory 
denials of access.
---------------------------------------------------------------------------

    Also incorporated into proposed Rule 301(b)(5)(iii)(A), and taken 
from current Rule 301(b)(5)(ii)(B), is that the written standards apply 
to access of ``the services of the alternative trading system.'' This 
addition to the rule text serves to emphasize that the Fair Access Rule 
applies not only to the initial grant or denial of access to an 
applicant of the ATS, but also to the services of the ATS that are 
offered to current participants. ATS services, including, among others, 
the provision of market data, order entry functionalities, priority 
rules, segmentation procedures, negotiation features, communication 
protocols, counterparty selection, and order types offered, would all 
be subject to the provisions of the Fair Access Rule. The Commission is 
also incorporating from current Rule 301(b)(5)(ii)(B) that the Fair 
Access Rule applies when limiting and denying access to the ATS 
services, not solely granting access.\667\ The application of the Fair 
Access Rule to limitations and denials of access would help ensure that 
market participants receive the full benefits of participation in an 
ATS subject to the Fair Access Rule unless a limitation or denial of 
access can be reasonably justified.
---------------------------------------------------------------------------

    \667\ Rule 301(b)(5)(ii)(B) states that the ATS shall not 
``unreasonably prohibit or limit'' (emphasis added) any person with 
respect to the services of the ATS.
---------------------------------------------------------------------------

    As indicated above, the Commission is making explicit in the text 
of Rule 301(b)(5) that the written standards required under the Fair 
Access Rule must be reasonable. An ATS subject to the Fair Access Rule 
is not required to treat all participants the same in all instances; 
however, the Fair Access Rule has always required that an ATS subject 
to the rule provide reasonable access to ATS services.\668\ The 
Commission is revising the rule text to make it clear that the written 
standards must be reasonable. For an ATS's written standards to be 
reasonable, the standards must be fair and not unreasonably 
discriminatory. Some ATSs, for example, might offer different services, 
or levels of a service, to one subscriber or among different classes of 
subscribers. An ATS subject to the Fair Access Rule could not provide 
services to one class of participants and not to other classes of 
participants unless the ATS established standards with a reasonable 
basis for treating the participant classes differently. For example, as 
stated in the Regulation ATS Adopting Release, an ATS may establish a 
standard that requires all participants be registered broker-dealers 
and that ATS may deny access to the ATS to any applicant that is not a

[[Page 15574]]

registered broker-dealer.\669\ As part of its reasonable analysis, an 
ATS subject to the Fair Access Rule must explain why the standard for 
admitting registered broker-dealers rather than non-registered broker-
dealers is fair and not unreasonably discriminatory.\670\ Fees can be a 
manner of limiting or denying services. In another example, an ATS that 
charges certain fees to one class of participants but different fees to 
another class of participants for the same service could not, if it 
were subject to the Fair Access Rule, discriminate in this manner 
unless it adopted reasonable written standards and applied them in a 
fair and non-discriminatory manner. Also, to apply the standards fairly 
and non-discriminatorily, the ATS's activities (or the activities of 
persons performing a function of the ATS) must be carried out in 
accordance with the established written standards of the ATS.
---------------------------------------------------------------------------

    \668\ See supra notes 666-667.
    \669\ See Regulation ATS Adopting Release, supra note 31, at 
70874.
    \670\ See proposed Rule 301(b)(5)(iii)(A)(4).
---------------------------------------------------------------------------

    When assessing the reasonableness of standards under the Fair 
Access Rule, the Commission may consider principles applied in the 
national securities exchange context to guide its analysis of whether 
an ATS's written standards are fair and not unreasonably 
discriminatory. Under Section 6(b)(5) of the Exchange Act, for example, 
a national securities exchange must show that its rules are not 
designed to permit unfair discrimination between customers, issuers, 
brokers or dealers.\671\ Sections 6(b)(2) and 6(c) of the Exchange Act 
require national securities exchanges to consider the public interest 
in administering their markets and to establish rules designed to admit 
members fairly.\672\ National securities exchanges and ATSs are 
regulated pursuant to separate statutory and rule provisions of the 
Federal securities laws and there are different benefits and burdens 
associated with each entity; however, as the Commission stated in the 
Regulation ATS Adopting Release, fair access requirements are based on 
the principle that qualified market participants should have fair 
access to the U.S. securities markets, and such markets would include 
ATSs subject to the Fair Access Rule.\673\
---------------------------------------------------------------------------

    \671\ 15 U.S.C. 78f(b)(5).
    \672\ 15 U.S.C. 78f(b)(2) and (c).
    \673\ See Regulation ATS Adopting Release, supra note 31, at 
70874.
---------------------------------------------------------------------------

    The justification provided for why each written standard is fair 
and not unreasonably discriminatory is an important aspect of an ATS's 
compliance with the Fair Access Rule as proposed to be amended. The 
same limitation or restriction on different ATSs may be unfair on one 
ATS and not another depending on the design of the ATS and its 
rationale for such a limitation. One commenter suggested that fair 
access is not applicable to fixed income platforms where each 
participant has discretion over which other participants they want to 
trade with.\674\ Under these circumstances where ATS participants can 
select their potential counterparties, the Commission would view an ATS 
that implements the participant's choices as having adopted those as 
ATS standards. As a result, the ATS subject to the Fair Access Rule 
would need to establish reasonable written standards that, among other 
things, justify why the differences in access between the selected and 
not-selected counterparties are fair and non-discriminatory and thus 
reasonable. For example, if subscribers selected their counterparties 
based on the condition of the counterparty's balance sheet (e.g., 
totals for assets and liabilities), and the ATS implemented those 
selections, then the ATS would need to include a justification in its 
written standards for why implementing those selections is fair and not 
unreasonably discriminatory.\675\ In cases where the Commission staff 
reviews an ATS's fair access standards, whether in the description 
provided under Item 24 of revised Form ATS-N for NMS Stock ATSs and 
Government Securities ATSs (as proposed) or during an examination, the 
Commission staff would review whether a given justification for the 
standard is, for example, unreasonably discriminatory, or is pretextual 
and, in fact, designed to thwart the goal of providing fair access to 
qualified market participants.\676\
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    \674\ See MarketAxess Letter at 10.
    \675\ In practice, the ATS participant making a selection of its 
potential counterparties would need to provide the ATS with its 
justification for selecting those counterparties, and the ATS would 
need to evaluate whether the stated justification comports with the 
Fair Access Rule, and if so, incorporate it into the ATS's 
established written standards.
    \676\ Rule 301(b)(5)(ii)(D) requires ATSs to report to the 
Commission information on Form ATS-R regarding grants, limitations, 
and denial of access to an ATS subject to the Fair Access Rule. 
Specifically, Form ATS-R, Exhibit C requires the ATS to list of all 
persons granted, denied, or limited access to the ATS during the 
period covered by the report, designating for each person whether 
they were granted, denied, or limited access; the date the ATS took 
such action; the effective date of such action; and the nature of 
any denial on limitation of access. The Commission stated in the 
Regulation ATS Adopting Release that the Commission intended to 
enforce the Fair Access Rule by reviewing Form ATS-R reports and 
investigating any possible violations of the rules. See Regulation 
ATS Adopting Release, supra note 31, at 70874.
---------------------------------------------------------------------------

    Even if an ATS's written standard is equally applicable to all 
participants, the ATS must nevertheless ensure the standard itself is 
not unfair or unreasonably discriminatory or applied in an unfair or 
unreasonably discriminatory manner. If an ATS included in its written 
standards that it reserves the right to accept or deny applicants to 
the ATS at its sole discretion, such standard may apply equally to all 
applicants, but it would not be reasonable as it would contradict the 
rule's goal of promoting fair access to the securities markets. In 
another example, if an ATS adopts a written standard that it would only 
accept participants with ``industry-leading reputations,'' such written 
standard, depending on the justification, is unlikely to be considered 
reasonable because of its subjectivity and potential substantial 
limiting effect on market participants' access to the ATS. As stated in 
the Regulation ATS Adopting Release, if an ATS applied its standards so 
as to discriminate among similarly-situated participants, such actions 
would be inconsistent with reasonable written standards because the ATS 
would not be acting impartially. One example of this would be an ATS 
that provides liquidity providers that met certain volume thresholds 
with trading privileges, yet does not provide those privileges equally 
to every qualifying liquidity provider. Another example would be a 
Communication Protocol System that establishes a standard to track all 
participants' ``firm up'' rates in response to requests for quotes but 
subsequently denies or limits access to only certain subscribers that 
exceed the firm-up threshold and not to other participants who likewise 
exceeded the firm-up threshold.
    The Commission is also proposing Rule 301(b)(5)(iii)(A)(1) through 
(5) to provide minimum requirements for the reasonable written 
standards that must be established, and applied, by an ATS that is 
subject to the Fair Access Rule. These minimum requirements for what 
the written standards must include do not alter the substantive 
requirement that the written standards be reasonable. Rather, they 
explain in more granular detail what is required to be sufficient 
written standards to facilitate compliance. First, the Commission is 
proposing Rule 301(b)(5)(iii)(A)(1) to require that an ATS's reasonable 
written standards provide the dates that each written standard is 
adopted, effective, and, if applicable, modified. This proposed 
requirement is designed to assist Commission examination staff in their 
evaluation of the application of an ATS's written standards as well as 
help the staff understand the written fair

[[Page 15575]]

access standards that were in place at a given time.
    Second, the Commission is proposing Rule 301(b)(5)(iii)(A)(2) to 
require an ATS's reasonable written standards set forth any objective 
and quantitative criteria upon which each standard is based.\677\ 
Objective or quantitative standards can help demonstrate an ATS's 
compliance with the Fair Access Rule by limiting an ATS's discretion 
and its ability to act arbitrarily with respect to an applicant to the 
ATS or current participant. Nevertheless, an ATS's objective or 
quantitative standards must still be fair and not unreasonably 
discriminatory. An ATS could not, for example, establish, without 
reasonable justification, a quantitative standard at such a high level 
that it unfairly results in only a limited group of ATS participants 
that can meet it. If an ATS, for example, sets its required firm up 
rate on conditional orders at 95 percent, compliance with the Fair 
Access Rule would depend on whether that standard was fair and whether 
it unreasonably discriminated against those subscribers that did not 
attain a 95 percent firm up rate.\678\
---------------------------------------------------------------------------

    \677\ See Regulation ATS Adopting Release, supra note 31, at 
70874 (providing minimum capital or credit requirements for 
subscribers as an example of objective standards).
    \678\ In assessing whether such a standard is reasonable, the 
Commission could consider, among other things, the quantitative 
criteria upon which the standard is based, the justification by the 
ATS for why the standard is fair and not unreasonably 
discriminatory, the differences in, and impact on, access to 
services from the application of the standard, and other information 
provided through discussions with the ATS.
---------------------------------------------------------------------------

    In the case of an ATS that segments the order flow of its 
participants into certain categories based on quantitative metrics, 
such as reversion rates,\679\ the ATS's standards generally should 
include, among other things, the metrics and factors used to determine 
the segmented categories and, as explained further below, how the 
metrics and factors are fair and not unreasonably discriminatory, and 
thus are reasonable. The presence of the objective and quantitative 
thresholds limits the ATS's discretion in differentiating among 
participants (in this example, by setting segmented categories for 
order interaction and thus denying certain participants the ability to 
interact with other participants on the ATS). The quantitative 
threshold still must be reasonable; an objective or quantitative 
standard would not by itself be sufficient to comply with fair access. 
In cases where an ATS has a written standard for access that is not 
based on objective or quantitative criteria, the ATS must still justify 
why the standard is reasonable, and more specifically, how such 
standard is fair and not unreasonably discriminatory.
---------------------------------------------------------------------------

    \679\ In the Commission's experience, a common method for ATSs 
to segment order flow is to measure a security's change in price 
within a certain (usually short) time period after an execution and, 
based on that figure or reversion rate, assign a score to one or 
both of the parties to the transaction. If a security's price moves 
substantially after an execution, then that subscriber's (or 
subscribers') score may cause it to be segmented into a class of 
subscribers that is considered riskier to trade against and other 
subscribers may select to not trade against that subscriber. 
Subscribers are assigned scores based on their reversion rates and 
segmented into classes or categories accordingly.
---------------------------------------------------------------------------

    Third, the Commission is proposing Rule 301(b)(5)(iii)(A)(3) to 
require that an ATS's reasonable written standards identify any 
differences in access to the services of the ATS by applicants and 
current participants. The purpose of this provision is to highlight 
each instance where an ATS treats participants differently under the 
established written standards. Under the Fair Access Rule, ATSs may 
provide different services to different subscribers, or may vary how 
services are offered among ATS participants; however, the ATS must have 
a reasonable basis for doing so. An ATS might, for example, segment 
participant order flow into specific categories (i.e., based upon the 
type of market participant generating the order flow) to determine 
order interaction. As a result, some subscribers can only interact with 
certain subscribers and not others. In such a case, the ATS would be 
required to, among other things, identify the segmentation categories 
and criteria used to set the categories. If, for example, an ATS grants 
certain trading privileges, such as being able to view certain trading 
interest, to a person classified as a liquidity provider, the ATS would 
be required to describe any such differences in treatment for the 
liquidity provider. The identification of differences in treatment 
required would also include those applicable to applicants to the ATS. 
For example, if an ATS had different minimum capital and credit 
requirements for applicants to the ATS, the ATS would need to identify 
the differences in its written standards. As described above, 
differences in access must be reasonable and the ATS would be required 
to justify how such differences in access are fair and not unreasonably 
discriminatory pursuant to proposed Rule 301(b)(5)(iii)(A)(4).
    Fourth, the Commission is proposing Rule 301(b)(5)(iii)(A)(4) to 
require that an ATS's reasonable written standards justify why each 
standard, including any differences in access to the services of the 
ATS, is fair and not unreasonably discriminatory. While the Fair Access 
Rule does not require that the ATS treat all market participants 
equally, the Fair Access Rule requires an ATS to have a reasonable 
basis for not treating market participants equally. Accordingly, an ATS 
would be required to justify in writing why its standards are fair and 
not unreasonably discriminatory.\680\ Requiring an ATS to justify its 
fair access standards in writing would facilitate Commission staff 
review of those standards, whether by reviewing the standards in the 
description provided under Item 24 of revised Form ATS-N for NMS Stock 
ATSs and Government Securities ATSs (as proposed) or during an 
examination of an ATS. Above, the Commission sets forth an example of 
an ATS establishing different minimum capital and credit requirements 
for applicants to the ATS. In addition to identifying that difference 
in its written standards, the ATS would also be required to justify why 
the difference is fair and not unreasonably discriminatory. The ATS 
could, for instance, explain: (1) Objective or quantitative criteria 
used to determine which minimum applies to which applicants and why the 
ATS chose the objective and qualitative criteria that it did, which 
would also meet the requirements of paragraph (b)(5)(iii)(A)(2) 
outlined above; and (2) why those objective or quantitative criteria 
are fair and not unreasonably discriminatory as applied to the ATS. If 
there are no objective criteria, the ATS must explain why it is fair 
and not unreasonably discriminatory to have and apply the capital and 
credit requirements among applicants to the ATS.
---------------------------------------------------------------------------

    \680\ As the Commission is proposing to relocate these 
requirements under the requirements for an ATS's written standards 
under Rule 301(b)(5)(iii)(A), the Commission is proposing to delete 
the rule text under current Rule 301(b)(5)(ii)(B) and renumber 
current paragraphs (b)(5)(ii)(B) and (C) to paragraphs (b)(5)(ii)(C) 
and (D), respectively.
---------------------------------------------------------------------------

    Finally, the Commission is proposing Rule 301(b)(5)(iii)(A)(5) to 
require an ATS's reasonable written standards address any standard for 
granting, limiting, or denying access to the services of the ATS 
performed by persons other than the broker-dealer operator. From the 
Commission's experience, persons other than the broker-dealer operator 
may perform all or some functions of the ATS. In other cases, the 
broker-dealer operator, or affiliate of the broker-dealer operator, may 
direct the ATS participants to use the services of a person other than 
the broker-dealer operator. In both such cases, the activities of those 
persons can affect participants' access to the ATS,

[[Page 15576]]

and therefore, the ATS must ensure, through its written fair access 
standards, that those persons have established reasonable written 
standards for granting, denying, and limiting access to the ATS and are 
applying those standards in a fair and non-discriminatory manner.
    For example, an ATS that arranges for an entity to provide order 
entry services to the ATS would be required to ensure that the order 
entry provider has reasonable standards for ATS participants to access 
the order entry services, and thus the ATS. The ATS would be required 
to address in its reasonable written standards how the provider ensures 
that its standards are reasonable because the activities of the 
provider can impact the ability of participants to access the ATS. In 
addition, if the ATS broker-dealer operator, or affiliate of the 
broker-dealer operator, directs participants to use the services of 
another entity in connection with the ATS, that ATS would be 
responsible to ensure that such entity establishes reasonable standards 
for access. For example, if the broker-dealer operator, or affiliate of 
the broker-dealer operator, directs participants to use the services of 
a certain clearing broker, the ATS would be required to ensure that the 
clearing broker has reasonable written standards and to include in the 
ATS's written standards the clearing broker's written standards for 
granting, denying, or limiting access to its clearing services as they 
relate to the ATS. The Commission is concerned that an ATS may attempt 
to use an affiliate or third party to perform ATS activities or 
functions while avoiding the application of Regulation ATS to those 
activities or functions.\681\ Requiring an ATS subject to the Fair 
Access Rule to address in its written standards the activities or 
functions performed by persons in conjunction with the ATS other than 
the broker-dealer operator would help ensure fair access to the ATS by 
investors.
---------------------------------------------------------------------------

    \681\ See Regulation ATS Adopting Release, supra note 31, at 
70873, n.252.
---------------------------------------------------------------------------

4. Recordkeeping Requirements
    The Commission is also proposing changes to the ATS recordkeeping 
requirements under Rule 301(b)(5)(iii)(B), as proposed to be 
amended.\682\ The Commission is proposing to replace the reference to 
records relating to grants of access to ``subscribers'' with references 
to ``participants.'' In the Commission's experience, ATSs can grant 
access to customers of subscribers who may not themselves be 
subscribers to the ATS. This proposed change would clarify that records 
related to such participants would need to be made and kept under the 
rule. In addition, the Commission is proposing to add to the rule text 
that the ATS must make and keep records related to denials or 
limitations of access and reasons for each applicant ``and 
participant.'' By adding ``participant,'' the Commission will reflect 
that it requires an ATS subject to the rules to keep records of when it 
limits access to existing participants (not only ``applicants'') to the 
ATS system. This is a technical change, as the current rule requires 
the ATS to make and keep all records related to limitations of access 
and reasons for such limitations, which would apply to both existing 
participants, as well as applicants upon entry to the ATS.
---------------------------------------------------------------------------

    \682\ This is currently in paragraph (b)(5)(iii)(C), but would 
be renumbered to paragraph (b)(5)(iii)(B) under the proposed 
changes.
---------------------------------------------------------------------------

    The Commission is also proposing to add language to Rule 
301(b)(5)(iii)(B)(1) and (2) to reference that grants of access and 
denials of limits of access and reasons for limitation and denying 
access to the services of the ATS would be under the standards provided 
in proposed Rule 301(b)(5)(iii)(A). Referencing the standards in Rule 
301(b)(5)(iii)(A) would clarify that grants, limitations, and denials 
of ATS services would be under the standards of the rule, as proposed 
to be revised. The Commission is also proposing to amend Rule 
303(a)(1)(iii) of Regulation ATS to require an ATS subject to the Fair 
Access Rule, for a period of not less than three years, the first two 
years in an easily accessible place, to preserve at least one copy, 
including each version, of such ATS's written standards for access to 
trading, all documents relevant to the ATS decision to grant, deny, or 
limit access to any person, and all other documents made or received by 
the ATS in complying with the Fair Access Rule.\683\ This change would 
modify the current rule to specify that the standards are ``written'' 
and that the ATS must maintain ``each version'' of the written 
standards required under Rule 301(b)(5), which is consistent with the 
previous Commission guidance.\684\
---------------------------------------------------------------------------

    \683\ The Commission is also proposing to specify in Rule 
303(a)(1)(iv) and (v) that an ATS must maintain ``each version'' of 
copies of records made in the course of complying with Rule 
301(b)(6) and copies of the written safeguards and written 
procedures to protect subscribers' confidential trading information 
and written oversight procedures created in the course of complying 
with Rule 301(b)(10).
    \684\ See Regulation ATS Adopting Release, supra note 31, at 
n.251 (stating that the Commission expects an ATS to maintain a 
record of its standards at each point in time, and that if the ATS 
amends or modifies its access standards, the records kept should 
reflect historic standards, as well as current standards).
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5. Removal of the Exclusion for Passive Systems From the Fair Access 
Rule
    The Commission is re-proposing to remove an exclusion from 
compliance with the Fair Access Rule under Rule 301(b)(5) and the 
Capacity, Integrity, and Security Rule under Rule 301(b)(6) that is 
applicable to ATSs that trade equities.\685\ An ATS is excluded from 
complying with the requirements of the Fair Access Rule and the 
Capacity, Integrity, and Security Rule if the ATS: (i) matches customer 
orders for a security with other customer orders; (ii) such customers' 
orders are not displayed to any person, other than employees of the 
ATS; and (iii) such orders are executed at a price for such security 
disseminated by an effective transaction reporting plan, or derived 
from such prices.\686\ In adopting the exclusion, the Commission stated 
that ATSs of this nature, the so-called ``passive systems,'' did not 
contribute significantly to price discovery; however, the Commission 
also stated that they had the potential to and frequently do affect the 
markets from which their prices are derived, and thus, the Commission 
would continue to monitor these systems and reconsider whether the 
requirements should apply if concerns arise in the future.\687\
---------------------------------------------------------------------------

    \685\ When adopting the exclusion, the Commission contemplated 
that it would apply only to ATSs that trade equity securities, as 
one of the elements of the exclusion requires that the prices in the 
ATS be based on the SIP. The third prong of each exception states 
that if an ATS meets the requirement, among others, to execute 
customer orders ``at a price for such security disseminated by an 
effective transaction reporting plan, or derived from such prices,'' 
the ATS would not be subject to the Fair Access Rule or Capacity, 
Integrity, and Security Rule, as applicable. 17 CFR 
242.301(b)(5)(iii)(C); 17 CFR 242.301(b)(6)(iii)(C).
    \686\ 17 CFR 242.301(b)(5)(iii); 17 CFR 242.301(b)(6)(iii).
    \687\ Regulation ATS Adopting Release, supra note 31, at 70853.
---------------------------------------------------------------------------

    In the Regulation ATS Adopting Release, the Commission explained 
that fair treatment by ATSs of subscribers is particularly important 
when an ATS captures a large percentage of trading volume in a security 
because investors lack access to viable alternatives to trading in the 
ATS.\688\ Since the adoption of Regulation ATS, passive systems (as the 
term is used in the Regulation ATS Adopting Release) for NMS stocks 
have garnered a significant percentage of trading volume in securities 
and have come to play an important role in matching buyers and sellers 
of securities.\689\ Eliminating the

[[Page 15577]]

Rule 301(b)(5)(iii) exclusion would ensure that the Fair Access Rule is 
applied as intended and help ensure fair treatment of applicants and 
current subscribers by any type of ATS that captures a large percentage 
of trading in a security or type of security.
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    \688\ Id. at 70872.
    \689\ See NMS Stock ATS Adopting Release, supra note 2, at 
38770-71.
---------------------------------------------------------------------------

    The Commission is also re-proposing to amend Rule 301(b)(6) to 
remove the exclusion from compliance with the Capacity, Integrity, and 
Security Rule under Rule 301(b)(6)(iii).\690\ As part of Regulation 
SCI, Rule 301(b)(6) of Regulation ATS was amended to no longer apply to 
ATSs that trade equities because Regulation SCI superseded and replaced 
the requirements of the Capacity, Integrity, and Security Rule with 
regard to ATSs that trade NMS stocks and non-NMS stocks.\691\
---------------------------------------------------------------------------

    \690\ 17 CFR 242.301(b)(6)(iii).
    \691\ See Regulation SCI Adopting Release, supra note 3, at 
72252, 72267.
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Request for Comment
    150. Should the Commission change the five percent fair access 
threshold for NMS stocks, equity securities that are not NMS stocks, 
corporate bonds, or municipal securities? If so, should the threshold 
be changed higher or lower than the existing five-percent threshold 
under Rule 301(b)(5)(i)? National securities exchanges are required to 
have rules designed to prevent unfair discrimination \692\ and admit 
members fairly.\693\ Because ATSs are operating pursuant to an 
exemption from exchange registration, should the Commission eliminate 
the volume threshold(s) for the Fair Access Rule and thus, require all 
ATSs to provide fair access to their participants regardless of trading 
volume? If yes, should the Commission eliminate the volume thresholds 
for all categories of securities subject to the Fair Access Rule or 
only specific categories?
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    \692\ 15 U.S.C. 78f(b)(5).
    \693\ See 15 U.S.C. 78f(b)(2) and (c); 15 U.S.C. 78o-3(b)(8).
---------------------------------------------------------------------------

    151. Should the Commission change the look-back period for applying 
the fair access thresholds from four out of the preceding six months to 
something different? For example, should an ATS be subject to fair 
access if its average daily trading volume in a subject security is 
five percent over the prior quarter or the prior month? Should the 
Commission change to the look-back period for all categories of 
securities subject to the Fair Access Rule, or just specific 
categories?
    152. Should the Commission allow or require ATSs to use sources of 
market data other than published data provided by the SRO to which 
trades are reported? If yes, which data sources?
    153. Should the Commission change the Fair Access Rule for it to 
apply categorically to NMS stocks rather than on a security-by-security 
basis? For example, should the Commission change the fair access 
threshold for equity securities so that an ATS would only be subject to 
the requirements of the Fair Access Rule if its average daily trading 
volume is five percent across all NMS stocks? Should the Commission 
change the Fair Access Rule to provide fair access in all NMS stocks if 
it surpasses the fair access threshold in a single NMS stock?
    154. Should the Commission change the Fair Access Rule so that it 
applies categorically, rather than on a security-by-security basis, to 
equity securities that are not NMS stocks? For example, should the 
Commission change the fair access threshold for equity securities so 
that an ATS would only be subject to the requirements of the Fair 
Access Rule if its average daily trading volume is five percent across 
all equity securities that are not NMS stocks? Additionally, or 
alternatively, should the Commission change the Fair Access Rule to 
require an ATS to provide fair access in all NMS stocks if it surpasses 
the fair access threshold in a single NMS stock?
    155. Should the Commission adopt rules to amend the Rule 
301(b)(5)(ii) of the Fair Access Rule to aggregate the trading volume 
for a security or category of securities for ATSs that are operated by 
a common broker-dealer, or ATSs that are operated by affiliated broker-
dealers, solely for the purpose of calculating the average transaction 
volume under Rule 301(b)(5)(i)(A) through (F)?
    156. Under Regulation ATS, an ATS would be subject to Rule 
301(b)(3) (Order Display and Execution Rule) and Rule 301(b)(6) 
(Capacity, Integrity and Security Rule) if the ATS exceeded certain 
volume thresholds within a given period of time under the rules. Should 
the Commission amend the Order Display and Execution Rule and the 
Capacity, Integrity, and Security Rule to aggregate the trading volume 
for a security or category of securities for ATSs that are operated by 
a common broker-dealer, or ATSs that are operated by affiliated broker-
dealers, for the purpose of calculating the average transaction volume 
under those rules?
    157. Instead of aggregating trading volume across multiple ATSs 
operated by a common broker-dealer, should the Commission amend 
Regulation ATS to require a broker-dealer to operate only one ATS for a 
category of security? If no, why is it important for one broker-dealer 
to be able to offer multiple ATS market places for the trading of the 
same category of security?
    158. Should the Commission adopt the same standard of 
reasonableness that is applied to national securities exchanges for 
purposes of the Fair Access Rule? If not, what standard of 
reasonableness should apply to ATSs that are subject to the Fair Access 
Rule?
    159. Should the Commission adopt requirements in addition to the 
reasonable written standards proposed in Rule 301(b)(5)(iii)(A)(1) 
through (4)? Should any of those standards be amended?
    160. Should the Commission eliminate the exclusion from compliance 
with the Fair Access Rule under Rule 301(b)(5)(iii) and with the 
Capacity, Integrity, and Security Rule under Rule 301(b)(6)(iii)?
    161. Should the Commission adopt the changes to the recordkeeping 
provisions of the Fair Access Rule? Are there any additional records 
that an ATS should be required to keep?

B. Electronic Filing of and Other Changes to Form ATS and Form ATS-R

    The Commission is re-proposing revisions to Rule 301(b)(2), Form 
ATS, and Form ATS-R to modernize Form ATS and Form ATS-R and to provide 
that they are filed electronically. In addition, the Commission is 
proposing to require ATSs to provide certain additional information on 
Form ATS-R, including volume reporting for transactions in repurchase 
and reverse repurchase agreements on the ATS. ATSs are required to file 
the information required by Form ATS-R \694\ pursuant to Rule 301(b)(9) 
within 30 calendar days after the end of each calendar quarter in which 
the ATS has operated.\695\
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    \694\ See Form ATS-R. See also supra notes 144-147.
    \695\ See 17 CFR 242.301(b)(9)(i). An ATS must also file Form 
ATS-R more frequently upon request of the Commission. See Form ATS-R 
Instructions.
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    First, the Commission is re-proposing an amendment to Rule 
301(b)(2)(vi), which currently states that ``[e]very notice or 
amendment filed pursuant to this paragraph (b)(2) shall constitute a 
`report''' within the meaning of applicable provisions of the Exchange 
Act. The Commission proposes to add a reference to Rule 301(b)(9) to 
state that Form ATS-R, as is the case with Form ATS, constitutes a 
report within the meaning of applicable provisions of the Exchange 
Act.\696\
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    \696\ This amendment would be consistent with Rule 
301(b)(2)(vii), which states that ``[a]ll reports filed pursuant to 
this paragraph (b)(2) and paragraph (b)(9)'' of Rule 301 are, as 
proposed, accorded confidential treatment subject to applicable law. 
See 17 CFR 242.301(b)(2)(vii). The instructions to Form ATS and Form 
ATS-R require an ATS to submit one original and two copies of Form 
ATS and Form ATS-R to the Commission. See Form ATS and Form ATS-R 
Instructions. In addition, Rule 301(b)(2)(vii) requires that an ATS 
file copies of its Form ATS filings with the examining authority of 
the SRO with which it is registered (e.g., FINRA) at the same time 
it files with the Commission, and upon request, the ATS must provide 
its SRO's surveillance personnel with duplicate Form ATS-R filings. 
See 17 CFR 242.301(b)(2)(vii).

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[[Page 15578]]

    Next, the Commission is re-proposing to require that all Forms ATS 
and ATS-R are filed with the Commission electronically. As proposed, 
following the effective date of the proposed rule, all Form ATS filers 
would be required to file an amendment on Form ATS in the electronic 
format proposed herein that would also include all new information 
required by revised Form ATS. Currently, ATSs are required to submit 
paper submissions of Forms ATS and ATS-R to the Commission.\697\ The 
Commission proposes to amend Rule 301(b)(2)(vii) to require that an ATS 
must file a Form ATS or a Form ATS-R in accordance with the 
instructions therein. The Commission is proposing to revise the 
instructions to Form ATS and Form ATS-R to require that they be 
submitted electronically via EDGAR.\698\ The Commission is also 
proposing to require in Rule 301(b)(2)(vii) that reports provided for 
in Rule 301(b)(2) and (9) shall be filed on Form ATS and Form ATS-R, as 
applicable, and include all information as prescribed in Form ATS or 
Form ATS-R, as applicable, and the instructions thereto.\699\ In 
addition, the Commission is proposing to require that any Form ATS or 
Form ATS-R shall be executed at, or prior to, the time Form ATS or Form 
ATS-R is filed and shall be retained by the ATS in accordance with Rule 
303 of Regulation ATS and Rule 302 of Regulation S-T, and the 
instructions in Form ATS or Form ATS-R, as applicable.\700\ Among other 
benefits, the electronic filing of Forms ATS and ATS-R would increase 
efficiencies and decrease filing costs for ATSs (i.e., ATSs would no 
longer be required to print and mail paper filings) and for Commission 
staff when undertaking a review of these forms. Form ATS-N is required 
to be filed in EDGAR. EDGAR is currently configured to support the 
Commission's receipt and review of filings under Regulation ATS, and 
requiring electronic Form ATS and Form ATS-R filings to be submitted 
via EDGAR would be the most efficient way to facilitate their 
electronic filing.
---------------------------------------------------------------------------

    \697\ Rule 301(b)(2)(vii) of Regulation ATS specifies that 
reports on Form ATS shall be considered filed upon receipt by the 
Division of Trading and Markets, at the Commission's principal 
office in Washington, DC See 17 CFR 242.301(b)(2)(vii).
    \698\ See infra note 701 and accompanying text.
    \699\ Accordingly, the Commission is proposing to delete the 
provisions of Rule 301(b)(2)(vii) related to paper submission. 
Specifically, the Commission is proposing to delete the sentence 
that the reports shall be considered filed ``upon receipt by the 
Division of Trading and Markets, at the Commission's principal 
office in Washington, DC'' Additionally, although the Commission 
would continue to require that duplicates of filings on Form ATS be 
provided to the SRO that is the examining authority for each ATS, 
and that duplicates of the Form ATS-R be made available to the 
surveillance personnel of such SRO upon request, the Commission 
proposes to eliminate the reference to ``originals'' in Rule 
301(b)(2)(vii) because paper reports will no longer be furnished to 
the Commission and there will therefore be no ``original'' version 
of the reports.
    \700\ The Commission notes that the proposed provisions would 
conform to similar provisions of Rule 304, which provide for the 
electronic filing of Form ATS-N. See 17 CFR 242.304(c).
---------------------------------------------------------------------------

    To facilitate electronic filing, the Commission is proposing to 
amend the text of General Instructions A.4 of Forms ATS and ATS-R to 
require that all filings be submitted via EDGAR and prepared, 
formatted, and submitted in accordance with Regulation S-T and the 
EDGAR Filer Manual.\701\ The Commission also proposes to amend Forms 
ATS and ATS-R General Instruction A.5 to state that a filing that is 
defective may be rejected and not be accepted by the EDGAR system and 
that any filing so rejected shall be deemed not filed. This is 
consistent with the requirements of Regulation S-T, which provides the 
rules for EDGAR submissions.\702\ The Commission also notes that the 
instructions for current Form ATS contain similar language,\703\ but 
the current instructions for Form ATS-R do not contain such language. 
The Commission believes that it would be appropriate to reject a filing 
as defective if it does not comply with the technical requirements of 
the form, for example, if a Form ATS or Form ATS-R is missing exhibits, 
or if the ATS does not provide a response to a Form ATS request or does 
not comply with the electronic filing requirements. The Commission is 
also proposing to amend General Instruction A.6 (``Recordkeeping'') of 
both forms to reflect that records must be retained in accordance with 
the EDGAR Filer Manual and Rule 303 of Regulation ATS and to conform to 
the recordkeeping instructions on Form ATS-N, as revised.\704\ 
Instruction A.8 would also be revised to reflect updated Paperwork 
Reduction Act estimates, and, to conform to changes the Commission is 
proposing in Rule 301(b)(2)(vii),\705\ to state that types of 
securities traded provided on Form ATS and Form ATS-R will not be 
afforded confidential treatment. The Commission is also proposing to 
add new Instruction A.8 to Form ATS to require that, for amendments, 
the filer attach an Exhibit C marked to indicate additions to or 
deletions from the disclosures in Items 1 through 6 of Form ATS. This 
document would help enable the Commission to identify any changes to 
the form more easily. Most ATSs currently provide such a marked 
document to the Commission on a voluntary basis. The Commission is also 
proposing to amend the instructions to Form ATS to state that Newly 
Designated ATSs are required to file a Form ATS no later than the date 
30 calendar days after the effective date of any final rule, if 
adopted.\706\
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    \701\ The Commission proposes to eliminate the language in the 
Form ATS instructions and Form ATS-R instructions requesting that an 
ATS type all information because an ATS would not otherwise have the 
option to handwrite any responses. The instructions for both forms 
would be amended to eliminate the option to use a ``reproduction'' 
of the forms. The Commission also believes it is redundant to state 
that the Form ATS or Form ATS-R must be the ``current version'' as 
the ATS is required to attest that the form is ``current.'' The 
Commission also proposes to delete the requirement to attach an 
execution page with original manual signatures for Form ATS because, 
as discussed above, Form ATS and Form ATS-R would be signed 
electronically and thus there would be no need for an execution 
page. The Commission also proposes to delete the instruction that 
the name of the alternative trading system, CRD number, SEC file 
number, and report period dates be listed on each page, as this 
requirement will be unnecessary because the Form ATS or Form ATS-R 
will be submitted as a single submission. Because Form ATS and Form 
ATS-R would be submitted via EDGAR, the Commission is also proposing 
to delete references to submitting the ``original'' and ``copies'' 
of the form to the Commission at the Commission's mailing address.
    \702\ 17 CFR part 232. This is also consistent with the 
requirements for Form ATS-N.
    \703\ The Form ATS Instructions state that ``Form ATS shall not 
be considered filed, unless it complies with applicable 
requirements.''
    \704\ Rule 303 of Regulation ATS provides the record 
preservation requirements for ATSs. See 17 CFR 242.303.
    \705\ See infra Section V.C.
    \706\ See supra note 180 and accompanying text.
---------------------------------------------------------------------------

    In addition, the Commission is re-proposing to amend Form ATS to 
require an ATS filing an amendment on Form ATS to identify whether the 
Form ATS filing is a material amendment under Rule 301(b)(2)(ii), a 
periodic amendment under Rule 301(b)(2)(iii), or a correcting amendment 
under Rule 301(b)(2)(iv).\707\ An ATS currently identifies an amendment 
to current Form ATS by marking the ``Amendment to Initial Operation 
Report'' box on Form ATS, and Form ATS currently does not ask the ATS 
to specify whether the amendment to Form ATS is a material, periodic, 
or correcting

[[Page 15579]]

amendment.\708\ Requiring an ATS to specify the type of amendment would 
better enable the Commission to determine whether an ATS is in 
compliance with Regulation ATS. The Commission also proposes requiring 
an ATS that is filing a cessation of operations report to provide the 
date that the ATS ceased to operate, which is not currently required on 
Form ATS. The Commission believes that having information about the 
date that the ATS ceased to operate would enable the Commission to 
determine more readily whether an ATS is, or was, in compliance with 
Regulation ATS.\709\
---------------------------------------------------------------------------

    \707\ See Rule 301(b)(2)(ii)-(iv).
    \708\ The Commission is also proposing to add cites to the 
relevant rule text next to the check boxes on Form ATS identifying 
whether the ATS is filing an Initial Operation Report (``IOR''), 
amendment to IOR, or a cessation of operations report.
    \709\ See Rule 301(b)(2)(v) (requiring an ATS to promptly file a 
cessation of operations report on Form ATS in accordance with the 
instructions therein upon ceasing to operate as an ATS).
---------------------------------------------------------------------------

    The Commission is also re-proposing to amend Form ATS and Form ATS-
R to change the solicitation of information relating to the name of the 
broker-dealer operator and the registration and contact information of 
the broker-dealer operator. Because many broker-dealer operators of 
ATSs engage in brokerage and/or dealing activities in addition to 
operating an ATS, and some broker-dealers operate multiple ATSs, the 
name of the broker-dealer operator of an ATS often differs from the 
commercial name under which the ATS conducts business. To identify the 
broker-dealer operator of an ATS and to assist the Commission in 
collecting and organizing its filings and assessing whether the ATS has 
met its requirement to register as a broker-dealer, Forms ATS and ATS-R 
would require the ATS to indicate the full name of the broker-dealer 
operator of the ATS, as it is stated on Form BD, in Item 1 of Form ATS 
and Form ATS-R. To further facilitate compliance with the requirements 
of Regulation ATS, as proposed, Form ATS and Form ATS-R would require 
the ATS to indicate whether the filer is a broker-dealer registered 
with the Commission and whether the broker-dealer operator has been 
authorized by a national securities association to operate an ATS. Such 
requirements would conform to the proposed requirements of Form ATS-
N.\710\ The Commission is proposing to conform Item 1 of Form ATS and 
Form ATS-R \711\ to the requirements of Form ATS-N, which is currently 
filed electronically. In addition, the Commission is proposing to add 
to Item 1 of Form ATS and Form ATS-R a requirement that the ATS provide 
the broker-dealer operator's LEI, if the broker-dealer operator has an 
LEI,\712\ and the MPID of the broker-dealer operator.\713\ These 
requests would help the Commission in identifying and corresponding 
with ATSs and would conform to the identifying information on Form ATS-
N, as proposed to be revised.\714\ To determine whether the compliance 
transition rules applicable to Newly Designated ATSs apply, the 
Commission is also proposing to require the ATS to indicate if it is a 
Newly Designated ATS in Item 2.
---------------------------------------------------------------------------

    \710\ See supra Section IV.D.3.
    \711\ Form ATS and Form ATS-R currently ask for the ATS's main 
street address, mailing address, business telephone number and 
facsimile number, and the contact information for the ATS's contact 
person. The Commission is proposing to move the information requests 
for the name and title and telephone number of the contact employee 
to the signature block on the form, and to request an email address 
for such person and not require the facsimile number. The proposed 
signature block would ask for the primary street address and mailing 
address of the ATS. The current certifications required in Form ATS 
and Form ATS-R, including that the information filed is current, 
true, and complete, would remain unchanged. However, the Commission 
is proposing to delete the provision allowing for service of any 
civil action pursuant to confirmed telegram and instead, permit 
service of any civil action via email. The signature block on Form 
ATS and Form ATS-R would conform to the signature block in Form ATS-
N, as proposed. See supra Section IV.D.6.
    \712\ See supra note 506.
    \713\ See supra Section IV.D.3 (proposing requiring the ATS to 
disclose the MPID of its broker-dealer operator).
    \714\ The Commission proposes to replace in Item 1 of Form ATS 
and Form ATS-R the requests for the ATS's main street address, 
mailing address, and business telephone number and facsimile number 
with a requirement that the ATS provide the primary, and if any, 
secondary physical street address of the ATS's matching system, as 
well as a URL address for its website if it has a website. Knowing 
the location of the matching system address and secondary matching 
system address could be useful to the Commission in the event of, 
for instance, a natural disaster that could impact market 
participants' ability to trade in the ATS and potential latency that 
could be experienced due to the location of the secondary site of 
the ATS. The Commission is also requesting the full name of the 
national securities association of the broker-dealer operator, the 
effective date of the broker-dealer operator's membership with the 
national securities association, and MPID of the ATS. In addition, 
because any current or former names of the ATS would be searchable 
on EDGAR and there will be multiple identifiers included on the 
form, including MPID, the Commission is proposing to delete the 
requirement that the ATS indicate if it is changing its name and 
list its former name.
---------------------------------------------------------------------------

    In addition, to facilitate the electronic filing of Form ATS, the 
Commission is proposing to revise Form ATS to provide that the 
narrative disclosures be included in a single document, rather than 
multiple exhibits.\715\ The ATS would be required to provide the 
information currently required in Exhibits A, B, C, E, F (other than a 
copy of the ATS's subscriber manual and any other materials provided to 
subscribers), G, H, and I in a single document. Because the subscriber 
manual may be lengthy, it would be more efficient for the ATS to 
provide a copy of its subscriber manual and any other materials 
provided to subscribers, which are currently required to be included in 
Exhibit F, as a separate, new Exhibit A. In addition, the Commission is 
proposing new Exhibit B, which would include a copy of the 
constitution, articles of incorporation or association, with all 
amendments, and of the existing by-laws or corresponding rules or 
instruments, whatever the name, of the alternative trading system. 
Today, an ATS may, in lieu of attaching such documents, indicate that 
the ATS makes such information publicly available on a continuous basis 
on an internet site controlled by the ATS and indicate the website of 
the ATS. Because the Commission is requiring the ATS to provide its 
website in Part I,\716\ the Commission is proposing to include a 
checkbox for the ATS to select if, in lieu of filing, the ATS certifies 
that the information requested under the exhibit is available at the 
website above and is maintained on a continuous basis and is accurate 
as of the date of the filing.
---------------------------------------------------------------------------

    \715\ In response to the 2020 Proposal, one commenter stated 
that current Form ATS Exhibit F, which requires the ATS to provide 
certain specified information about its operations and procedures, 
should be amended to follow the same structure as current Form ATS 
Exhibit G, which requires a ``brief description'' of the ATS's 
procedures for reviewing system capacity, security, and contingency 
planning procedures to provide ATS operators with latitude in the 
manner in which they provide information to the Commission. See ICE 
Bonds Letter I at 6-7. The Commission is not proposing a change to 
the structure of Exhibit F of Form ATS to conform to the structure 
of Exhibit G. The structures of Exhibits F and G are not dissimilar 
in that they both require an ATS to provide a description of ATS 
policies and procedures and that the information solicited by 
Exhibit F is important for the Commission to understand and oversee 
ATSs.
    \716\ See supra note 714.
---------------------------------------------------------------------------

    The Commission is also re-proposing to amend Form ATS-R to make it 
easier for the Commission staff to identify if the ATS has met its 
reporting obligations. First, the Commission is proposing to require an 
ATS to specify whether it is filing a quarterly report amendment under 
Rule 301(b)(9)(i) or a report for an ATS that has ceased to operate 
under Rule 301(b)(9)(ii) and, if the latter, to indicate the date the 
ATS ceased to operate. Requiring an ATS to indicate its type of Form 
ATS-R filing would enable the Commission to more effectively review 
Form ATS-R submissions and determine whether an ATS is in compliance 
with Regulation ATS. The Commission is also proposing

[[Page 15580]]

to amend Form ATS-R to ask whether the ATS was subject to the fair 
access obligations under Sec.  242.301(b)(5) during any portion of the 
period covered by the report by adding a corresponding box for the ATS 
to check ``yes'' or ``no.'' Currently, Form ATS-R requires an ATS that 
is subject to the Fair Access Rule to report a list of all persons for 
whom access to the ATS was granted, denied, or limited during the 
period covered by the Form ATS-R.\717\ Asking the ATS to indicate 
whether the ATS was subject to the Fair Access Rule during any portion 
of the period covered by the report would facilitate the Commission's 
review of Form ATS-R submissions.
---------------------------------------------------------------------------

    \717\ See Form ATS-R and Form ATS-R Instructions, No. 8.
---------------------------------------------------------------------------

    The Commission is also proposing changes to the Form ATS-R 
categories of securities to modernize them and add more specificity 
with regard to all categories of securities. Form ATS-R currently 
requires ATSs to indicate the total dollar volume of government 
securities transactions in the period covered by the report. The 
Commission is proposing to require that ATSs specify the total dollar 
volume of transactions in ``U.S. Treasury Securities'' and ``Agency 
Securities'' under the heading ``Government securities.'' \718\ As 
currently, ATSs would also be required to indicate the total dollar 
volume in government securities overall. This change would help the 
Commission facilitate compliance with the thresholds for the Fair 
Access Rule and Regulation SCI, which the Commission is proposing would 
be based on trading volume in U.S. Treasury Securities and Agency 
Securities.\719\ To avoid double-reporting of transactions in after-
hours trading (reported under Item 6), the Commission is proposing to 
specify that Item 4 pertains to transactions ``other than those for 
after-hours trading.'' In addition, the Commission is proposing to 
amend Form ATS-R to update the descriptions of certain categories of 
securities for which volume is required to be reported on Form ATS-R by 
an ATS. Specifically, the Commission is proposing to delete the 
categories of securities, ``Nasdaq National Market Securities'' and 
``Nasdaq SmallCap Market Securities,'' reported in Items 4 and 6 of 
Form ATS-R.\720\ The proposal to require ATSs to file Form ATS-R 
electronically via EDGAR would allow the Commission staff to easily 
ascertain on which national securities exchanges the equity securities 
the ATS traded during the applicable period, as disclosed in Exhibit B, 
are traded. Therefore, it would no longer be necessary to separate out 
the total volume of securities traded on the Nasdaq markets from the 
total volume of securities traded on other national securities 
exchanges. The proposal would require ATSs to report the total volume 
previously reported under the ``Nasdaq National Market Securities'' and 
``Nasdaq SmallCap Market Securities'' categories under ``Listed Equity 
Securities.''
---------------------------------------------------------------------------

    \718\ The Commission is proposing to add to the Form ATS-R 
instructions the definitions of U.S. Treasury Security and Agency 
Security, which would conform to the definitions the Commission is 
proposing in Rule 300(o) and (p), respectively.
    \719\ See supra Sections III.B.4 and III.C.
    \720\ Currently, any equity securities traded on the Nasdaq 
Global Market are required to be reported under ``Nasdaq National 
Market Securities,'' and any equity securities traded on the Nasdaq 
Capital Market are required to be reported under ``Nasdaq SmallCap 
Market Securities.'' ``Listed Equity Securities'' include all other 
equity securities listed on any other markets or national securities 
exchanges, including the Nasdaq Global Select Market. Any rights and 
warrants are required to be reported under the ``Rights and 
Warrants'' category even if they are listed on a national securities 
exchange. As proposed, Items 4B, 4C, 6B, and 6C would be deleted, 
and therefore, Items 4D through 4N and Item 6D would be re-numbered.
---------------------------------------------------------------------------

    The Commission is proposing to require ATSs to break down the 
volume for corporate debt securities, currently reported in Item 4J, by 
U.S. and non-U.S. corporate debt securities. Non-U.S. corporate debt 
securities would include debt securities issued by a foreign issuer 
(excluding a foreign government) in emerging markets as well as non-
emerging markets. In addition, the Commission is adding new Item 4L to 
require ATSs to report total dollar volume for foreign sovereign debt 
securities, which currently are required to be reported under other 
debt securities in Item 4N. Foreign sovereign debt securities would be 
defined in Instruction B of Form ATS-R as any security other than an 
equity security, as defined in Sec.  240.3a11-1, issued or guaranteed 
by a foreign government, as defined in Sec.  240.3b-4.\721\ Creating 
subcategories of corporate debt securities and a reporting requirement 
for foreign sovereign debt securities would improve the quality of data 
that the Commission already gathers through Form ATS-R. In addition, 
the proposed reporting requirements would help the Commission further 
understand the amount of trading that occurs on the ATSs for corporate 
bonds and foreign sovereign debt securities markets.
---------------------------------------------------------------------------

    \721\ ``Debt Securities'' is defined as ``any security other 
than an equity security, as defined in Sec.  240.3a11-1'' in Form 
ATS-R. See Instruction B of Form ATS-R. Section 240.3b-4 (Rule 3b-
4(a) under the Exchange Act) defines ``foreign government'' as the 
government of any foreign country or of any political subdivision of 
a foreign country. See 17 CFR 240.3b-4.
---------------------------------------------------------------------------

    The Commission is also proposing to add new Items 4N and 4O to Form 
ATS-R, which would require ATSs to disclose the total unit and dollar 
volume of transactions in repurchase agreements and reverse repurchase 
agreements. Specifically, the Commission is proposing to require ATSs 
to disclose the total unit \722\ and dollar volume of repurchase and 
reverse repurchase transactions broken down by (1) whether the 
transaction is overnight or term; \723\ (2) whether the transaction is 
triparty \724\ or bilateral; \725\ and (3) the type of securities used 
to finance the collateral--i.e., NMS stocks, U.S. Treasury Securities, 
Federal Agency Securities, Agency Mortgage-Backed Securities, municipal 
securities, U.S. and non-U.S. corporate debt securities, asset-backed 
securities, foreign sovereign debt securities, and other 
securities.\726\ If an ATS traded repurchase or reverse repurchase 
agreements collateralized with other securities, the ATS would list the 
other types of securities in proposed Item 4N or 4O. In the 
Commission's experience, some ATSs that trade repurchase or reverse 
repurchase agreements, which are currently required to be disclosed as 
debt securities on Item 4N of Form ATS-R, currently provide in Item 5B 
of

[[Page 15581]]

Form ATS-R on a voluntary basis a breakdown of nominal trade value of 
each of these types of securities. Adding new Items 4N and 4O to Form 
ATS-R to require that ATSs provide the total unit and dollar volume of 
transactions in repurchase and reverse repurchase agreements would 
require all ATSs that trade repurchase or reverse repurchase agreements 
to take a consistent approach in providing this information. The 
Commission understands that certain transaction information about 
repurchase and reverse repurchase agreements is publicly 
available.\727\ However, individual ATSs are not currently required to 
provide the Commission with information breaking down the types of 
transactions in repurchase and reverse repurchase agreements. In 
addition, transactions in repurchase and reverse repurchase agreements 
are not generally required to be reported to an SRO, and the absence of 
information about the trading of repurchase and reverse repurchase 
agreements that occur on ATSs impedes the Commission's oversight of 
these markets. The proposed reporting requirement would enhance the 
Commission's oversight of ATSs that trade repurchase and reverse 
repurchase agreements.
---------------------------------------------------------------------------

    \722\ For repurchase or reverse repurchase agreements 
collateralized with a basket or group of securities, ``total unit 
volume of transactions'' would mean the number of units within each 
basket or group rather than the number of baskets or groups.
    \723\ Overnight repo trades end in one business day, whereas 
term repos mature on a specific future business day that is more 
than one business day. See, e.g., Office of Financial Research, U.S. 
Repo Market Data Release Methodology for Tri-party Repo, available 
at https://www.financialresearch.gov/data/files/2021-04-Methodology-TPR.pdf; Office of Financial Research, U.S. Repo Market Data Release 
Methodology for DVP Cleared Repo, available at https://www.financialresearch.gov/data/files/2021-04-Methodology-DVP.pdf.
    \724\ See supra note 521. Triparty repurchase and reverse 
repurchase transactions would include triparty trades between 
members that participate in the Fixed Income Clearing Corporation's 
(``FICC'') General Collateral Financing (GCF) Repo Service. On the 
other hand, repurchase and reverse repurchase transactions in the 
FICC's Delivery vs. Payment (``DVP'') Repo Service would be reported 
under the bilateral category.
    \725\ See supra note 522.
    \726\ As a result, ATSs would report the total unit and dollar 
volume of transactions for each of 80 categories of repos: 2 types 
of agreements (repurchase or reverse repurchase) x 2 transaction 
types (overnight or term) x 2 party types (bilateral or triparty) x 
10 collateral types (NMS stocks, U.S. Treasury Securities, Federal 
Agency Securities, Agency Mortgage-Backed Securities, municipal 
securities, U.S. corporate debt securities, non-U.S. corporate debt 
securities, asset-backed securities, foreign sovereign debt 
securities, or other securities).
    \727\ For instance, the Treasury Department's Office of 
Financial Research (``OFR'') collects data on repurchase agreements 
cleared by triparty clearing banks and major central counterparties, 
such as the FICC, and publishes aggregate statistics on these 
transactions broken out by three venues--which are the triparty 
market, FICC's DVP Service, and FICC's GCP Repo Service--collateral, 
tenor, volume, and rates. See OFR, U.S. Repo Market Data Release, 
available at https://www.financialresearch.gov/data/us-repo-data/.
---------------------------------------------------------------------------

    Finally, the Commission is proposing to add new Item 5C, which 
would require an ATS to list the types of listed options reported in 
Item 4F of Form ATS-R. Item 4F of Form ATS-R currently requires ATSs to 
disclose the total unit volume and dollar volume of transactions in 
listed options. Under new Item 5C, an ATS might indicate, for example, 
that it trades equity options and options on government securities. 
This would provide the Commission with more specific information about 
the types of options that each ATS trades.
    In addition, because the Commission is proposing to change the 
definition of ``exchange'' to include systems that use trading 
interest, the Commission is proposing to revise Form ATS to require 
information related to the entry of ``trading interest.'' Communication 
Protocol Systems that transact in securities other than NMS stocks or 
government securities or repos will be required to file Form ATS if 
they choose to comply with Regulation ATS and the resulting disclosures 
will help the Commission oversee these systems. In addition, the 
Commission is proposing to include in Form ATS the definition of 
``trading interest'' identical to that proposed in Rule 3b-16(e) and 
Rule 300(q).\728\ The Commission is also proposing to change the 
definition of ``subscriber'' to conform to the changes the Commission 
is proposing in Rule 300(b).\729\ Form ATS Item 3.g (current Exhibit 
F.a) requests that the ATS provide information about ``the manner of 
operations of the alternative trading system.'' \730\ An ATS that 
either operates a Communication Protocol System, or an order-driven 
system, would be required to provide information about the manner of 
operations on Form ATS that is akin to information provided in response 
to in Part III of Form ATS-N (e.g., display, connectivity, 
segmentation, market data, counterparty selection).\731\ For example, 
ATSs that use orders generally should provide information about order 
types and sizes, and the trading facilities and rules for bringing 
together the orders of buyers and sellers on the ATS. ATSs that use 
non-firm trading interest generally should provide information about 
the communication protocols and functionalities of the ATS, including 
the use of messages, requirements related to the size of trading 
interest, and procedures governing the communication protocols.
---------------------------------------------------------------------------

    \728\ See supra note 98 and accompanying text.
    \729\ See id.
    \730\ See Item 4.g of Form ATS, as proposed to be revised.
    \731\ See NMS Stock ATS Adopting Release, supra note 2, at 38869 
(describing that many of the disclosure items on Form ATS-N are also 
required by respondents in whole or in part on current Form ATS). 
See also NMS Stock ATS Proposing Release, supra note 29, at 81099-
102 (describing that some of the disclosures of Form ATS-N that the 
Commission was proposing were already required under Form ATS).
---------------------------------------------------------------------------

Request for Comment
    162. Would the proposed changes to Form ATS and Form ATS-R enhance 
the Commission's oversight of ATSs? Do commenters disagree with any of 
the proposed modifications? If so, what alternatives should the 
Commission implement?
    163. Form ATS-R requires an ATS to quarterly report volume of 
transactions for certain securities, all subscribers that were 
participants in the ATS, and securities that were traded in the ATS. 
Should the Commission adopt amendments to Form ATS-R to add, change, or 
modify any of the requests for information on Form ATS-R? Are the 
current categories of securities and the proposed categories of 
securities for reporting transaction volume to the Commission 
appropriate?
    164. Should Form ATS-R require ATSs to disclose total unit volume 
in government securities, U.S. Treasury Securities, and/or Agency 
Securities?
    165. Proposed Items 4N and 4O of Form ATS-R would require ATSs to 
report unit and dollar volume of transactions in repurchase and reverse 
repurchase agreements broken down by, among other categories, whether 
the transaction is triparty or bilateral. Do commenters believe that 
categorizing repurchase and reverse repurchase agreements into these 
two segments would yield useful information to the Commission? Do 
commenters believe that the Commission should require ATSs to 
separately report volumes for repurchase and reverse repurchase 
agreements in the FICC's GCF Repo Service and FICC's DVP Service rather 
than include them under volumes for triparty and bilateral, 
respectively? Are there any types of securities, not otherwise covered 
in proposed Items 4N and 4O, that are used as collateral in repurchase 
and reverse repurchase agreements?
    166. Proposed Items 4N and 4O of Form ATS-R would require ATSs to 
report transaction volumes of repurchase and reverse repurchase 
agreements in total unit and dollar volume. Do commenters believe that 
ATSs should be required to provide the unit volume as well as the 
dollar volume?
    167. Are there characteristics unique to repurchase or reverse 
repurchase agreements collateralized with a basket or group of 
securities that would make reporting those repurchase or reverse 
repurchase agreements in both unit and dollar volume in Form ATS-R 
unduly burdensome or inappropriate for ATSs? For such basket repos, the 
Commission is proposing to define ``total unit volume of transactions'' 
as the number of units within each basket or group rather than the 
number of baskets or groups. Do commenters believe ``unit'' should be 
defined differently for basket repos?
    168. Proposed Item 4J of Form ATS-R would require ATSs to report 
dollar volume of transactions in U.S. and non-U.S. corporate debt 
securities. Do commenters believe that the two subcategories would 
yield useful information to the Commission? Non-U.S. corporate debt 
securities would include debt securities issued by a foreign issuer in 
emerging markets as well as non-emerging markets. Do commenters believe 
that the Commission should require ATSs to

[[Page 15582]]

further break down the volume for non-U.S. corporate debt securities by 
type of market--emerging and non-emerging? If so, how should ``emerging 
markets'' be defined for the purpose of reporting on Form ATS-R? Do 
commenters believe ``emerging markets'' should be defined by country or 
region?
    169. Do commenters believe that the Commission should require ATSs 
to report total dollar volume of foreign sovereign debt securities on 
Form ATS-R, as proposed? Should the proposed definition of sovereign 
debt securities be modified in any way?
    170. Instruction A.1 of Form ATS-R requires ATSs to file Form ATS-R 
within 30 days after the end of each calendar quarter, or more 
frequently upon the request of the Commission. Do commenters believe 
that the Commission should request information from ATSs on Form ATS-R 
on a more frequent basis (e.g., monthly)? Do commenters believe that 
such request would be unduly burdensome for ATSs?
    171. Form ATS requires an ATS to report information to the 
Commission about the ATS, including but not limited to, types of 
subscribers and differential access to services, types of securities 
traded, counsel, governance documents, service providers, manner of 
operations, including entry of trading interest, order execution 
procedures, clearance and settlement procedures, and trade reporting, 
procedures for reviewing system capacity, security, and contingency 
planning, procedures to safeguard subscriber funds and securities, and 
direct owners. Should the Commission adopt amendments to Form ATS to 
add, change, or modify any of the requests for information on Form ATS? 
The proposed changes to Rule 3b-16 would require Communication Protocol 
Systems that trade securities other than NMS stocks or government 
securities or repos to file Form ATS. Are there any changes that the 
Commission should make to Form ATS that would be relevant to 
Communication Protocol Systems? If so, please identify the request and 
explain how it should be amended.
    172. Should the Commission amend Form ATS to require disclosures 
similar to disclosures required on Part II of Form ATS-N, which 
requests information about ATS-related activities of the broker-dealer 
operator and its affiliates?
    173. Should the Commission amend Form ATS to include questions 
similar to those in Part III of Form ATS-N, which requests information 
about the manner of the ATS's operations?
    174. Are there any specific items on Form ATS-N, currently or as 
proposed to be revised, that the Commission should incorporate into 
Form ATS?
    175. Should the Commission amend Rule 301(b)(2) and Form ATS to 
provide that Form ATS is publicly disseminated? If so, should any of 
the information on Form ATS be kept confidential?

C. Amendment to Rule 301(b)(2)(vii)

    Rule 301(b)(2)(vii) provides that all reports filed pursuant to 
Rules 301(b)(2) and (9) are ``deemed confidential.'' \732\ As a result, 
the Commission does not make Form ATS and Form ATS-R disclosures 
available to the public, including the types of securities that the ATS 
trades or intends to trade.\733\ Currently, the Commission makes public 
on a monthly basis on the Commission website information about ATSs 
that have a Form ATS on file with the Commission, which includes the 
name of the ATS, any name(s) under which business is conducted, and the 
location of each ATS. The list also identifies each ATS that filed a 
cessation of operations report in the prior month. While the Commission 
does not approve Form ATS filings, the list is designed to inform the 
public about ATSs that have noticed their operations with the 
Commission.
---------------------------------------------------------------------------

    \732\ See 17 CFR 242.301(b)(2)(vii).
    \733\ The Commission notes, however, that Form ATS and Form ATS-
R are available to the examination staff of state securities 
authorities and SROs. See Instruction A.7 of Form ATS and Form ATS-
R. See also 17 CFR 242.301(b)(2)(vii) (requiring duplicate of 
filings on Form ATS be provided to the surveillance personnel 
designated by the SRO that is the examining authority for each ATS, 
and that duplicates of the Form ATS-R be made available to the 
surveillance personnel of such SRO upon request).
---------------------------------------------------------------------------

    The Commission is re-proposing to amend Rule 301(b)(2) to clarify 
that being ``deemed confidential'' means receiving confidential 
treatment under a relevant Commission regulation subject to applicable 
law \734\ and to eliminate confidential treatment for information about 
the type(s) of securities that the ATS trades as disclosed in the 
Exhibit B, subpart (a) of Form ATS and Exhibit B of Form ATS-R. The 
Commission does not believe that ATSs will be harmed by these 
disclosures because a vast majority of ATSs currently publicize the 
types of securities in which they transact, for example, on the website 
for the ATS or the website of the ATS broker-dealer operator. The 
Commission publishes on its website a list of ATSs that have an active 
Form ATS on file with the Commission; however, information about types 
of securities traded is not provided on that list and the Commission 
frequently receives requests from the public and regulators for more 
detail in the Commission's publication about the types of securities 
traded by ATSs. Disclosing this information could help the public 
understand a fundamental aspect of an ATS. To allow for this narrow 
exception, the Commission is proposing to amend Rule 301(b)(2)(vii) of 
Regulation ATS to state that the content of reports filed under Rule 
301(b)(2) and (9) ``(except for types of securities traded provided on 
Form ATS and Form ATS-R) will be accorded confidential treatment 
subject to applicable law.''
---------------------------------------------------------------------------

    \734\ See, e.g., 17 CFR 200.83, 240.24b-2.
---------------------------------------------------------------------------

Request for Comment
    176. Should the Commission amend Rule 301(b)(2)(vii) to make Form 
ATS, Form ATS-R, or both public? Should the Commission amend Rule 
301(b)(2)(vii) to make any other disclosures provided on Form ATS or 
Form ATS-R public?
    177. Should the Commission eliminate confidential treatment for 
information about the type(s) of securities that the ATS trades as 
disclosed on Form ATS and Form ATS-R?

VI. General Request for Comment

    The Commission is requesting comments from all members of the 
public. The Commission particularly requests comment from the point of 
view of persons who operate ATSs that would meet the proposed 
definition of Government Securities ATS, subscribers to those systems, 
and investors. The Commission seeks comment on all aspects of the 
proposed rule amendments and proposed form, particularly the specific 
questions posed above. Commenters are requested to provide empirical 
data in support of any arguments or analyses. With respect to any 
comments, the Commission notes that they are of the greatest assistance 
to its rulemaking initiative if accompanied by supporting data and 
analysis of the issues addressed in those comments and by alternatives 
to the Commission's proposals where appropriate.

VII. Paperwork Reduction Act

    Certain provisions of the proposed rule amendments contain 
``collection of information'' requirements within the meaning of the 
Paperwork Reduction Act of 1995 (``PRA'').\735\ The Commission is 
submitting these collections of information to the Office of Management 
and Budget (``OMB'') for review in accordance with 44 U.S.C. 3507(d) 
and 5 CFR 1320.11. An agency

[[Page 15583]]

may not conduct or sponsor, and a person is not required to respond to, 
a collection of information unless the agency displays a currently 
valid control number. The Commission is proposing to alter seven 
existing collections of information and apply such collections of 
information to new categories of respondents. The titles of such 
existing collections of information are:
---------------------------------------------------------------------------

    \735\ 44 U.S.C. 3501 et seq.

------------------------------------------------------------------------
                                                            OMB control
              Rule                      Rule title              No.
------------------------------------------------------------------------
Rule 301 of Regulation ATS.....  Regulation ATS Rule 301       3235-0509
                                  Amendments.
Rule 302 of Regulation ATS.....  Rule 302 (17 CFR              3235-0510
                                  242.302) Recordkeeping
                                  Requirements for
                                  Alternative Trading
                                  Systems.
Rule 303 of Regulation ATS.....  Rule 303 (17 CFR              3235-0505
                                  242.303) Record
                                  Preservation
                                  Requirements for
                                  Alternative Trading
                                  Systems.
Rule 304 of Regulation ATS.....  Regulation ATS Rule 304       3235-0763
                                  and Form ATS-N.
17 CFR 240.15b1-1 (Rule 15b1-1   Form BD and Rule 15b1-1       3235-0012
 under the Exchange Act).         Application for
                                  Registration as a
                                  Broker-Dealer.
17 CFR 232.10(b) (Rule 10(b) of  Form ID................       3235-0328
 Regulation S-T).
Rules 1001 through 1007 of       Regulation SCI and Form       3235-0703
 Regulation SCI.                  SCI.
------------------------------------------------------------------------

A. Summary of Collection of Information

    The proposed amendments create burdens under the PRA by (1) adding 
new categories of respondents to the seven existing collections of 
information noted above and (2) modifying the requirements of two of 
those collections, as noted below. The proposed amendments do not 
create any new collections of information. The collections of 
information and applicable categories of new respondents \736\ are 
summarized in the following table: \737\
---------------------------------------------------------------------------

    \736\ See infra Section VII.C for a description of the 
categories of respondents.
    \737\ Unless otherwise described, none of the existing 
information collections are being revised with new requirements.

----------------------------------------------------------------------------------------------------------------
      Collection of information                  Rule              Burden description     Respondent categories
----------------------------------------------------------------------------------------------------------------
Rule 301 of Regulation ATS and Forms   Rule 301(b)(2).........  Revised Burden: File     Certain Communication
 ATS and ATS-R.                                                  initial operations       Protocol Systems.
                                                                 report using the        All Other Form ATS
                                                                 proposed modernized      Filers.
                                                                 Form ATS.
                                       Rule 301(b)(5).........  Comply with fair access  Certain Communication
                                                                 standards                Protocol Systems.
                                                                 recordkeeping and fair  Certain Legacy
                                                                 access notice            Government Securities
                                                                 requirements for         ATSs.
                                                                 certain securities,     Certain NMS Stock ATSs.
                                                                 including, as           Certain Other ATS
                                                                 proposed, U.S.           Filers.
                                                                 Treasury Securities
                                                                 and Agency Securities.
                                       Rule 301(b)(6).........  Comply with ATS-         Certain Communication
                                                                 specific systems         Protocol Systems.
                                                                 capacity, integrity
                                                                 and security
                                                                 recordkeeping and
                                                                 systems outages notice
                                                                 requirements.
                                       Rule 301(b)(9).........  Revised Burden: File     All Communication
                                                                 quarterly reports        Protocol Systems.
                                                                 using the proposed      All Legacy Government
                                                                 modernized Form ATS-R.   Securities ATSs.
                                                                                         All NMS Stock ATSs.
                                                                                         All Other Form ATS
                                                                                          Filers.
                                       Rule 301(b)(10)........  Comply with written      All Communication
                                                                 safeguards and           Protocol Systems.
                                                                 procedures requirement. All Currently Exempted
                                                                                          Government Securities
                                                                                          ATSs.
Rule 302 of Regulation ATS...........  Rule 302...............  Comply with ATS          All Communication
                                                                 recordkeeping            Protocol Systems.
                                                                 requirements (required  All Currently Exempted
                                                                 by Rule 301(b)(8)).      Government Securities
                                                                                          ATSs.
Rule 303 of Regulation ATS...........  Rule 303...............  Comply with ATS record   All Communication
                                                                 preservation             Protocol Systems.
                                                                 requirements (required  All Currently Exempted
                                                                 by Rule 301(b)(8)).      Government Securities
                                                                                          ATSs.
Rule 304 of Regulation ATS and Form    Rule 304...............  Revised Burden: File     Certain Communication
 ATS-N.                                                          initial Form ATS-N       Protocol Systems.
                                                                 (required by Rule       All Legacy Government
                                                                 301(b)(2)(viii)), as     Securities ATSs.
                                                                 proposed to be revised. All NMS Stock ATSs.
Rule 15b1-1 and Form BD..............  Rule 15b1-1............  Register as a broker-    Certain Communication
                                                                 dealer using Form BD     Protocol Systems.
                                                                 (required by Rule       Certain Currently
                                                                 301(b)(1)).              Exempted Government
                                                                                          Securities ATSs.
Form ID..............................  Rule 101 of Regulation   Apply for EDGAR access   Certain Communication
                                        S-T.                     using Form ID.           Protocol Systems.
                                                                                         Certain Currently
                                                                                          Exempted Government
                                                                                          Securities ATSs.

[[Page 15584]]

 
Regulation SCI.......................  Rules 1001-1007 of       Comply with Regulation   Certain Communication
                                        Regulation SCI.          SCI.                     Protocol Systems.
                                                                                         Certain Legacy
                                                                                          Government Securities
                                                                                          ATSs.
----------------------------------------------------------------------------------------------------------------

B. Proposed Use of Information

    The existing information collections affected by the proposed 
amendments are used as described below:
1. Rule 301 of Regulation ATS and Forms ATS and ATS-R
    Rule 301 of Regulation ATS sets forth the conditions that an ATS 
must comply with to be exempt pursuant to Exchange Act Rule 3a1-
1(a)(2). Rule 301 requires an ATS to register as a broker-dealer. Rule 
301 further requires all ATSs that wish to comply with Regulation ATS 
to file an initial operation report on Form ATS. The initial operation 
report requires information regarding operation of the system including 
the manner of operation, how subscribers access the trading system, and 
the types of securities traded. ATSs are also required to notice 
changes in their operations by filing amendments to Form ATS to the 
Commission.
    In addition, Regulation ATS requires ATSs to provide quarterly 
transaction reports on Form ATS-R. ATSs are also required to file 
cessation of operations reports on Form ATS. The gathering of such 
information permits the Commission to oversee the operation of such 
systems and track the growth of their role in the securities markets.
    The Commission is proposing revisions to Rule 301(b)(2), Form ATS, 
and Form ATS-R to modernize Form ATS and Form ATS-R and to provide that 
they are filed electronically. The Commission believes that, among 
other benefits, the electronic filing of Forms ATS and ATS-R would 
increase efficiencies and decrease filing costs for ATSs.
    ATSs with significant volume are required to comply with 
requirements for fair access pursuant to Rule 301(b)(5) of Regulation 
ATS. As proposed, such ATSs would be required to establish and apply 
reasonable written standards for granting, limiting, and denying access 
to the services of the ATS and make and keep records of all grants of 
access including, for all subscribers, the reasons for granting such 
access, and all denials or limitations of access, and the reasons for 
each applicant for denying or limiting access.\738\ The Commission is 
proposing to apply the Fair Access Rule to the trading of U.S. Treasury 
Securities and Agency Securities. The Commission believes that, today, 
the principles undergirding the Fair Access Rule are equally relevant 
to a Government Securities ATS and amending the Fair Access Rule to 
include the trading of U.S. Treasury Securities and Agency Securities 
would help ensure the fair treatment of potential and current 
subscribers to ATSs that consist of a large percentage of trading 
volume in these two types of securities.
---------------------------------------------------------------------------

    \738\ See supra Section V.A.
---------------------------------------------------------------------------

    ATSs with significant volume are also required to comply with 
requirements for systems capacity, integrity and security pursuant to 
Rule 301(b)(6), which, together with the requirements under Rule 302, 
requires ATSs to preserve any records made in the process of complying 
with the systems capacity, integrity, and security requirements. In 
addition, such ATSs are required to notify Commission staff of material 
systems outages and significant systems changes.
    The Commission uses the information provided pursuant to Rule 301 
to comprehensively monitor the growth and development of ATSs to 
confirm that investors effecting trades through the systems are 
adequately protected, and that the systems do not impede the 
maintenance of fair and orderly securities markets or otherwise operate 
in a manner that is inconsistent with the Federal securities laws. In 
particular, the information collected and reported to the Commission by 
ATSs enables the Commission to evaluate the operation of ATSs with 
regard to national market system goals, and monitor the competitive 
effects of these systems to ascertain whether the regulatory framework 
remains appropriate to the operation of such systems.
    Without the information provided on Forms ATS and ATS-R, the 
Commission would not have readily available information on a regular 
basis in a format that would allow it to determine whether such systems 
have adequate safeguards. Further, in the absence of Rule 301, the 
Commission would not regularly obtain uniform trading data to identify 
areas where surveillance by SROs may be more appropriately tailored to 
the detection of fraudulent, deceptive and manipulative practices that 
may be peculiar to an automated trading environment.
2. Rule 302 of Regulation ATS
    Rule 302, as proposed to be amended,\739\ would require ATSs to 
make a record of subscribers to the ATS, daily summaries of trading in 
the ATS and time-sequenced records of trading interest information in 
the ATS. Regulators (including the Commission and SROs) use the 
information contained in the records required to be preserved by Rule 
302 to ensure that ATSs are in compliance with Regulation ATS as well 
as other applicable rules and regulations. Without the data required by 
Rule 302, regulators would be limited in their ability to comply with 
their statutory obligations, provide for the protection of investors, 
and promote the maintenance of fair and orderly markets.
---------------------------------------------------------------------------

    \739\ See supra notes 165-166 and accompanying text.
---------------------------------------------------------------------------

3. Rule 303 of Regulation ATS
    Rule 303 describes the record preservation requirements for ATSs. 
Rule 303 also describes how such records must be maintained, what 
entities may perform this function, and how long records must be 
preserved.
    The information contained in the records required to be preserved 
by Rule 303 is used by regulators (including the Commission and the 
SROs) to ensure that ATSs are in compliance with Regulation ATS as well 
as other applicable rules and regulations. Without the data required by 
Rule 303, regulators would be limited in their ability to comply with 
their statutory obligations, provide for the protection of investors, 
and promote the maintenance of fair and orderly markets.
4. Rule 304 of Regulation ATS and Form ATS-N
    Rule 304 provides conditions for NMS Stock ATSs seeking to rely on 
the exemption from the definition of ``exchange'' provided by Rule 3a1-
1(a) of the Exchange Act, including to file a Form ATS-N, and for that 
Form ATS-N to become effective. Form ATS-N requires NMS Stock ATSs to 
provide information about their manner of operations, the broker-dealer 
operator, and the ATS-related activities of the broker-dealer operator 
and its affiliates to comply with the conditions provided under Rule 
304. Form ATS-N promotes

[[Page 15585]]

more efficient and effective market operations by providing more 
transparency to market participants about the operations of NMS Stock 
ATSs and the potential conflicts of interest of the controlling broker-
dealer operator and its affiliates, and helps brokers meet their best 
execution obligations to their customers. Operational transparency 
rules, including Form ATS-N, are designed to increase competition among 
trading centers in regard to order routing and execution quality.
    As discussed above, the Commission is re-proposing to amend Rule 
304(a) to require that a Covered ATS, which would include a Government 
Securities ATS, must comply with Rules 300 through 304 of Regulation 
ATS, as applicable, to be exempt pursuant to Rule 3a1-1(a)(2). As 
proposed, all Government Securities ATSs would be required to comply 
with Rule 304, as proposed to be amended, to file Form ATS-N, as 
revised.\740\
---------------------------------------------------------------------------

    \740\ See supra Section IV.A.
---------------------------------------------------------------------------

    The Commission is proposing to revise Form ATS-N to include 
information it previously proposed on Form ATS-G, including a question 
requiring information about interaction with related markets, which 
would be required to be responded to by both Government Securities ATSs 
and NMS Stock ATSs.\741\ The Commission is also proposing to reorganize 
certain questions on Form ATS-N and to require disclosure about any 
surveillance and monitoring that is conducted with respect to the 
ATS.\742\ The Commission believes that the proposed revisions to Form 
ATS-N will continue to allow for better comparisons between ATSs, and 
applying Form ATS-N to Government Securities ATSs will help enable 
market participants to compare Government Securities ATSs.
---------------------------------------------------------------------------

    \741\ See supra Section IV.D.1.
    \742\ See supra Section IV.D.5.
---------------------------------------------------------------------------

    The Commission is also proposing certain amendments to Form ATS-N 
that would apply globally to Form ATS-N unless otherwise noted.\743\ 
The Commission believes that Form ATS-N's public disclosures would 
provide important information to market participants that would help 
them better understand these operational facets of Government 
Securities ATSs and select the best trading venue based on their needs.
---------------------------------------------------------------------------

    \743\ See supra Section IV.D.
---------------------------------------------------------------------------

5. Rule 15b1-1 and Form BD
    The Commission uses the information disclosed by applicants in Form 
BD: (1) To determine whether the applicant meets the standards for 
registration set forth in the provisions of the Exchange Act; (2) to 
develop a central information resource where members of the public may 
obtain relevant, up-to-date information about broker-dealers, municipal 
securities dealers, and government securities broker-dealers, and where 
the Commission, other regulators, and SROs may obtain information for 
investigatory purposes in connection with securities litigation; and 
(3) to develop statistical information about broker-dealers, municipal 
securities dealers, and government securities broker-dealers. Without 
the information disclosed in Form BD, the Commission could not 
effectively implement policy objectives of the Exchange Act with 
respect to its investor protection function.
6. Form ID
    The information provided on Form ID allows the Commission staff to 
review applications for EDGAR access and, if the application is 
approved, assign identification numbers (if the applicant does not 
already have an identification number) and access codes to applicants 
to permit filing on EDGAR. Form ID is essential to EDGAR security.
7. Regulation SCI
    Regulation SCI requires certain key market participants to, among 
other things: (1) Have comprehensive policies and procedures in place 
to help ensure the robustness and resiliency of their technological 
systems, and also that their technological systems operate in 
compliance with the Federal securities laws and with their own rules; 
and (2) provide certain notices and reports to the Commission to 
improve Commission oversight of securities market infrastructure.

C. Respondents

    The categories of respondents for which the proposed amendments 
create a burden under the PRA are described below.
1. Legacy Government Securities ATSs
    As discussed above, the Commission is re-proposing amendments to 
Regulation ATS that would require a Currently Exempted Government 
Securities ATS that seeks to operate pursuant to the exemption from the 
definition of an ``exchange'' under Exchange Act Rule 3a1-1(a)(2), and 
thus not be required to be registered as a national securities 
exchange, to comply with Regulation ATS as proposed \744\ and that 
Current Government Securities ATSs will have to comply with the 
enhanced requirements for Government Securities ATSs.\745\ The 
Commission estimates the total number of Currently Exempted Government 
Securities ATSs to be 7 \746\ and Current Government Securities ATSs to 
be 17,\747\ and some or all of this number will be subject to the 
following collections of information as estimated below:
---------------------------------------------------------------------------

    \744\ See supra Section III.B.2.
    \745\ See supra Section IV.A.
    \746\ The Commission estimates that there are 7 Currently 
Exempted Government Securities ATSs that would be newly subject to 
the requirements of the exemption under Rule 3a1-1(a)(2) and will be 
required to comply with the applicable sections of Regulation ATS, 
as amended. The Commission estimates that 5 such ATSs limit their 
trading activity to government securities and the other 2 ATSs limit 
their trading activity to repos.
    \747\ As of September 30, 2021, 17 Government Securities ATSs 
currently operate pursuant to a Form ATS currently on file with the 
Commission.

----------------------------------------------------------------------------------------------------------------
     Collection of information                Rule            Number of respondents          Description
----------------------------------------------------------------------------------------------------------------
Rule 301 of Regulation ATS and       Rule 301(b)(5)........  7.....................  The Commission estimates
 Forms ATS and ATS-R.                                                                 that certain Legacy
                                                                                      Government Securities ATSs
                                                                                      would satisfy the
                                                                                      conditions for the
                                                                                      proposed application of
                                                                                      the Fair Access Rule to
                                                                                      Government Securities ATS
                                                                                      and be subject to the
                                                                                      related recordkeeping and
                                                                                      notice provisions.

[[Page 15586]]

 
                                     Rule 301(b)(9)........  24....................  The Commission estimates
                                                                                      that all Legacy Government
                                                                                      Securities ATSs will have
                                                                                      to comply with the
                                                                                      requirement to file
                                                                                      quarterly reports on the
                                                                                      proposed modernized Form
                                                                                      ATS-R. The proposal would
                                                                                      impose the full currently-
                                                                                      authorized baseline burden
                                                                                      of filing on Currently
                                                                                      Exempted Government
                                                                                      Securities ATSs, for which
                                                                                      the requirement is new.
                                                                                      For Current Government
                                                                                      Securities ATSs, the
                                                                                      proposal would only impose
                                                                                      the marginal new burden of
                                                                                      filing using the
                                                                                      modernized version of the
                                                                                      form.
                                     Rule 301(b)(10).......  7.....................  The Commission estimates
                                                                                      that all Currently
                                                                                      Exempted Government
                                                                                      Securities ATSs will have
                                                                                      to comply with the
                                                                                      requirement to have
                                                                                      written safeguards and
                                                                                      written procedures to
                                                                                      protect subscribers'
                                                                                      confidential trading
                                                                                      information.
Rule 302 of Regulation ATS.........  Rule 302..............  7.....................  The Commission estimates
                                                                                      that all Currently
                                                                                      Exempted Government
                                                                                      Securities ATSs will have
                                                                                      to comply with the
                                                                                      recordkeeping requirements
                                                                                      for ATSs.
Rule 303 of Regulation ATS.........  Rule 303..............  7.....................  The Commission estimates
                                                                                      that all Currently
                                                                                      Exempted Government
                                                                                      Securities ATSs will have
                                                                                      to comply with the record
                                                                                      preservation requirements
                                                                                      for ATSs.
Rule 304 of Regulation ATS and Form  Rule 304..............  24....................  The Commission estimates
 ATS-N.                                                                               that all Legacy Government
                                                                                      Securities ATSs will have
                                                                                      to comply with the
                                                                                      requirement to file
                                                                                      initial Form ATS-N, as
                                                                                      proposed to be revised.
Rule 15b1-1 and Form BD............  Rule 15b1-1...........  1.....................  The Commission estimates
                                                                                      that certain Currently
                                                                                      Exempted Government
                                                                                      Securities ATSs currently
                                                                                      operated by a bank and not
                                                                                      registered as a broker-
                                                                                      dealer will have to
                                                                                      register using Form BD.
Form ID............................  Rule 101 of Regulation  1.....................  The Commission estimates
                                      S-T.                                            that the same subset of
                                                                                      Currently Exempted
                                                                                      Government Securities ATSs
                                                                                      that are not currently
                                                                                      registered as a broker-
                                                                                      dealer will also have to
                                                                                      file Form ID to apply for
                                                                                      EDGAR access.
Regulation SCI.....................  Rules 1001-1007 of      1 Legacy Government     The Commission estimates
                                      Regulation SCI.         Securities ATS that     that certain Legacy
                                                              is an existing SCI      Government Securities ATSs
                                                              entity and 1 that is    would meet the specified
                                                              a new SCI entity.       volume threshold to meet
                                                                                      the proposed amended
                                                                                      definition of ``SCI
                                                                                      alternative trading
                                                                                      system'' and be subject to
                                                                                      the requirements of
                                                                                      Regulation SCI.
----------------------------------------------------------------------------------------------------------------

2. Communication Protocol Systems
    As discussed above, the Commission is proposing to amend Exchange 
Act Rule 3b-16(a) to cause Communication Protocol Systems to fall 
within the definition of ``exchange'' and believes that such 
Communication Protocol Systems would likely choose to register as a 
broker dealer and be regulated under the Regulation ATS exemption than 
register as a national securities exchange because of the lighter 
regulatory requirements imposed on ATSs, as compared to registered 
exchanges.\748\ The Commission estimates the total number of 
Communication Protocol Systems to be 22,\749\ and some or all of this 
total number will be subject to the following collections of 
information as estimated below:\750\
---------------------------------------------------------------------------

    \748\ See supra Section II.D.
    \749\ Some of the below estimates could change based on how the 
Communication Protocol Systems structure their operations if subject 
to Regulation ATS. For example, the Commission is basing some of the 
below estimates on the assumption that operators of Communication 
Protocol Systems that are affiliated with existing broker-dealers 
would structure their operations so that the existing broker-dealer 
would operate the ATS to avoid the costs of new broker-dealer 
registration. In addition, the Commission estimates that 2 
Communication Protocol Systems that trade municipal securities or 
corporate debt securities would meet the volume thresholds to 
satisfy the conditions for complying with ATS-specific systems 
capacity, integrity and security recordkeeping as well as systems 
outages requirements. This number is based on aggregate data 
reported by broker-dealers and could vary based on how these systems 
structure their businesses.
    \750\ The estimated respondents for the Rule 304/Form ATS-N 
collection of information is based on the assumption that systems 
that operate multiple market places that are affiliated with a new 
or existing broker-dealer will all be operated by such broker-
dealer, and that such systems will not register multiple broker-
dealers to operate multiple affiliated ATSs.

----------------------------------------------------------------------------------------------------------------
                                                                      Number of
       Collection of information                   Rule              respondents            Description
----------------------------------------------------------------------------------------------------------------
Rule 301 of Regulation ATS and Forms    Rule 301(b)(2)...........              14  The Commission estimates that
 ATS and ATS-R.                                                                     certain Communication
                                                                                    Protocol Systems, which
                                                                                    trade securities other than
                                                                                    NMS stocks or government
                                                                                    securities or repos, would
                                                                                    be required to file the
                                                                                    proposed modernized Form
                                                                                    ATS.

[[Page 15587]]

 
                                        Rule 301(b)(5)...........               8  The Commission estimates that
                                                                                    certain Communication
                                                                                    Protocol Systems would meet
                                                                                    the volume thresholds in
                                                                                    government securities, NMS
                                                                                    stocks, corporate debt
                                                                                    securities, municipal
                                                                                    securities, equity
                                                                                    securities that are not NMS
                                                                                    stocks and for which
                                                                                    transactions are reported to
                                                                                    an SRO and be subject to the
                                                                                    Fair Access Rule and the
                                                                                    related recordkeeping and
                                                                                    notice provisions.
                                        Rule 301(b)(6)...........               2  The Commission estimates that
                                                                                    certain Communication
                                                                                    Protocol Systems that trade
                                                                                    municipal securities or
                                                                                    corporate debt securities
                                                                                    and meet certain volume
                                                                                    requirements would satisfy
                                                                                    the conditions for complying
                                                                                    with ATS-specific systems
                                                                                    capacity, integrity and
                                                                                    security recordkeeping as
                                                                                    well as systems outages
                                                                                    requirements.
                                        Rule 301(b)(9)...........              22  The Commission estimates that
                                                                                    all Communication Protocol
                                                                                    Systems will have to comply
                                                                                    with the requirement to file
                                                                                    quarterly reports on the
                                                                                    proposed modernized Form ATS-
                                                                                    R.
                                        Rule 301(b)(10)..........              22  The Commission estimates that
                                                                                    all Communication Protocol
                                                                                    Systems will have to comply
                                                                                    with the requirement to have
                                                                                    written safeguards and
                                                                                    written procedures to
                                                                                    protect subscribers'
                                                                                    confidential trading
                                                                                    information.
Rule 302 of Regulation ATS............  Rule 302.................              22  The Commission estimates that
                                                                                    all Communication Protocol
                                                                                    Systems will have to comply
                                                                                    with the recordkeeping
                                                                                    requirements for ATSs.
Rule 303 of Regulation ATS............  Rule 303.................              22  The Commission estimates that
                                                                                    all Communication Protocol
                                                                                    Systems will have to comply
                                                                                    with the record preservation
                                                                                    requirements for ATSs.
Rule 304 of Regulation ATS and Form     Rule 304.................               8  The Commission estimates that
 ATS-N.                                                                             certain Communication
                                                                                    Protocol Systems that trade
                                                                                    NMS stocks or government
                                                                                    securities or repos would be
                                                                                    required to file Form ATS-N,
                                                                                    as proposed to be revised.
Rule 15b1-1 and Form BD...............  Rule 15b1-1..............               6  The Commission estimates that
                                                                                    certain Communication
                                                                                    Protocol Systems are not
                                                                                    currently registered as or
                                                                                    affiliated with a broker-
                                                                                    dealer and will have to
                                                                                    register using Form BD.
Form ID...............................  Rule 101 of Regulation S-               6  The Commission estimates that
                                         T.                                         the same subset of
                                                                                    Communication Protocol
                                                                                    Systems that are not
                                                                                    currently registered as or
                                                                                    affiliated with a broker-
                                                                                    dealer will also have to
                                                                                    file Form ID to apply for
                                                                                    EDGAR access.
Regulation SCI........................  Rules 1001-1007 of                      2  The Commission estimates that
                                         Regulation SCI.                            certain Communication
                                                                                    Protocol Systems that trade
                                                                                    government securities, NMS
                                                                                    stocks, or equity securities
                                                                                    other than NMS stocks
                                                                                    reported to an SRO would
                                                                                    meet the specified volume
                                                                                    threshold to meet the
                                                                                    proposed amended definition
                                                                                    of ``SCI alternative trading
                                                                                    system'' and be subject to
                                                                                    the requirements of
                                                                                    Regulation SCI.
----------------------------------------------------------------------------------------------------------------

3. NMS Stock ATSs
    As discussed above, the Commission is proposing to revise Form ATS-
N to include information it previously proposed on Form ATS-G, 
including adding questions requiring information about interaction with 
related markets, surveillance and monitoring on the ATS, and liquidity 
providers, which would be required to be responded to by both 
Government Securities ATSs and NMS Stock ATSs.\751\ The Commission is 
also proposing to reorganize certain questions on Form ATS-N.\752\ The 
Commission estimates the total number of NMS Stock ATSs to be 34 \753\ 
and that all will be subject to the following collections of 
information as estimated below:
---------------------------------------------------------------------------

    \751\ See supra Section IV.D.1.
    \752\ See id. and Section IV.D.4-5. In addition, for purposes of 
calculating whether an ATS meets the Fair Access Rule volume 
thresholds, the Commission is proposing to aggregate trading volume 
among certain affiliated ATSs. See supra Section V.A. At this time, 
the Commission estimates that no NMS Stock ATSs would be subject to 
the Fair Access Rule as a result of the proposed changes to 
aggregate affiliated ATS trading volume, and that the proposed 
change would therefore impose no additional burden. Also see infra 
note 1085.
    \753\ As of September 30, 2021, there are 34 NMS Stock ATSs that 
have filed an effective Form ATS-N with the Commission. For the 
purpose of this PRA analysis, NMS Stock ATSs include only those that 
operate today. The burden on Communication Protocol Systems that the 
Commission estimates will trade NMS stocks are included in the 
discussion of that category of respondent. See supra, Section 
VII.C.2; infra, Section VII.D.3.

----------------------------------------------------------------------------------------------------------------
                                                                      Number of
       Collection of information                   Rule              respondents            Description
----------------------------------------------------------------------------------------------------------------
Rule 301 of Regulation ATS and Forms    Rule 301(b)(9)...........              34  The Commission estimates that
 ATS and ATS-R.                                                                     all NMS Stock ATSs will have
                                                                                    to prospectively comply with
                                                                                    the requirement to file
                                                                                    quarterly reports on the
                                                                                    proposed modernized Form ATS-
                                                                                    R.

[[Page 15588]]

 
Rule 304 of Regulation ATS and Form     Rule 304.................              34  The Commission estimates that
 ATS-N.                                                                             all NMS Stock ATSs will be
                                                                                    required to re-file their
                                                                                    current electronic Form ATS-
                                                                                    N disclosure using Form ATS-
                                                                                    N, as proposed to be
                                                                                    revised.
----------------------------------------------------------------------------------------------------------------

4. Other Form ATS Filers
    There is set of respondents (``Other Form ATS Filers'') that are 
currently required to file Form ATS and are neither NMS Stock ATSs nor 
exclusively \754\ Legacy Government Securities ATSs and will continue 
to have an obligation to file Form ATS after the effective date of any 
final rule. These filers will incur burdens to comply with the proposed 
revisions to Forms ATS and ATS-R discussed above.\755\ The Commission 
estimates the total number of Other Form ATS Filers to be 59 \756\ and 
that these respondents will be subject to the following collections of 
information as estimated below:
---------------------------------------------------------------------------

    \754\ Government Securities ATSs that also have trading 
activities other than in government securities or repos will be 
required to separately report that activity on Form ATS after the 
effective date of any final rule.
    \755\ See supra Section V.B. In addition, for purposes of 
calculating whether an ATS meets the Fair Access Rule volume 
thresholds, the Commission is proposing to aggregate trading volume 
among certain affiliated ATSs. See supra Section V.A. At this time, 
the Commission estimates that no Other Form ATS Filers would be 
subject to the Fair Access Rule as a result of the proposed changes 
to aggregate affiliated ATS trading volume, and that the proposed 
change would therefore impose no additional burden. As discussed 
above, the Commission is also re-proposing to remove an exclusion 
from compliance with the Fair Access Rule under Rule 301(b)(5) and 
the Capacity, Integrity, and Security Rule under Rule 301(b)(6) that 
is applicable to ATSs that trade equities and also re-proposing 
revisions to Rule 301(b)(2), Form ATS, and Form ATS-R to modernize 
Form ATS and Form ATS-R and to provide that they are filed 
electronically. See id. The Commission does not expect, however, 
that any ATSs will be newly subject to the Fair Access Rule or the 
Capacity, Integrity, and Security Rule as a result of removing the 
exclusion. Also see infra note 1085.
    \756\ As of September 30, 2021, there are 61 ATSs that file Form 
ATS. Two of these trade only government securities or repos and, as 
proposed, would only be required to file a Form ATS-N and amendments 
to Form ATS-N after the effective date of any final rule. 
Accordingly, the Commission estimates that 59 ATSs will continue to 
file Form ATS amendments.

----------------------------------------------------------------------------------------------------------------
                                                                      Number of
       Collection of information                   Rule              respondents            Description
----------------------------------------------------------------------------------------------------------------
Rule 301 of Regulation ATS and Forms    Rule 301(b)(2)...........              59  The Commission estimates that
 ATS and ATS-R.                                                                     all Other Form ATS Filers
                                                                                    will be required to re-file
                                                                                    their current paper Form ATS
                                                                                    disclosure using the
                                                                                    proposed modernized Form
                                                                                    ATS.
                                        Rule 301(b)(9)...........              59  The Commission estimates that
                                                                                    all Other Form ATS Filers
                                                                                    will have to comply
                                                                                    prospectively with the
                                                                                    requirement to file
                                                                                    quarterly reports on the
                                                                                    proposed modernized Form ATS-
                                                                                    R.
----------------------------------------------------------------------------------------------------------------

D. Total PRA Burdens

1. Burden of Rule 301 of Regulation ATS and Forms ATS and ATS-R
a. Rule 301(b)(2) Burden on Communication Protocol Systems and Other 
Form ATS Filers
    As discussed above, the Commission is proposing to amend Exchange 
Act Rule 3b-16(a), which would cause Communication Protocol Systems to 
fall within the definition of ``exchange'' and believes that such 
Communication Protocol Systems would likely choose to register as a 
broker dealer and be regulated under the Regulation ATS exemption.\757\ 
Certain Communication Protocol Systems that trade securities other than 
NMS stocks or government securities would be subject to requirements 
under Rule 301(b)(2), including to file an IOR and amendments thereto 
using the proposed modernized and electronic \758\ Form ATS.
---------------------------------------------------------------------------

    \757\ See supra Section II.D.
    \758\ The Commission believes that the proposed electronic 
submission of Forms ATS and ATS-R would impose no additional burden 
on existing filers under Regulation ATS such as Other Form ATS 
Filers. These respondents would already have been required to 
register as broker-dealers pursuant to Rule 301(b)(1), and 
registered broker-dealers have been assigned a CIK number and do not 
need to submit a Form ID to access EDGAR. A broker-dealer that has 
never used EDGAR to make electronic submissions may use its assigned 
CIK number to receive access codes that will allow that broker-
dealer operator to submit Form ATS-N filings on EDGAR without 
needing to apply for a Form ID, so the proposed changes would not 
impose a burden under the existing Rule 15b1-1 and Form BD or Form 
ID collections of information on this category of respondents.
---------------------------------------------------------------------------

    Other Form ATS Filers--current Form ATS filers that are not 
required to file Form ATS-N after the effective date of any final 
rule--would incur a burden to comply with the requirements to file Form 
ATS using the proposed modernized form. To comply with the requirements 
of revised Form ATS, such respondents would be required to re-file 
their most recently-filed Form ATS IOR or Amendment to IOR using the 
proposed modernized Form ATS. The Commission estimates an initial 
burden of 20.5 hours \759\ and an annual burden of 5 hours \760\ per 
respondent for complying with Rule 301(b)(2) and the following total 
initial and annual burdens:
---------------------------------------------------------------------------

    \759\ The Commission's currently approved baseline burden for 
the average initial compliance burden for each Form ATS IOR is 20 
hours (Attorney at 13 hours + Compliance Clerk at 7 hours). See 
Extension Without Change of a Currently Approved Collection: 
Regulation ATS Rule 301 Amendments; ICR Reference No. 202101-3235-
011; OMB Control No. 3235-0509 (June 9, 2018), available at https://www.reginfo.gov/public/do/PRAViewDocument?ref_nbr=202101-3235-011 
(``Rule 301 PRA Supporting Statement''). The Commission is proposing 
amendments to Part I of Form ATS, which would add an additional 
burden of 0.5 hours per filing using the modernized form (Compliance 
Clerk at 0.5 hours), and therefore the average compliance burden for 
each Form ATS filing would be 20.5 hours. See supra Section V.B and 
infra Section VII.E (discussing proposed changes).
    \760\ The Commission's currently approved baseline burden for 
the average ongoing compliance burden for each amendment to a Form 
ATS IOR is 4 hours ((Attorney at 1.5 hours + Compliance Clerk at 0.5 
hours) x 2 IOR amendments a year). See Rule 301 PRA Supporting 
Statement, supra note 759. The Commission is proposing amendments to 
Part I of Form ATS, including a requirement applicable to an ATS 
filing an IOR amendment to attach as Exhibit 3 a marked document to 
indicate changes to ``yes'' or ``no'' answers and additions or 
deletions from any Item in Part I, Part II, and Part III, which 
would add an additional annual burden of 1 hour per ATS using the 
modernized form (Compliance Clerk at 0.5 hours x 2 IOR amendments a 
year). Therefore the average compliance burden for each Form ATS 
filing would be 5 hours. See supra Section V.B and infra Section 
VII.E (discussing proposed changes).

[[Page 15589]]



----------------------------------------------------------------------------------------------------------------
                                                                                                  Total burden
                                                                                                   (number of
                                                                 Number of        Burden per      respondents x
             Burden type                  Respondent type       respondents       respondent       burden per
                                                                                   (hours)         respondent)
                                                                                                     (hours)
----------------------------------------------------------------------------------------------------------------
Initial.............................  Communication Protocol               14             20.5               287
                                       Systems.
Annual                                                                                       5                70
Initial.............................  Other Form ATS Filers.               59             20.5           1,209.5
Annual                                                                                       5               295
----------------------------------------------------------------------------------------------------------------

b. Rule 301(b)(5) Burden on Communication Protocol Systems and Legacy 
Government Securities ATSs
    As discussed above, the Commission is proposing to apply the Fair 
Access Rule to the trading of U.S. Treasury Securities and Agency 
Securities. Certain Communication Protocol Systems and Legacy 
Government Securities ATS that trade U.S. Treasury Securities and 
Agency Securities and meet the relevant thresholds would be newly 
subject to the requirements of Rule 301(b)(5) of Regulation ATS.\761\ 
In addition, for purposes of calculating whether an ATS meets the Fair 
Access Rule volume thresholds, the Commission is proposing to aggregate 
trading volume among certain affiliated ATSs, which will impose a 
burden on certain NMS Stock ATSs and Other Form ATS Filers that trade 
securities subject to the Fair Access Rule.\762\ There is no initial 
burden associated with the currently approved collection of information 
for this requirement.\763\ The Commission estimates an annual 
compliance burden of 37 hours per respondent \764\ and the following 
total annual burdens:
---------------------------------------------------------------------------

    \761\ See supra Section II.D.2.
    \762\ See proposed Rule 301(b)(5)(ii). See supra Section V.A.
    \763\ See Rule 301 PRA Supporting Statement, supra note 759.
    \764\ The Commission's currently approved baseline for the 
average compliance burden per respondent is 37 hours = 10 hours for 
Fair Access Standards recordkeeping (Attorney at 5 hours x 2 
responses a year) + 27 hours for Fair Access notices (Attorney at 1 
hour x 27 responses a year). See Rule 301 PRA Supporting Statement, 
supra note 759.

----------------------------------------------------------------------------------------------------------------
                                                                                                  Total annual
                                                                                                 burden (number
                                                                 Number of      Annual burden   of respondents x
                       Respondent type                          respondents     per respondent    annual burden
                                                                                   (hours)       per respondent)
                                                                                                     (hours)
----------------------------------------------------------------------------------------------------------------
Communication Protocol Systems..............................                8               37               296
Legacy Government Securities ATSs...........................                7               37               259
----------------------------------------------------------------------------------------------------------------

c. Rule 301(b)(6) Burden on Communication Protocol Systems
    As discussed above, the Commission is proposing to amend Exchange 
Act Rule 3b-16(a) to cause Communication Protocol Systems to fall 
within the definition of ``exchange'' and believes that such 
Communication Protocol Systems would likely choose to register as a 
broker dealer and be regulated under the Regulation ATS exemption. 
Certain Communication Protocol Systems that trade municipal and 
corporate debt securities and meet the relevant thresholds would be 
newly subject to the systems capacity, integrity, and security 
recordkeeping and systems outages notice requirements of Rule 301(b)(6) 
of Regulation ATS. There is no initial burden associated with the 
currently approved collection of information for this requirement.\765\ 
The Commission estimates an annual compliance burden of 11 hours per 
respondent \766\ and the following total annual burden:
---------------------------------------------------------------------------

    \765\ See Rule 301 PRA Supporting Statement, supra note 759.
    \766\ The Commission's currently approved baseline for the 
average compliance burden per respondent is 11.25 hours = 10 hours 
for systems capacity, integrity and security recordkeeping (Attorney 
at 10 hours) + 1.25 hours for systems outages notice (Attorney at 
.25 hours x 5 systems outages a year). See Rule 301 PRA Supporting 
Statement, supra note 759.

----------------------------------------------------------------------------------------------------------------
                                                                                           Total annual burden
                                                        Number of       Annual burden   (number of respondents x
                  Respondent type                      respondents     per respondent       annual burden per
                                                                           (hours)         respondent) (hours)
----------------------------------------------------------------------------------------------------------------
Communication Protocol Systems.....................               2             11.25                      22.5
----------------------------------------------------------------------------------------------------------------

d. Rule 301(b)(9) Burden on All Respondents
    All respondent categories--Communication Protocol Systems, Legacy 
Government Securities ATSs, NMS Stock ATSs, and Other Form ATS Filers--
are subject to the requirements of Rule 301(b)(9) and would incur a 
burden to file quarterly transaction reports using the proposed 
modernized and electronic \767\ Form ATS-R.
---------------------------------------------------------------------------

    \767\ As discussed above, the Commission believes that the 
proposed electronic submission of Form ATS-R would impose no 
additional burden on current Forms ATS and ATS-N filers. See supra 
note 758.

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

[[Page 15590]]

    Presently, neither Currently Exempted Government Securities ATSs--
the subset of Legacy Government Securities ATSs not operating pursuant 
to a Form ATS on file with Commission as of the effective date of any 
final rule--nor Communication Protocol Systems--are required to file 
quarterly transaction information on Form ATS-R, but the proposed 
amendments will newly impose on all respondents in these categories the 
currently-approved baseline burden of filing Form ATS-R and the 
additional burden of filing using the proposed modernized form.\768\
---------------------------------------------------------------------------

    \768\ The Commission's currently approved baseline for the 
average compliance burden for each Form ATS-R filing is 4 hours 
(Attorney at 3 hours + Compliance Clerk at 1). See Rule 301 PRA 
Supporting Statement, supra note 759. The Commission is proposing 
amendments to Form ATS-R, which would add an additional burden of 
0.75 hours per filing (Compliance Manager at 0.25 hours + Compliance 
Clerk at 0.5), and therefore the average compliance burden for each 
Form ATS-R filing would be 4.75 hours. See supra Section V.B and 
infra Section VII.E (discussing proposed changes to Form ATS-R 
applicable to all ATSs).
---------------------------------------------------------------------------

    Current Government Securities ATSs--the subset of Legacy Government 
Securities ATSs operating pursuant to a Form ATS on file with 
Commission as of the effective date of any final rule--as well as NMS 
Stock ATSs and Other Form ATS Filers already incur a burden to file 
Form ATS-R, so the proposed rules would only impose upon them the new 
increased burden of filing on the modernized version of Form ATS-R. 
There is no initial burden associated with the currently approved 
collection of information for this requirement.\769\ The Commission 
estimates an annual compliance burden of 19 hours per new Form ATS-R 
respondent \770\ and 3 hours per existing Form ATS-R respondent; \771\ 
and the following total annual burdens:
---------------------------------------------------------------------------

    \769\ See Rule 301 PRA Supporting Statement, supra note 759.
    \770\ The annual burden per Currently Exempted Government 
Securities ATS or Communication Protocol System would be 4.75 hours 
x 4 quarterly filings annually = 19 burden hours.
    \771\ The annual burden per existing Form ATS-R respondent would 
be 0.75 hours x 4 quarterly filings annually = 3 burden hours.

----------------------------------------------------------------------------------------------------------------
                                                                                           Total annual burden
                                                           Number of     Annual burden    (number of respondents
                    Respondent type                       respondents    per respondent    x annual burden per
                                                                            (hours)        respondent) (hours)
----------------------------------------------------------------------------------------------------------------
Communication Protocol Systems........................              22               19                      418
Currently Exempted Government Securities ATSs.........               7               19                      133
Current Government Securities ATSs....................              17                3                       51
NMS Stock ATSs........................................              34                3                      102
Other Form ATS Filers.................................              59                3                      177
----------------------------------------------------------------------------------------------------------------

e. Rule 301(b)(10) Burden on Communication Protocol Systems and 
Currently Exempted Government Securities ATSs
    Rule 301(b)(10) requires ATSs to establish adequate written 
safeguards and written procedures to protect subscribers' confidential 
trading information. Neither Currently Exempted Government Securities 
ATSs nor Communication Protocol Systems are presently subject to any of 
the requirements of Rule 301(b), but the current proposal will newly 
impose on all respondents in these categories the currently-approved 
baseline burden of complying with Rule 301(b)(10) after the effective 
date of any final rule.\772\ The Commission estimates an initial burden 
of 8 hours \773\ and an annual burden of 4 hours \774\ per respondent 
for complying with Rule 301(b)(10) and the following total initial and 
annual burdens:
---------------------------------------------------------------------------

    \772\ The proposal would not impose a new burden on Current 
Government Securities ATSs, NMS Stock ATSs, and Other Form ATS 
Filers, as these categories of respondents would already be required 
to comply with Rule 301(b)(10) before the effective date of any 
final rule.
    \773\ The Commission's currently approved baseline for the 
average initial compliance burden is 8 hours (Attorney at 7 hours + 
Compliance Clerk at 1 hour). See Rule 301 PRA Supporting Statement, 
supra note 759.
    \774\ The Commission's currently approved baseline for the 
average ongoing compliance burden is 4 hours (Attorney at 2 hours + 
Compliance Clerk at 2 hours). See Rule 301 PRA Supporting Statement, 
supra note 759.

----------------------------------------------------------------------------------------------------------------
                                                                           Burden per    Total burden (number of
           Burden type                Respondent type       Number of      respondent      respondents x burden
                                                           respondents       (hours)     per respondent) (hours)
----------------------------------------------------------------------------------------------------------------
Initial..........................  Communication                     22               8                      176
                                    Protocol Systems.
Annual                                                                                4                       88
Initial..........................  Currently Exempted                 7               8                       56
                                    Government
                                    Securities ATSs.
Annual                                                                                4                       28
----------------------------------------------------------------------------------------------------------------


2. Burden of Rules 302 and 303 of Regulation ATS on Communication 
Protocol Systems and Currently Exempted Government Securities ATSs

    Rule 301(b)(8) of Regulation ATS requires ATSs to comply with the 
recordkeeping requirements of Rule 302 and the record preservation 
requirements of Rule 303.

[[Page 15591]]

The proposal would newly impose the currently-approved baseline burden 
of complying with these rules on Communication Protocol Systems and 
Currently Exempted Government Securities ATS.\775\ The Commission 
estimates an annual burden of 45 hours per respondent to comply with 
Rule 302 \776\ and 15 hours to comply with Rule 303; \777\ and the 
following total annual burdens:
---------------------------------------------------------------------------

    \775\ The proposal would not impose a new burden on Current 
Government Securities ATSs, NMS Stock ATSs, and Other Form ATS 
Filers, as these categories of respondents would already be required 
to comply with Rules 302 and 303 before the effective date of any 
final rule.
    \776\ The Commission's currently approved baseline for the 
average compliance burden is 45 hours (Compliance Clerk at 45 
hours). See Extension Without Change of a Currently Approved 
Collection: Rule 302 (17 CFR 242.302) Recordkeeping Requirements for 
Alternative Trading Systems; ICR Reference No. 201906-3235-011; OMB 
Control No. 3235-0510 (October 24, 2019), available at https://www.reginfo.gov/public/do/PRAViewDocument?ref_nbr=201906-3235-011. 
There is no initial burden associated with this rule.
    \777\ The Commission's currently approved baseline for the 
average compliance burden is 15 hours (Compliance Clerk at 15 
hours). See Extension Without Change of a Currently Approved 
Collection: Rule 303 (17 CFR 242.303) Record Preservation 
Requirements for Alternative Trading Systems; ICR Reference No. 
202101-3235-010; OMB Control No. 3235-0505 (June 25, 2021), 
available at https://www.reginfo.gov/public/do/PRAViewDocument?ref_nbr=202101-3235-010. There is no initial burden 
associated with this rule.

----------------------------------------------------------------------------------------------------------------
                                                                                           Total annual burden
                                                           Number of     Annual burden    (number of respondents
               Rule                  Respondent type      respondents    per respondent    x annual burden per
                                                                            (hours)        respondent) (hours)
----------------------------------------------------------------------------------------------------------------
Rule 302.........................  Communication                    22               45                      990
                                    Protocol Systems.
Rule 303                                                                             15                      330
Rule 302.........................  Currently Exempted                7               45                      315
                                    Government
                                    Securities ATSs.
Rule 303                                                                             15                      105
----------------------------------------------------------------------------------------------------------------

3. Burden of Rule 304 of Regulation ATS and Form ATS-N on Communication 
Protocol Systems, Legacy Government Securities ATSs, and NMS Stock ATSs
    As discussed above, the Commission is proposing to amend Exchange 
Act Rule 3b-16(a) to cause Communication Protocol Systems to fall 
within the definition of ``exchange'' and believes that such 
Communication Protocol Systems would likely choose to register as a 
broker dealer and be regulated under the Regulation ATS exemption.\778\ 
Under the proposal, Government Securities ATSs (inclusive of 
Communication Protocol Systems) would be subject to the proposed 
changes to Regulation ATS related to Government Securities ATSs.\779\ 
Those respondents, as well as Communication Protocol Systems that trade 
NMS Stocks, will be newly required to file Form ATS-N as revised,\780\ 
pursuant to Rule 304. In addition, existing NMS Stock ATSs that do not 
also trade in government securities will, after the effective date of 
any final rule, be required to re-file their most recent Form ATS-N or 
Form ATS-N amendment using the revised Form ATS-N. The Commission 
estimates the initial burden for new filers of Form ATS-N, as revised--
Currently Exempted Government Securities ATSs and Communication 
Protocol Systems that trade government securities or NMS Stocks--to be 
136.4 hours.\781\ The Commission estimates the initial burden for 
Current Government Securities ATSs, which currently file on Form ATS, 
to file on Form ATS-N, as revised, to be 116.4 hours.\782\ The 
Commission estimates the initial burden for existing NMS Stock ATSs 
that do not also trade government securities, which currently file on 
Form ATS-N, to be 8 hours.\783\ The Commission estimates that the 
annual burden for each new Form ATS-N respondent to file amendments to 
Form ATS-N is 47 hours.\784\ The total estimated initial and annual 
\785\ burdens for each respondent type are as follows:
---------------------------------------------------------------------------

    \778\ See supra Section II.D.
    \779\ See supra Section III.
    \780\ See supra Section IV.
    \781\ The Commission's currently approved baseline burden for 
the average initial compliance burden for each initial Form ATS-N is 
130.4 hours (currently approved baseline burden to complete an 
initial Form ATS at 20 hours: Attorney at 13 hours and Compliance 
Clerk at 7 hours; see Rule 301 PRA Supporting Statement, supra note 
759) + (Part I at 0.5 hour) + (Part II at an average of 29 hours) + 
(Part III at an average of 78.75 hours) + (Access to EDGAR at 0.15 
hours) + (Posting link to published Form ATS-N on ATS website at 2 
hours) = 130.4 burden hours. See Extension Without Change of a 
Currently Approved Collection: Regulation ATS Rule 304 and Form ATS-
N; ICR Reference No. 202109-3235-014; OMB Control No. 3235-0763 
(January 3, 2022), available at https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=202109-3235-014 (``Rule 304 PRA Supporting 
Statement''). The aggregate totals by professional, including the 
baseline, are estimated to be approximately 54.6 hours for an 
Attorney, 0.5 hours for a Chief Compliance Manager, 34.55 hours for 
a Compliance Manager, 32.25 hours for a Senior Systems Analyst, 1 
hour for a Senior Marketing Manager, and 7.5 hours for a Compliance 
Clerk. The Commission estimates that the proposed amendments to Form 
ATS-N would add an additional burden of 6 hours per filing (Attorney 
at 2.5 hours, Compliance Manager at 1.5 hours, Senior Systems 
Analyst at 1.5 hours, and Compliance Clerk at 0.5 hours), and 
therefore the average compliance burden for each new Form ATS-N 
filer would be 136.4 hours. See supra Section V.B and infra Section 
VII.E (discussing proposed changes).
    \782\ The Commission estimates that existing Form ATS filers 
will not incur the portion of the currently approved baseline burden 
to file an initial Form ATS-N that is attributable to completing an 
initial Form ATS, estimated at 20 hours. See Rule 304 PRA Supporting 
Statement, supra note 781. Thus, the total initial burden for these 
respondents will be 116.4 hours (130.4 hours baseline burden to file 
an Initial Form ATS-N-20 hours + 6 hours per filing to complete the 
proposed revised items of Form ATS-N). See id.
    \783\ The Commission estimates the proposal would impose upon 
current Form ATS-N filers a one-time burden of 8 hours: The marginal 
burden of 6 hours to respond to the revised items in the form (see 
supra note 781) + 2 hours for a Compliance Clerk to reorganize their 
current Form ATS disclosures to respond to revised Form ATS-N.
    \784\ The currently approved baseline burden for filing 
amendments to Form ATS-N is 47 hours ((Attorney at 5.5 hours + 
Compliance Manager at 2 hours + Compliance Clerk at 1.9 hours) x 5 
amendments a year). See Rule 304 PRA Supporting Statement, supra 
note 781.
    \785\ The currently approved baseline annual burden for Rule 304 
contemplates NMS Stock ATSs filing amendments to Form ATS-N, and 
this proposal does not add to that burden.

[[Page 15592]]



----------------------------------------------------------------------------------------------------------------
                                                                                         Total burden (number of
                                                            Number of      Burden per      respondents x burden
           Burden type                Respondent type      respondents     respondent    per respondent, rounded
                                                                             (hours)      to nearest 0.5 hours)
----------------------------------------------------------------------------------------------------------------
Initial..........................  Communication                      8           136.4                    1,091
                                    Protocol Systems.
Annual                                                                               47                      376
Initial..........................  Currently Exempted                 7           136.4                      955
                                    Government
                                    Securities ATSs.
Annual                                                                               47                      329
Initial..........................  Current Government                17           116.4                    1,979
                                    Securities ATSs.
Annual                                                                               47                      799
Initial..........................  NMS Stock ATSs......              34               8                      272
----------------------------------------------------------------------------------------------------------------

4. Burden of Rule 15b1-1 and Form BD on Communication Protocol Systems 
and Currently Exempted Government Securities ATSs
    Rule 301(b)(1) of Regulation ATS requires ATSs to register as a 
broker-dealer under section 15 of the Act. The proposal would newly 
impose the currently-approved baseline burden of complying with the 
Rule 15b1-1 and Form BD collection of information on certain 
Communication Protocol Systems and Currently Exempted Government 
Securities ATSs that are not already registered as broker-dealers.\786\ 
The Commission estimates an initial burden of 2.75 hours \787\ and an 
annual burden of 1 hour \788\ per respondent for completing Form BD and 
the following total initial and annual burdens:
---------------------------------------------------------------------------

    \786\ The proposal would not impose a new burden on Current 
Government Securities ATSs, NMS Stock ATSs, and Other Form ATS 
Filers, as these categories of respondents are already subject to 
the requirement of Regulation ATS, and specifically Rule 301(b)(1) 
to register as a broker-dealer. The Commission also estimates that a 
subset of Communication Protocol Systems and Currently Exempted 
Government Securities ATSs would already be registered as broker-
dealers.
    \787\ The Commission's currently approved baseline burden for 
the average initial compliance burden for each Form BD is 2.75 hours 
(Compliance Manager at 2.75 hours). See Extension Without Change of 
a Currently Approved Collection: Form BD and Rule 15b1-1. 
Application for registration as a broker-dealer; ICR Reference No. 
201905-3235-016; OMB Control No. 3235-0012 (August 7, 2019), 
available at https://www.reginfo.gov/public/do/PRAViewDocument?ref_nbr=201905-3235-016. (``Form BD PRA Supporting 
Statement'').
    \788\ The Commission's currently approved baseline burden for 
the average ongoing compliance burden for each respondent amending 
Form BD is .95 hours (Compliance Manager at 0.33 hours x 2.87 
amendments per year). See Form BD PRA Supporting Statement, supra 
note 787.

----------------------------------------------------------------------------------------------------------------
                                                                                         Total burden (number of
                                                            Number of      Burden per      respondents x burden
           Burden type                Respondent type      respondents     respondent    per respondent, rounded
                                                                             (hours)      to nearest 0.5 hours)
----------------------------------------------------------------------------------------------------------------
Initial..........................  Communication                      6            2.75                     16.5
                                    Protocol Systems.
Annual                                                                              .95                      5.5
Initial..........................  Currently Exempted                 1            2.75                        3
                                    Government
                                    Securities ATSs.
Annual                                                                              .95                        1
----------------------------------------------------------------------------------------------------------------

5. Burden of Form ID on Communication Protocol Systems and Currently 
Exempted Government Securities ATSs
    The same subset of Communication Protocol Systems and Currently 
Exempted Government Securities ATSs that are not already registered as 
broker-dealers discussed above would also newly incur the currently-
approved baseline burden of the Form ID collection of information 
necessary to apply for EDGAR access.\789\ The Commission estimates an 
initial burden of 0.15 hours \790\ and no annual burden per respondent 
for completing Form ID, and the following total burdens:
---------------------------------------------------------------------------

    \789\ As discussed above, respondents burdened under the PRA by 
this proposal that are already registered as broker-dealers would 
not incur this burden. See supra note 786.
    \790\ See Revision of a Currently Approved Collection: Form ID--
EDGAR Password; ICR Reference No. 202104-3235-022; OMB Control No. 
3235-0328 (April 29, 2021), available at https://www.reginfo.gov/public/do/PRAViewDocument?ref_nbr=202104-3235-022.

----------------------------------------------------------------------------------------------------------------
                                                                                           Total initial burden
                                                                         Initial burden   (number of respondents
                    Respondent type                        Number of     per respondent    x initial burden per
                                                          respondents       (hours)       respondent, rounded to
                                                                                            nearest 0.5 hours)
----------------------------------------------------------------------------------------------------------------
Communication Protocol Systems........................               6             0.15                        1
Currently Exempted Government Securities ATSs.........               1             0.15                        0
----------------------------------------------------------------------------------------------------------------

6. Burden of Regulation SCI on Communication Protocol Systems and 
Legacy Government Securities ATSs
    As discussed above, the Commission is re-proposing to amend 
Regulation SCI to expand the definition of ``SCI alternative trading 
system'' to include Government Securities ATSs that meet a specified 
volume threshold, which would, in turn, fall within the definition of 
``SCI entity'' and, as a result, be subject to the requirements of 
Regulation SCI.\791\ As proposed, (1) Communication Protocol Systems 
that transact in U.S. Treasuries, Agency Securities, NMS stocks, or 
equity securities other than NMS stocks reported to an SRO and (2) 
Legacy Government Securities ATSs could become newly subject to the 
requirements of Regulation SCI if they

[[Page 15593]]

satisfy the thresholds set forth in the proposed amended definition of 
``SCI alternative trading system.'' \792\
---------------------------------------------------------------------------

    \791\ See supra Section III.C.
    \792\ The proposal would not impose a new burden on (1) 
Communications Protocol Systems that transact in categories of 
securities that are not within the definition of ``SCI alternative 
trading system,'' (2) NMS Stock ATSs, which are already subject to 
the requirements of Regulation SCI (unless they are Communication 
Protocol Systems that meet the Regulation SCI thresholds in NMS 
stocks), and (3) Other Form ATS Filers, which, as defined in this 
proposal, do not transact in the categories of securities within the 
definition of ``SCI alternative trading system.''
---------------------------------------------------------------------------

    The Commission estimates 2 Communication Protocol Systems will 
initially satisfy the conditions and thresholds set forth in the 
proposed amended definition of ``SCI alternative trading system'' that 
are not existing SCI entities or affiliated with SCI entities and will 
incur a higher initial burden to comply. With respect to Legacy 
Government Securities ATSs, the Commission estimates that 1 respondent 
will qualify as an SCI alternative trading system that is currently an 
SCI entity or is affiliated with an SCI entity and will incur a lower 
initial burden to comply with Regulation SCI, and 1 respondent will 
qualify as an SCI alternative trading systems that is not an existing 
SCI entity or affiliated with an SCI entity and will incur the higher 
initial burden to comply.
    The Commission estimates an initial compliance burden for existing 
SCI entities of 1,017.15 hours,\793\ an initial compliance burden for 
new SCI entities of 2,034.3 hours,\794\ an annual compliance burden for 
all qualifying SCI entities of 2,458.65 hours,\795\ and the following 
total initial and annual burdens:
---------------------------------------------------------------------------

    \793\ The Commission's currently approved baseline burden for 
the average initial compliance burden for an existing SCI entity 
that is not an SRO or a plan processor is 1,017.15 hours. See 
Extension Without Change of a Currently Approved Collection: 
Regulation SCI and Form SCI; ICR Reference No. 201807-3235-001; OMB 
Control No. 3235-0703 (September 26, 2018) available at https://www.reginfo.gov/public/do/PRAViewDocument?ref_nbr=201807-3235-001 
(``2018 SCI PRA Supporting Statement'').
    \794\ The Commission's currently approved baseline burden for 
the average initial compliance burden for an existing SCI entity 
that is not an SRO or a plan processor is 2,034.3 hours. See 2018 
SCI PRA Supporting Statement supra note 793.
    \795\ The Commission's currently approved baseline burden for 
the average ongoing compliance burden for an SCI entity that is not 
an SRO or a plan processor is 2,458.6 hours. See 2018 SCI PRA 
Supporting Statement supra note 793.

----------------------------------------------------------------------------------------------------------------
                                                                                         Total burden (number of
                                    Burden description/     Number of      Burden per      respondents x burden
           Burden type                respondent type      respondents     respondent    per respondent, rounded
                                                                             (hours)      to nearest 0.5 hours)
----------------------------------------------------------------------------------------------------------------
Initial..........................  Compliance with                    1        1,017.15                    1,017
Annual...........................   Regulation SCI                             2,458.65                  2,458.5
                                    (Legacy Government
                                    Securities ATSs
                                    that are existing
                                    SCI entities).
Initial..........................  Compliance with                    1         2,034.3                  2,034.5
Annual...........................   Regulation SCI                             2,458.65                  2,458.5
                                    (Legacy Government
                                    Securities ATSs
                                    that are new SCI
                                    entities).
Initial..........................  Compliance with                    2         2,034.3                  4,068.5
Annual...........................   Regulation SCI                             2,458.65                  4,917.5
                                    (Communication
                                    Protocol Systems
                                    that are new SCI
                                    entities).
----------------------------------------------------------------------------------------------------------------

E. Request for Comments

    Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits 
comments to:
    178. Evaluate whether the proposed collection of information is 
necessary for the proper performance of the Commission's functions, 
including whether the information shall have practical utility;
    179. Evaluate the accuracy of the Commission's estimates of the 
burden of the proposed collection of information;
    180. Determine whether there are ways to enhance the quality, 
utility, and clarity of the information to be collected;
    181. Evaluate whether there are ways to minimize the burden of 
collection of information on those who are to respond, including 
through the use of automated collection techniques or other forms of 
information technology; and
    182. Evaluate whether the proposed amendments would have any 
effects on any other collection of information not previously 
identified in this section.
    Persons submitting comments on the collection of information 
requirements should direct them to the Office of Management and Budget, 
Attention: Desk Officer for the Securities and Exchange Commission, 
Office of Information and Regulatory Affairs, Washington, DC 20503, and 
should also send a copy of their comments to Vanessa Countryman, 
Secretary, Securities and Exchange Commission, 100 F Street NE, 
Washington, DC 20549-1090, with reference to File Number S7-02-22. 
Requests for materials submitted to OMB by the Commission with regard 
to this collection of information should be in writing, with reference 
to File Number S7-02-22 and be submitted to the Securities and Exchange 
Commission, Office of FOIA/PA Services, 100 F Street NE, Washington, DC 
20549-2736. As OMB is required to make a decision concerning the 
collection of information between 30 and 60 days after publication, a 
comment to OMB is best assured of having its full effect if OMB 
receives it within 30 days of publication.

VIII. Economic Analysis

A. Introduction

    We are mindful of the economic effects that may result from the 
proposed amendments, including the benefits, costs, and the effects on 
efficiency, competition, and capital formation.\796\ This section 
analyzes the expected economic effects of the proposed rules relative 
to the current baseline, which consists of the current market and 
regulatory framework in existence today.
---------------------------------------------------------------------------

    \796\ Exchange Act Section 3(f) requires the Commission, when it 
is engaged in rulemaking pursuant to the Exchange Act and is 
required to consider or determine whether an action is necessary or 
appropriate in the public interest, to consider, in addition to the 
protection of investors, whether the action will promote efficiency, 
competition, and capital formation. See 15 U.S.C. 78c(f). In 
addition, Exchange Act Section 23(a)(2) requires the Commission, 
when making rules pursuant to the Exchange Act, to consider among 
other matters the impact that any such rule would have on 
competition and not to adopt any rule that would impose a burden on 
competition that is not necessary or appropriate in furtherance of 
the purposes of the Exchange Act. See 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------

    A significant number of buyers and sellers for securities are 
brought together through Communication Protocol Systems, Government 
Securities ATSs, ATSs trading other securities asset classes, and 
registered exchanges, but this activity is subject to different 
regulations according to the type of venue and asset class. By amending 
Exchange Act Rule 3b-16 to include Communication Protocol Systems 
within the definition of exchange and ending the exemption for 
Government Securities ATSs, the proposed amendments would functionally 
apply

[[Page 15594]]

Regulation ATS to an additional number of entities not currently 
regulated by it. This would have a number of benefits, including 
enhanced regulatory oversight and protection for investors, a reduction 
in trading costs and improvement in execution quality, and enhancement 
of price discovery and liquidity.
    The proposed amendments would also have costs for those entities 
subject to new requirements, including compliance costs associated with 
filing forms such as Form ATS-N or Form ATS, protecting confidential 
information, keeping certain records, and complying with the Fair 
Access Rule and/or Regulation SCI.

B. Baseline

1. Current State of Communication Protocol Systems
    Communication Protocol Systems bring together buyers and sellers of 
securities through the use of non-firm trading interest and by 
providing structured methods for communication. Three common types of 
protocols, RFQ, stream axes, and conditional order protocols, along 
with their potential advantages and disadvantages for participants, are 
described in following subsections.\797\ Subsequent sections discuss 
details of Communication Protocol Systems that are particular to 
different asset classes.\798\
---------------------------------------------------------------------------

    \797\ See infra Tables VIII.5 and VIII.6 for a breakdown of the 
market share of different protocols, including ATS protocols, in the 
markets for government securities and corporate debt.
    \798\ See infra Sections VIII.B.2.b, VIII.B.3.b, VIII.B.4.b, 
VIII.B.5.d, VIII.B.6.b, and VIII.B.7.
---------------------------------------------------------------------------

a. Request-for-Quote Protocol
    As described in Section II.B.2, an RFQ protocol system typically 
allows market participants to obtain quotes for a particular security 
by simultaneously sending messages to one or more potential 
respondents. The initiating participant is typically required to 
provide information related to the request in a message, which may 
include the name of the initiating participant, CUSIP, side, and size. 
Participants that observe the initiating participant's request have the 
option to respond to the request with a price quote. These respondents 
are typically dealers in the relevant asset class, and are often, 
though not always, pre-selected. The initiating participant can then 
select among the respondents by either accepting one of multiple 
responses or rejecting all responses, usually within a ``good for'' 
time period. After the initiating participant and a respondent agree on 
the terms of the trade, the trade will then proceed to post-trade 
processing.
    Initiating participants have an incentive to invite multiple 
respondents to an RFQ, because receiving more quotes increases price 
competition and thus may improve execution quality.\799\ The Commission 
understands that it is common for an RFQ to include at least three 
participants.
---------------------------------------------------------------------------

    \799\ See MarketAxess Letter at 3, stating that variations of 
the RFQ protocol can allow clients to simultaneously request 
liquidity on an anonymous basis from over 1,000 platform 
participants, and that connecting to more counterparties improves 
trading outcomes and lowers transaction costs for liquidity 
providers and takers.
---------------------------------------------------------------------------

    The number of respondents that are invited to participate in the 
RFQ is generally less than the total number of dealers available 
through the system.\800\ There may be several reasons for this. First, 
the Commission understands that the system itself may limit the total 
number of respondents that can be selected for a single RFQ, typically 
to five counterparties. This limitation may encourage dealers to 
respond to RFQs, since it reduces the number of other dealers they 
would compete with in any give request session.
---------------------------------------------------------------------------

    \800\ See supra Section V.A.3, discussing the applicability of 
fair access to platforms where each participant has discretion over 
which other participants they want to trade.
---------------------------------------------------------------------------

    A second reason stems from the initiating participant's possible 
incentive to limit the degree of information leakage. If the trade the 
initiating participant is seeking to complete with the help of the RFQ 
is not completely filled in that one session, and other participants 
know this, quotes the initiating participant receives elsewhere may be 
affected, including in subsequent RFQ sessions.
    A third reason is that respondents and initiators both have an 
incentive to limit price impact because of the expense it will add to 
the offsetting trade that must follow. Specifically, a dealer who takes 
a position to fill a customer order through an RFQ will often 
subsequently offset that position in the interdealer market. If a large 
number of dealers are invited to participate in an RFQ, this would lead 
to widespread knowledge that the dealer with the winning bid will now 
try to offset that position, which could impact the prices available to 
that dealer in the interdealer market.
    Because RFQs give the initiating participant the opportunity to 
mitigate the information leakage described above, they may give the 
initiating participant more control over its information than a limit 
order book (``LOB'').\801\
---------------------------------------------------------------------------

    \801\ This reduction in information leakage may be offset by the 
fact that on disclosed RFQs, the initiator's identity is revealed to 
participants in the session, which may be an especially sensitive 
bit of information to reveal.
---------------------------------------------------------------------------

    Once the initiator receives responses from the counterparties, the 
initiator can select a quote with which to trade. On some RFQ 
platforms, it is at this point that both sides become committed to the 
trade. However, there are other RFQ platforms which allow the 
respondent an opportunity to confirm the trade. Additionally, after the 
RFQ session has ended, the system may inform other respondents to the 
RFQ of the price of the second best quote. This allows them to get 
information as to what other respondents are quoting in the market, 
while limiting information leakage regarding the details of the actual 
trade that took place.
    Anonymous RFQ sessions may reduce information leakage more than a 
disclosed RFQ, because the identity of the initiating participant might 
otherwise reveal something about the initiating participant's 
willingness to pay.\802\ However, this means respondents are not able 
to price quotes on the basis of an ongoing relationship with the 
counterparty.
---------------------------------------------------------------------------

    \802\ The use of anonymous RFQ is not uniform across asset 
classes. The Commission preliminarily believes that anonymous RFQ is 
uncommon in the market for U.S. Treasury Securities.
---------------------------------------------------------------------------

    RFQ systems have disadvantages for the initiating participants, 
when compared with LOBs. For liquid securities, trading on an RFQ 
system results in less price competition among respondents when 
compared with an LOB, if the number of respondents are limited. 
Compared to an LOB, respondents cannot see what quotes they would have 
to beat to win the auction, and may not have to compete with as many 
respondents to provide a quote.
    Also, the Commission understands that there may be less straight-
through processing when trading is conducted via an RFQ protocol 
system, as opposed to on an exchange. Furthermore, depending on the 
type of asset being traded, there may not be centralized means of 
clearing and settlement available. For these reasons, the Commission 
understands that one reason why disclosed RFQs are used is so that RFQ 
initiating participants can choose dealers with whom the initiator has 
an established relationship.\803\ Then, after an RFQ session has ended, 
all necessary processing for the trade is completed through this 
relationship, in the same way that a transaction might

[[Page 15595]]

be processed via bilateral voice trading.\804\
---------------------------------------------------------------------------

    \803\ See, e.g., MarketAxess Letter at 5, stating that the 
majority of RFQ trades are completed on a name-disclosed basis with 
no central clearing party.
    \804\ Bilateral voice trading refers to telephone calls, chat 
messages, etc.
---------------------------------------------------------------------------

    In order to facilitate processing of the trade while maintaining 
the anonymity of the counterparties, the operator of the anonymous RFQ, 
which is typically a broker-dealer, may act as a counterparty to each 
side of the trade. Also, the Commission understands that anonymous RFQs 
are often received by all liquidity providers participating on the 
platform, instead of a pre-selected few. The Commission understands 
that providing an intermediary broker to act as a counterparty to each 
side of a trade on the system may also function as a convenience to RFQ 
participants generally, by allowing the system to help facilitate more 
straight-through processing.
    As described in Section II.B.2, RFQ Lists, also referred to as BWIC 
or OWIC,\805\ are a variation of the RFQ protocol in which quotes are 
solicited for multiple securities simultaneously. Market participants 
use RFQ Lists to complete trades in a number of different securities at 
the same time. Bringing all liquidity providers together into a single, 
multi-security RFQ may be a more efficient way of trading multiple 
securities at once than initiating a separate RFQ session for each 
security, especially if it is important to complete the trades close 
together in time. However, the use of the joint session may reveal more 
about the trading intentions of the initiator to its counterparties 
than using separate RFQ sessions, where information leakage is more 
limited, as respondents may be less aware of the complete position the 
initiator is seeking to take.
---------------------------------------------------------------------------

    \805\ See supra note 58.
---------------------------------------------------------------------------

b. Stream Axes
    As defined in Section II.B.2, ``stream axes'' are systems that 
electronically display continuous trading interest (firm or non-firm) 
in a security or type of security to participants on the systems. The 
Commission understands a typical stream axe to operate as follows: 
Dealers submit an indication or indications of interest (``axe'' or 
``axes''), which may include price quotes and sizes for buying and 
selling securities. Axes are streamed to participants, updating 
continuously as dealers adjust prices and inventory offerings. A market 
participant may choose an axe with which to trade at the broadcasted 
price and size. In some cases, the axes are streamed on a non-anonymous 
basis, which permits the prices to be customized to the recipient on 
the basis of the relationship between the recipient and the dealer.
    Stream axes differ from RFQs in that the dealer streaming the axes 
receives less information about the counterparty's trading intentions 
before the trade is agreed to. Stream axes are similar to an LOB in 
this way. This lack of information may end up reflected in the prices 
the dealer chooses to stream, as well as the type of dealer who chooses 
to participate in stream axes. Therefore, the decision to use an RFQ or 
stream axe may depend on the trading intentions of the participant. The 
stream axes protocol gives the participant receiving the stream the 
free option to trade at whatever price is being streamed at the moment, 
without revealing anything about its trading intentions beyond its 
identity. On the other hand, this may be less conducive to trading in 
certain sizes, and may not result in the same price as an RFQ.
c. Conditional Order Protocol
    Section II.B.2 defines conditional orders as trading interest that 
may not be executable until after a user takes subsequent action, for 
example, sending a firm-up invitation message to other participants. 
Conditional order protocols often allow the matched parties to modify 
the attributes of the non-firm trading interest before accepting the 
firm-up invitation. If both matching parties accept the firm-up invite, 
the parties would agree upon the terms of the trade and an execution 
would occur.
    Unlike LOBs, conditional order protocols allow participants to 
ultimately decline a transaction after receiving a response to their 
quote. This may be particularly useful for large size orders or for 
illiquid securities, for which search costs may be particularly high. 
For example, participants can place conditional orders on various 
systems in search of liquidity, and use the fact that the orders are 
non-firm to avoid the risk of double-execution by declining some 
responses if they receive more than one. However, the ability for the 
matched counterparty to also decline to transact implies that the risk 
of non-execution on conditional order protocols is likely higher than 
that of LOBs.
2. Current State of Government Securities Market
    The market for U.S. Government securities is large both in terms of 
the outstanding debt and daily trading volume. According to the 
Treasury Department, as of the end of 2020, the total amount 
outstanding of marketable Treasury Securities was approximately $21 
trillion.\806\ The Financial Accounts of the United States Z.1 released 
by the Federal Reserve Board shows that the amount outstanding of 
Agency- and GSE-Backed Securities is about $10.1 trillion, as of the 
end of 2020.\807\ According to data published by SIFMA, in September 
2021, the average daily trading volume in government securities was 
about $850.1 billion, or roughly 95 percent of all fixed income trading 
volume in the U.S.\808\ This includes $582.1 billion average daily 
trading in U.S. Treasury Securities, $265.7 billion in Agency MBSs, and 
$2.4 billion in other Agency Securities.
---------------------------------------------------------------------------

    \806\ See Monthly Statement of the Public Debt of the United 
States, dated December 31, 2020, available at https://www.treasurydirect.gov/govt/reports/pd/mspd/2020/opds122020.pdf.
    \807\ See Financial Accounts of the United States Z.1 at 177, 
available at https://www.federalreserve.gov/releases/z1/20210311/z1.pdf.
    \808\ See SIFMA Fixed Income Trading Volume, available at 
https://www.sifma.org/resources/research/us-fixed-income-securities-statistics/. The stated figures include Treasury Securities, Agency 
MBS, and Federal Agency Securities.
---------------------------------------------------------------------------

a. ATSs in the Market for U.S. Government Securities
i. Operations and Market Share of Government Securities ATSs
    The variety of market participants trading on Government Securities 
ATSs has increased since their inception. While Government Securities 
ATSs in the market for U.S. Treasury Securities historically only 
allowed bank and non-bank dealers \809\ to trade, beginning in 2003, 
firms that were neither banks nor dealers, such as hedge funds, 
insurance companies, and PTFs, gained permission from the ATSs to trade 
directly on Government Securities ATSs.\810\ The Commission estimates 
that there are currently 17 ATSs trading in government securities 
(either Treasury or Agency securities, or both) that have a Form ATS on 
file.\811\

[[Page 15596]]

Additionally, the Commission estimates that 7 Currently Exempted 
Government Securities ATSs are not currently required to register as a 
national securities exchange or comply with Regulation ATS.\812\
---------------------------------------------------------------------------

    \809\ Absent an exception or an exemption, Section 15(a)(1) of 
the Exchange Act makes it unlawful for a ``dealer'' to effect any 
transactions in, or to induce or attempt to induce the purchase or 
sale of, any security unless registered with the Commission in 
accordance with Section 15(b) of the Exchange Act. Similarly, 
Section 15C of the Exchange Act makes it unlawful for a ``government 
securities dealer'' (other than a registered broker-dealer or 
financial institution) to induce or attempt to induce the purchase 
or sale of any government security unless such government securities 
dealer is registered in accordance with Section 15C(a)(2).
    \810\ See Letter from Jim Greco, CEO, Direct Match, to David R. 
Pearl, Office of the Executive Secretary, U.S. Department of the 
Treasury, dated April 22, 2016, (``Direct Match Letter'') at 5, 
available at https://www.treasurydirect.gov/instit/statreg/gsareg/RFIcommentletterDirectMatch.pdf at 6-7.
    \811\ See supra Section VII.C.1. The Commission estimates that 
some of these ATSs only support Treasuries trading to facilitate 
hedging in conjunction with corporate bonds transactions, but 
typically are not used for outright Treasuries trading. See also ICE 
Bonds Letter I at 3, stating that this offering of Government 
Securities ATSs gives participants the convenience of electronically 
trading in instruments with correlated trading activities in a 
centralized location.
    \812\ As discussed in Section I, a Currently Exempted Government 
Securities ATS is defined as an ATS that limits its securities 
activities to government securities or repos and registers as a 
broker-dealer or is a bank. Currently Exempted Government Securities 
ATSs transact exclusively in government securities or repos, and are 
not required to file a Form ATS.
---------------------------------------------------------------------------

    Currently, Government Securities ATSs account for a significant 
percentage of all Treasury trading activity reported to TRACE.\813\ As 
shown in Table VIII.1, ATSs accounted for approximately 32 percent of 
U.S. Treasury Securities trading volume in the first half of 2021. 
Dealer participants on current ATSs use them as a source of liquidity 
in government securities, including the liquidity needed to efficiently 
fill customer orders outside the current ATSs. The Commission 
understands that this means some portion of dealer transactions on 
Government Securities ATSs are associated with the dealers' activity in 
filling customer orders.
---------------------------------------------------------------------------

    \813\ TRACE aggregation and analysis methods follow those used 
by Treasury market regulators and FINRA, including adjustments for 
multiple trade reports for a single transaction and counting only 
one trade report for an ATS or inter-dealer broker (IDB). Commission 
staff uses the regulatory version of TRACE in its analysis.
    A ``Give-Up'' ID is reported when a principal to a transaction 
delegates another participant to report a trade on its behalf. When 
a ``Give-Up'' ID is reported, the corresponding reporting or contra- 
party is replaced with the ``Give-Up'' ID. This ensures that trades 
are attributed to the principals to each transaction. System control 
numbers are used to link corrected, canceled, and reversed trade 
messages with original new trade messages. In these cases, only 
corrected trades are kept and all cancellation and reversal messages 
and their corresponding new trade messages are removed.
    Special care must be taken when counting market volume. When a 
FINRA registered broker directly purchases from another FINRA 
member, two trade messages are created. If those FINRA registered 
brokers transact through an IDB, four trade messages are created, 
two for the IDB and one for each member. In both cases, the volume 
from only one report is needed. To ensure that double counting of 
transactions does not occur, only the following trade messages are 
summed to calculate market volume: Sales to non-IDB members, sales 
to identified customers, such as banks, hedge funds, asset managers, 
and PTFs, and purchases from and sales to customers and affiliates. 
Any trade in which the contra-party is an IDB is excluded. Thus, in 
the case of trades involving IDBs, only the IDBs' sale message is 
added to overall volume.

                                     Table VIII.1--ATS Market Share Analysis
----------------------------------------------------------------------------------------------------------------
                                                                                                     Number of
                                                                     Treasury         Agency          unique
                                                                    securities      securities       platforms
----------------------------------------------------------------------------------------------------------------
Num. of Current Gov. Sec. ATSs..................................              13               7              15
Num. of Currently Exempted Gov. Sec. ATSs.......................               5               1               5
Num. of Grouped-Affiliated ATSs.................................              18               7  ..............
Total volume share of Current Gov. Sec. ATSs....................           24.5%           11.6%  ..............
Total volume share of Currently Exempted Gov. Sec. ATSs.........            9.6%            0.7%  ..............
Total volume share of Grouped-Affiliated ATSs Companies.........           34.1%           12.3%  ..............
----------------------------------------------------------------------------------------------------------------
                                             Above 10% Market Share
----------------------------------------------------------------------------------------------------------------
Num. of Current Gov. Sec. ATSs..................................               1               1               2
Num. of Currently Exempted Gov. Sec. ATSs.......................               0               0               0
Num. of Grouped-Affiliated ATSs.................................               2               1  ..............
Total volume share of Current Gov. Sec. ATSs....................           15.2%           11.6%  ..............
Total volume share of Currently Exempted Gov. Sec. ATSs.........  ..............  ..............  ..............
Total volume share of Grouped-Affiliated ATSs...................           15.2%  ..............  ..............
----------------------------------------------------------------------------------------------------------------
                                              Above 5% Market Share
----------------------------------------------------------------------------------------------------------------
Num. of Current Gov. Sec. ATSs..................................               2               1               2
Num. of Currently Exempted Gov. Sec. ATSs.......................               0               0               0
Num. of Grouped-Affiliated ATSs.................................               4               1  ..............
Total volume share of Current Gov. Sec. ATSs....................           21.3%           11.6%  ..............
Total volume share of Currently Exempted Gov. Sec. ATSs.........  ..............  ..............  ..............
Total volume share of Grouped-Affiliated ATSs...................           23.7%  ..............  ..............
----------------------------------------------------------------------------------------------------------------
                                              Above 4% Market Share
----------------------------------------------------------------------------------------------------------------
Num. of Current Gov. Sec. ATSs..................................               2               1               2
Num. of Currently Exempted Gov. Sec. ATSs.......................               0               0               0
Num. of Grouped-Affiliated ATSs.................................               4               1  ..............
Total volume share of Current Gov. Sec. ATSs....................           21.3%           11.6%  ..............
Total volume share of Currently Exempted Gov. Sec. ATSs.........  ..............  ..............  ..............
Total volume share of Grouped-Affiliated ATSs...................           23.7%  ..............  ..............
----------------------------------------------------------------------------------------------------------------
                                              Above 3% Market Share
----------------------------------------------------------------------------------------------------------------
Num. of Current Gov. Sec. ATSs..................................               2               1               2
Num. of Currently Exempted Gov. Sec. ATSs.......................               2               0               2
Num. of Grouped-Affiliated ATSs.................................               8               1  ..............
Total volume share of Current Gov. Sec. ATSs....................           21.3%           11.6%  ..............
Total volume share of Currently Exempted Gov. Sec. ATSs.........            7.9%  ..............  ..............
Total volume share of Grouped-Affiliated ATSs...................           32.0%  ..............  ..............
----------------------------------------------------------------------------------------------------------------

[[Page 15597]]

 
                                              Above 2% Market Share
----------------------------------------------------------------------------------------------------------------
Num. of Current Gov. Sec. ATSs..................................               3               1               3
Num. of Currently Exempted Gov. Sec. ATSs.......................               2               0               2
Num. of Grouped-Affiliated ATSs.................................               8               1  ..............
Total volume share of Current Gov. Sec. ATSs....................           23.7%           11.6%  ..............
Total volume share of Currently Exempted Gov. Sec. ATSs.........            7.9%  ..............  ..............
Total volume share of Grouped-Affiliated ATSs...................           32.0%  ..............  ..............
----------------------------------------------------------------------------------------------------------------
Each panel reports the volume share (%) for Government Securities ATSs and the number of Government Securities
 ATSs above the specified market share level. Grouped-Affiliated ATSs refer to ATSs operated by a common broker-
 dealer or affiliated broker-dealer and for which their volume would be aggregated under the proposed changes to
 the Fair Access Rule. Treasury Securities include nominal bonds, TIPS and STRIPS. Agency Securities include
 Agency Debentures, Agency Collateralized Mortgage Obligations, and Agency Pass-Through Mortgage Backed
 Securities.\a\ Trading volume is measured in dollar volume in par value. Data is based on the regulatory
 version of TRACE for U.S. Treasury Securities and TRACE for Agency Securities from April 1, 2021 to September
 30, 2021.\b\ \c\
----------------------------------------------------------------------------------------------------------------
\a\ Agency Pass-through Mortgage Backed Securities include those traded in specified pool transactions and those
  to be announced. ``Agency Debenture'' is equivalent to ``Federal Agency Security,'' as used in Part I, Item
  8(b) of Form ATS-N. ``Agency Mortgage Backed Securities'' as used in Part I, Item 8(b) of Form ATS-N include
  both ``Agency Collateralized Mortgage Obligations'' and ``Agency Pass-Through Mortgage Backed Securities.''
\b\ The analysis based on TRACE is necessarily limited to transactions reported to TRACE, which may not be all
  transactions in government securities. Transactions that take place on non-FINRA member ATSs or between two
  non-FINRA members are not reported to TRACE.
\c\ Trades reported to TRACE may include trades conducted on a Communication Protocol System if one participant
  in the trade is a FINRA member. The volume reported in this table is categorized given this limitation.

    Government Securities ATSs have evolved such that they operate with 
a level of technology use and speed of trading that is similar to that 
observed on NMS Stock ATSs, particularly in the secondary electronic 
cash market for on-the-run U.S. Treasury Securities.\814\ Some 
Government Securities ATSs operate as anonymous LOB systems and offer 
features such as low latency connectivity, direct market data feeds, 
co-location services, and a variety of order types. In addition to 
facilitating low latency trading, the Commission understands that the 
data feeds provided by Government Securities ATS serve as a source for 
real-time prices in the market for government securities.\815\ In 
providing such information to market participants about Treasury prices 
in particular, these feeds may serve as a source for real-time risk-
free rate benchmarks, which help price other financial instruments.
---------------------------------------------------------------------------

    \814\ See October 15 Staff Report, supra note 188, at 35-36, 
discussing increased electronic trading in the market for 
Treasuries. See also Bloomberg Letter at 5, stating that liquid on-
the-run government securities are mostly traded on central limit 
order books and Bloomberg Letter at 21, stating that ATSs are a 
significant source of liquidity for on-the-run U.S. Treasury 
Securities.
    \815\ See Letter from Dan Cleaves, Chief Executive Officer, 
BrokerTec Americas, and Jerald Irving, President, ICAP Securities 
USA LLC, to David R. Pearl, Office of the Executive Secretary, 
Treasury Department, dated April 22, 2016 at 7, available at https://www.treasurydirect.gov/instit/statreg/gsareg/ICAPTreasuryRFILetter.pdf.
---------------------------------------------------------------------------

    PTFs have a significant presence on Government Securities 
ATSs.\816\ Table VIII.2 shows that, during April to September of 2021, 
PTFs accounted for approximately 25.4 percent of total on-the-run U.S. 
Treasury Securities ATS trading volume. There were 41 PTFs operating on 
ATSs that trade U.S. Treasury Securities as of August 2021. The 
Commission understands that PTFs trading on the electronic market for 
U.S. Treasury Securities often employ automated, algorithmic trading 
strategies that rely on speed and allow the PTFs to quickly execute 
trades, or cancel or modify quotes in response to perceived market 
events.\817\ The Commission understands that PTFs contribute liquidity 
to the trading environment on Government Securities ATSs.\818\
---------------------------------------------------------------------------

    \816\ See supra Section III.A.
    \817\ See October 15 Staff Report at 32, 35-36, 39.
    \818\ One market participant stated that this liquidity 
provision may fill a gap that was left after the introduction of 
post-2008 financial crisis regulations and their subsequent effects 
on dealers. See Direct Match Letter at 7.

                        Table VIII.2--On-the-Run U.S. Treasury Securities Trading Volume
----------------------------------------------------------------------------------------------------------------
                                                                     Number of                     Volume share
                                                                      venues          Volume            (%)
----------------------------------------------------------------------------------------------------------------
                               On-the-Run U.S. Treasury Securities Trading Volume
----------------------------------------------------------------------------------------------------------------
ATSs............................................................              18         812,480            49.7
    Customer trades.............................................              11          52,754             3.2
    Dealer trades...............................................              18         344,781            21.1
    PTF trades..................................................              11         414,945            25.4
Non-ATS Interdealer Brokers.....................................              24         118,067             7.2
    Customer trades.............................................              19          77,334             4.7
    Dealer trades...............................................              23          40,252             2.5
    PTF trades..................................................               9             481         0.0 \a\
Bilateral dealer-to-dealer trades...............................             352          92,051             5.6
Bilateral dealer-to-customer trades.............................             333         604,823            37.0
Bilateral dealer-to-PTF trades..................................              97           7,250             0.4
                                                                 -----------------------------------------------

[[Page 15598]]

 
        Total...................................................  ..............       1,634,671           100.0
----------------------------------------------------------------------------------------------------------------
This table reports trading volume and volume share for ATSs,\b\ Non-ATS interdealer brokers, bilateral dealer-to-
 dealer transactions, bilateral dealer-to-customer, and bilateral dealer-to-PTF transactions for on-the-run U.S.
 Treasury Securities. On-the-run U.S. Treasury Securities are the most recently issued nominal coupon
 securities. Nominal coupon securities pay a fixed semi-annual coupon and are currently issued at original
 maturities of 2, 3, 5, 7, 10, 20, and 30 years. Treasury Bills and Floating Rate Notes are excluded. Volume is
 the average weekly dollar volume in par value (in millions of dollars) over the 6-month period, from April 1,
 2021, to September 30, 2021.\c\ Number of Venues is the number of different trading venues in each category and
 the number of distinct MPIDs for bilateral transactions.\d\ Market Share (%) is the measure of the dollar
 volume as a percent of total dollar volume.\e\ The volumes of ATSs and non-ATS interdealer brokers are broken
 out by Customer trades, Dealer trades, and PTF trades within each group.\f\ Data is based on the regulatory
 version of TRACE for U.S. Treasury Securities from April 1, 2021, to September 30, 2021. Bilateral trades are a
 catchall classification that may include trades conducted via bilateral negotiation, as well as trades
 conducted electronically via platforms not registered with FINRA as an ATS. Bilateral trades may include trades
 conducted on Communication Protocol Systems.
----------------------------------------------------------------------------------------------------------------
\a\ The percentage to the nearest non-zero is 0.02%.
\b\  See supra notes b and c in Table VIII.1.
\c\ FINRA reports volume as par volume, where par volume is the volume measured by the face value of the bond,
  in dollars. See relevant weekly volume files, available at https://www.finra.org/filing-reporting/trace/data/trace-treasury-aggregates.
\d\ Dealers are counted using the number of distinct MPIDs.
\e\ Total dollar volume (in par value) is calculated as the sum of dollar volume for ATSs, non-ATS interdealer
  brokers, bilateral dealer-to-dealer transactions, and bilateral dealer-to-customer transactions.
\f\ We identify ATS trades and non-ATS interdealer broker trades using MPID in the regulatory version of TRACE
  for U.S. Treasury Securities. The regulatory version of TRACE for U.S. Treasury Securities includes an
  identifier for customer and interdealer trades. Furthermore, we use MPID for non-FINRA member subscriber
  counterparties in the regulatory version of TRACE for U.S. Treasury Securities to identify PTF trades on ATSs.

    Table VIII.1 also shows that trading in the Treasury Securities 
market is concentrated on a few large ATSs.\819\ The largest ATS by 
Treasury dollar volume has 15.2 percent of the total Treasury 
Securities market reported to TRACE. Two Government Securities ATSs 
have dollar volumes that are over five percent of the total TRACE 
volume figure, and four have dollar volumes over three percent.
---------------------------------------------------------------------------

    \819\ All ATSs identified in this table are determined by the 
regulatory version of TRACE. TRACE data contains an identifier for 
trades occurring on ATSs, identifying the MPID of the ATS.
---------------------------------------------------------------------------

    Table VIII.2 shows that the majority of trading in on-the-run 
government securities reported to TRACE goes through Government 
Securities ATSs. Specifically, Government Securities ATSs accounted for 
nearly 50 percent of total dollar volume.
    When on-the-run securities transition to off-the-run status, their 
trading activity shifts away from Government Securities ATSs, and 
towards other transaction methods, including Communication Protocol 
Systems.\820\ This is reflected in Table VIII.3, which shows that 
Government Securities ATSs account for approximately 21 percent of the 
total dollar volume of off-the-run Treasury trading reported to 
TRACE.\821\ Table VIII.3 also shows that, while dealers remain a 
significant contributor to ATS trading in Treasury Securities in the 
off-the-run market, PTFs make up a smaller percentage of volume than 
they do in the on-the-run market.
---------------------------------------------------------------------------

    \820\ One commenter referenced that market participants trading 
in less liquid off-the-run securities are better able to find 
liquidity in non-ATS trading methods. See Bloomberg Letter at 5 and 
21-22.
    \821\ See supra note 193.

                        Table VIII.3--Off-the-Run U.S. Treasury Securities Trading Volume
----------------------------------------------------------------------------------------------------------------
                                                                     Number of                     Volume share
                                                                      venues          Volume            (%)
----------------------------------------------------------------------------------------------------------------
                               Off-the-Run U.S. Treasury Securities Trading Volume
----------------------------------------------------------------------------------------------------------------
ATSs............................................................              17         110,945            21.7
    Customer trades.............................................              10          13,304             2.1
    Dealer trades...............................................              17          83,668            13.0
    PTF trades..................................................              11          13,973             2.2
Non-ATS Interdealer Brokers.....................................              22          43,604             6.8
    Customer trades.............................................              18          15,092             2.4
    Dealer trades...............................................              21          28,451             4.4
    PTF trades..................................................              12              61         0.0 \a\
Bilateral dealer-to-dealer trades...............................             509          47,912             7.5
Bilateral dealer-to-customer trades.............................             333         437,665            68.2
Bilateral dealer-to-PTF trades..................................             114           1,415             0.2
                                                                 -----------------------------------------------
        Total...................................................  ..............         641,540           100.0
----------------------------------------------------------------------------------------------------------------

[[Page 15599]]

 
This table reports trading volume and volume share for ATSs,\b\ non-ATS interdealer brokers, bilateral dealer-to-
 dealer transactions, bilateral dealer-to-customer, and bilateral dealer-to-PTF transactions for off-the-run
 U.S. Treasury Securities. Off-the-run or ``seasoned'' U.S. Treasury Securities include TIPS, STRIPS, and
 nominal coupon securities issues that preceded the current on-the-run nominal coupon securities. Number of
 Venues is the number of different trading venues in each category and the number of distinct MPIDs for
 bilateral transactions. Volume is the average weekly dollar volume in par value (in millions of dollars) over
 the 6-month period, from April 1, 2021, to September 30, 2021. Market Share (%) is the measure of the dollar
 volume as a percent of the total dollar volume. The volumes of ATSs and non-ATS interdealer brokers are broken
 out by Customer trades, Dealer trades, and PTF trades within each group.\c\ Data is based on the regulatory
 version of TRACE for U.S. Treasury Securities from April 1, 2021, to September 30, 2021. Bilateral trades are a
 catchall classification that may include trades conducted via bilateral negotiation, as well as trades
 conducted electronically via platforms not registered with FINRA as an ATS. Bilateral trades may include trades
 conducted on Communication Protocol Systems.
----------------------------------------------------------------------------------------------------------------
\a\ The percentage to the nearest non-zero is 0.009%.
\b\ See supra notes b and c of Table VIII.1.
\c\ We identify ATS trades and non-ATS interdealer broker trades using MPID in the regulatory version of TRACE
  for U.S. Treasury Securities. The regulatory version of TRACE for U.S. Treasury Securities includes an
  identifier for customer and interdealer trades. Furthermore, we use MPID for non-FINRA member subscriber
  counterparties in the regulatory version of TRACE for U.S. Treasury Securities to identify PTF trades on ATSs.

    Government Securities ATSs also play a significant role in the 
market for Agency Securities, accounting for approximately 12 percent 
of the total dollar volume reported to TRACE. Like in the Treasury 
market, dealers play a significant role in trading on ATSs for Agency 
Securities.\822\
---------------------------------------------------------------------------

    \822\ Agency Securities are those issued by U.S. Government 
sponsored enterprises (``GSEs'') such as Federal Home Loan Banks 
(``FHLBs''), the Federal National Mortgage Association (``Fannie 
Mae''), and the Federal Home Loan Mortgage Corporation (``Freddie 
Mac'').
---------------------------------------------------------------------------

    It is the Commission's understanding that PTFs play only a small 
role in the market for Agency Securities. The Commission invites 
comment on the role of PTFs in trading Agency Securities. The 
Commission also requests comment on the providers of liquidity in the 
market for Agency Securities.

                                 Table VIII.4--Agency Securities Trading Volume
----------------------------------------------------------------------------------------------------------------
                                                                     Number of                     Volume share
                                                                      venues          Volume            (%)
----------------------------------------------------------------------------------------------------------------
                                        Agency Securities Trading Volume
----------------------------------------------------------------------------------------------------------------
ATSs............................................................               8          31,940            12.3
    1Customer trades............................................               7           6,767             2.6
    1Dealer trades..............................................               7          25,173             9.7
    PTF trades..................................................               3               1         \a\ 0.0
Non-ATS Interdealer Brokers.....................................              13           7,935             3.0
    Customer trades.............................................               9           1,096             0.4
    Dealer trades...............................................              13           6,838             2.6
    PTF trades..................................................               5               0         \b\ 0.0
Bilateral dealer-to-dealer trades...............................             470          12,170             4.7
Bilateral dealer-to-customer trades.............................             470         206,777            79.9
Bilateral dealer-to-PTF trades..................................              84               3         \c\ 0.0
                                                                 -----------------------------------------------
    Total.......................................................  ..............         264,916           100.0
----------------------------------------------------------------------------------------------------------------
This table reports trading volume and volume share for ATSs,\d\ non-ATS interdealer brokers, bilateral dealer-to-
 dealer transactions, and bilateral dealer-to-customer transactions for U.S. Agency Securities. Agency
 Securities include Agency Debentures, Agency Collateralized Mortgage Obligations, and Agency Pass-Through
 Mortgage Backed Securities. Number of Venues is the number of different trading venues in each category and the
 number of MPIDs for bilateral transactions. Volume is the average daily dollar volume in par value (in millions
 of dollars) over the 6-month period, from April 1, 2021, to September 30, 2021. Market Share (%) is the measure
 of the dollar volume as a percent of the total dollar volume. The volume of ATSs and non-ATS interdealer
 brokers are broken out by Customer trades and Dealer trades within each group.\e\ Data is based on the
 regulatory version of TRACE for Agency Securities from April 1, 2021, to September 30, 2021. Bilateral trades
 are a catchall classification that may include trades conducted via bilateral negotiation, as well as trades
 conducted electronically via platforms not registered with FINRA as an ATS. Bilateral trades may include trades
 conducted on Communication Protocol Systems.
----------------------------------------------------------------------------------------------------------------
\a\ The percentage to the nearest non-zero is 0.0003%.
\b\ The percentage to the nearest non-zero is 0.00007%.
\c\ The percentage to the nearest non-zero is 0.001%.
\d\ See supra notes b and c of Table VIII.1.
\e\ We identify ATS trades and non-ATS interdealer broker trades using MPID in the regulatory version of TRACE
  for Agency Securities. The regulatory version of TRACE for Agency Securities includes an identifier for
  customer and interdealer trades.


[[Page 15600]]

ii. Regulatory Environment for Government Securities ATSs
    The regulatory environment for Government Securities ATSs varies 
according to whether the ATS is a Current Government Securities ATS or 
a Currently Exempted Government Securities ATS, and whether the ATS is 
operated by a registered broker-dealer. Differences in reporting 
requirements can lead to an uneven competitive landscape for Government 
Securities ATSs and leave room for regulatory arbitrage.\823\ In 
addition, current regulation for Government Securities ATSs does not 
require public disclosure about operations, fair access, or robust 
systems.
---------------------------------------------------------------------------

    \823\ One commenter stated that the lack of a consistent 
regulatory framework for entities that undertake similar activities 
leads to opportunities for arbitrage and may result in market 
fragmentation, which in turn may cause reduced market liquidity. See 
Tradeweb Letter at 9.
---------------------------------------------------------------------------

    Much of the difference in regulatory treatment among Government 
Securities ATSs comes from the fact that Current Government Securities 
ATSs must comply with Regulation ATS, while Currently Exempted 
Government Securities ATSs do not. For example, Currently Exempted 
Government Securities ATSs are not required to file Form ATS with the 
Commission, while ATSs that trade U.S. Government securities as well as 
non-government securities, such as corporate or municipal securities, 
must have filed Form ATS as a confidential filing with the Commission 
when they began operations, and will incur the cost to do so again if 
there is a material change in operations.\824\
---------------------------------------------------------------------------

    \824\ The Commission may use this information in monitoring, 
examinations and enforcement.
---------------------------------------------------------------------------

    Current Government Securities ATSs are also required to 
confidentially report their transaction dollar volume in government 
securities to the Commission on a quarterly basis via Form ATS-R within 
30 days after the end of each calendar quarter. Currently Exempted 
Government Securities ATSs are not subject to this requirement.
    Unlike Current Government Securities ATSs, Currently Exempted 
Government Securities ATSs are not required to establish written 
safeguards and written procedures to protect subscribers' confidential 
trading information.\825\ To the extent that a Currently Exempted 
Government Securities ATS does not have these procedures, or has them 
but the procedures are not adequate,\826\ a subscriber's confidential 
trading information might be at risk of unauthorized disclosure or 
subject to potential misuse.
---------------------------------------------------------------------------

    \825\ These requirements come from Rule 301(b)(10) of Regulation 
ATS. Current Government Securities ATSs are currently subject to 
these rules. See supra Section II.D.2.
    \826\ Currently Exempted Government Securities ATSs are not 
required to file their written safeguards and written procedures 
with the Commission. Therefore, absent an examination by the 
Commission staff, the Commission is not able to determine which 
Currently Exempted Government Securities ATSs currently have 
adequate, written safeguards and written procedures to protect 
subscribers' confidential trading information. At the same time, 
based on the experience of the Commission, the Commission believes 
that some Currently Exempted Government Securities ATSs currently 
have, and maintain in writing, safeguards and procedures to protect 
subscribers' confidential trading information, as well as the 
oversight procedures to ensure such safeguards and procedures are 
followed.
---------------------------------------------------------------------------

    Current Government Securities ATSs must also comply with certain 
additional requirements, such as recordkeeping requirements pursuant to 
Rule 301(b)(8). These include requirements to make and keep certain 
records for an audit trail of trading activity, such as time-sequenced 
order information, as well as information about current subscribers and 
summaries of trading activity. The requirement to keep such records may 
impose compliance costs on Current Government Securities ATSs to which 
Currently Exempted Government Securities ATSs are not subjected. To the 
extent that Currently Exempted Government Securities ATSs do not 
voluntarily maintain records similar to those required by Rule 
301(b)(8), detection and investigation of potential market 
irregularities may be inhibited.
    A further disparity exists in the case of the estimated one bank-
operated Currently Exempted Government Securities ATS. All other 
Currently Exempted Government Securities ATSs and all Current 
Government Securities ATSs are registered broker-dealers that incur the 
costs of registering with the Commission as well as the costs of SRO 
membership, and face operational regulatory reporting 
requirements.\827\ In contrast, the estimated one bank-operated 
Currently Exempted Government Securities ATS is not required to 
register as a broker-dealer with the Commission and thus, does not have 
to file Form BD with the Commission or be subject to FINRA rules.
---------------------------------------------------------------------------

    \827\ See FINRA Letter at 2-3, stating that nearly all 
Government Securities ATSs currently are FINRA members
---------------------------------------------------------------------------

    The estimated one bank-operated Currently Exempted Government 
Securities ATS does not report government securities transactions to 
TRACE. All transactions in government securities that include at least 
one FINRA member are required to be reported to TRACE within 15 minutes 
of the time of execution.\828\ Trades on ATSs operated by FINRA members 
may be required to be reported to TRACE, by either the ATS, 
counterparties to the trade, or both, depending on whether the 
counterparties are FINRA members and whether the ATS holds itself out 
as a party to the trade.\829\
---------------------------------------------------------------------------

    \828\ See supra note 228 and corresponding text discussing TRACE 
reporting requirements for U.S. Government securities.
    \829\ FINRA Rule 6731 exempts certain ATSs from TRACE reporting 
requirements as long as all of the following conditions are met: All 
trades are between ATS subscribers that are both FINRA members; the 
ATS demonstrates that member subscribers are fully disclosed to one 
another at all times, the system does not permit automatic execution 
and a member must take affirmative steps to agree to a trade, the 
trade does not pass through any ATS account and the ATS does not 
hold itself out as a party to the trade; and the ATS does not 
exchange TRACE-Eligible Securities or funds on behalf of its 
subscribers, take either side of the trade for clearing or 
settlement purposes, or in any other way insert itself into the 
trade; the ATS and the member subscribers acknowledge and agree in 
writing that the ATS shall not be deemed a party to the trade for 
purposes of trade reporting and that trades shall be reported by 
each party to the transaction; and the ATS agrees to provide to 
FINRA on a monthly basis data relating to the volume of trades by 
security executed by the ATS's member subscribers using the ATS's 
system. Furthermore, Rule 6732 exempts certain transactions on ATS 
from TRACE reporting requirements as long as all of the following 
conditions are met: The trade is between FINRA members; the trade 
does not pass through any ATS account, and the ATS does not exchange 
TRACE-Eligible Securities or funds on behalf of the subscribers, 
take either side of the trade for clearing or settlement purposes, 
or in any other way insert itself into the trade; the ATS agrees to 
provide to FINRA on a monthly basis data relating to each exempted 
trade occurring on the ATS's system pursuant to this Rule 6732; the 
ATS remits to FINRA a transaction reporting fee for each exempted 
sell transaction occurring on the ATS; and the ATS has entered into 
a written agreement with each party to the transaction that such 
trade must be reported by such party. See also FINRA Letter at 6-7, 
stating that a fixed income ATS is a ``party to a transaction'' in a 
TRACE-eligible security occurring through its system and has TRACE 
transaction reporting obligations, unless an exception or exemption 
applies.
---------------------------------------------------------------------------

    Neither Current Government Securities ATSs nor Currently Exempted 
Government Securities ATSs are required to make disclosures on public 
forms, and this might lead to information asymmetries amongst different 
subscribers. For example, certain Government Securities ATSs might make 
voluntary disclosures regarding their operations as a signal of quality 
to some customers,\830\ without disclosing the same information to 
other customers or market participants generally. As a result, some 
subscribers have limited information which may affect their trading 
decisions.
---------------------------------------------------------------------------

    \830\ For example, the ATS may disclose order execution 
statistics to some customers.
---------------------------------------------------------------------------

    There is no legal mechanism to prevent Government Securities ATSs 
from unreasonably denying or limiting

[[Page 15601]]

subscribers' access, because the Fair Access Rule does not currently 
apply to any ATS that trades government securities.\831\ When a 
Government Securities ATS has a significant share of trading volume in 
government securities, unfairly discriminatory actions might hurt 
investors because viable alternatives to trading on such a high-volume 
system might be limited. To the extent this happens, it results in 
higher trading costs and a reduced efficiency with which such excluded 
participants achieve trading objectives, which may also lead to 
concentration in the market for dealers in government securities.\832\ 
Furthermore, market forces alone might not be sufficient to prevent a 
Government Securities ATS from unreasonably denying access to some 
market participants.\833\
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    \831\ See supra Section II.D.2, discussing the Fair Access Rule 
requirements.
    \832\ One commenter stated that registered investment companies 
generally are not able to directly access liquidity on most Treasury 
interdealer platforms. See ICI Letter at 4.
    \833\ See MFA Letter at 3, stating that currently there is no 
mechanism to prevent Government Securities ATSs from unreasonably 
denying or limiting subscribers' access to an ATS that is a 
significant market for government securities.
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    The Commission preliminarily believes that Government Securities 
ATSs may not fully internalize the cost of the externalities associated 
with not having robust, resilient systems, as would be required by the 
provisions of Regulation SCI and Rule 301(b)(6) of Regulation ATS. 
Without appropriate safeguards in place for Government Securities ATSs, 
technological vulnerabilities continue to exist and could lead to the 
potential for costly failures, disruptions, delays, intrusions, and the 
reduction in systems up-time,\834\ which could harm the price discovery 
process and price efficiency of government securities. Systems issues 
pose significant negative externalities on the market, in that if a 
trading system of a Government Securities ATS with significant trading 
volume fails, this failure will not only force the ATS to forgo revenue 
but might also diminish trading in government securities during the 
disruption. This would increase the trading costs of market 
participants that have optimized their trading strategy under the 
assumption that all Government Securities ATSs with significant volume 
are fully operational, and might harm the price discovery process and 
liquidity flows for government securities.\835\ In addition, price 
discovery in securities that use government security transaction prices 
as risk-free rate benchmarks might also be harmed.\836\
---------------------------------------------------------------------------

    \834\ Systems up-time is a measure of the time that a computer 
system is running and available.
    \835\ On January 11, 2019, the largest trading platform in on-
the-run U.S. Treasury Securities, experienced a system outage 
approximately from 2 p.m. to 3:30 p.m. ET. While the outage resulted 
in a modest reduction in market volume, had it occurred at a time 
other than late on a Friday afternoon when trading activity is 
normally already low, the outage could have resulted in more adverse 
consequences on the overall market. See also Elizabeth Stanton, Nick 
Baker, & Matthew Leising, Treasuries Hit by One-Hour Outage on 
Biggest Electronic Platform, Bloomberg, January 13, 2019, https://www.bloomberg.com/news/articles/2019-01-11/brokertec-inter-dealer-treasury-broker-suffers-outage.
    \836\ As noted in the October 15 Staff Report, price discovery 
is especially important in the secondary market for on-the-run U.S. 
Treasury Securities because the transaction prices are used as risk-
free rate benchmarks to price other securities transactions.
---------------------------------------------------------------------------

    One commenter on the 2020 Proposal stated that ``many Government 
Securities ATSs may already align with industry standards that achieve 
many of the same goals of Regulations SCI, although in slightly 
different manner.'' \837\ While the Commission recognizes that 
Government Securities ATSs have some incentives to maintain robust 
systems to remain competitive and thereby reduce systems issues, the 
Commission believes that market forces alone may not be sufficient to 
significantly reduce systems issues, because some of the impact of 
these systems issues represent an externality to the Government 
Securities ATS.\838\
---------------------------------------------------------------------------

    \837\ See BrokerTec Letter at 6.
    \838\ A commenter on the 2020 stated ``. . . we believe that 
market forces alone may be insufficient to significantly reduce 
systems issues in the market for trading and execution services in 
government securities.'' See MFA Letter at 6.
---------------------------------------------------------------------------

    A comment letter received in response to the Treasury Request for 
Information stated that many Government Securities ATSs adopted system 
testing and control procedures that followed the recommended best 
practices of the Treasury Market Practices Group.\839\ However, these 
best practices are meant only as useful operational guideposts rather 
than binding rules, and each trading venue can choose if it wants to 
comply and how to comply, which might provide weak only incentives to 
internalize the externality costs associated with system failures.
---------------------------------------------------------------------------

    \839\ See Letter from Mike Zolik, Nate Kalich, and Larry 
Magargal, Ronin Capital LLC, to David R. Pearl, Office of the 
Executive Secretary, U.S. Department of the Treasury, dated March 
19, 2016, at 31-33, available at https://www.treasurydirect.gov/instit/statreg/gsareg/RoninCapital.pdf. See also BrokerTec Letter at 
6. The Treasury Market Practices Group promotes a robust control 
environment for government securities trading, using internal 
controls and risk management. See Treasury Market Practices Group, 
Best Practices For Treasury, Agency Debt, and Agency Mortgage-Backed 
Securities Markets (July 2019), available at https://www.newyorkfed.org/medialibrary/Microsites/tmpg/files/TMPG_BestPractices_071119.pdf.
---------------------------------------------------------------------------

    The Commission is aware of 1 Government Securities ATS operated by 
a broker-dealer that also operates an NMS Stock ATS that is an SCI 
entity and so may already comply with much of Regulation SCI.
b. Communication Protocol Systems in the Market for Government 
Securities
    Communication Protocol Systems play a significant role in the 
market for government securities. The Commission estimates that there 
are 3 Communication Protocol Systems operating in the market for 
government securities that may meet the definition of exchange under 
the proposed changes to Exchange Act Rule 3b-16. The Commission 
understands that these systems are a significant component of the 
dealer-to-customer segment of the U.S. Treasury market and account for 
approximately 30 to 40 percent of the total trading volume in U.S. 
Treasuries.\840\ One of the roles of such systems is to provide a means 
to communicate trading interest in the dealer-to-customer market.\841\
---------------------------------------------------------------------------

    \840\ See infra Section VIII.B.2.d, Table VIII.5. Some part of 
the stream axes volume accounted for in that table may be ATS 
volume.
    \841\ As described in Section III.A, the secondary market for 
U.S. Treasury Securities is generally bifurcated between the dealer-
to-customer market and the interdealer market. See also Bloomberg 
Letter at 5, referencing that the bifurcating of the market is due 
to some extent to structural issues in clearing.
---------------------------------------------------------------------------

    The Commission understands that investors who wish to transact in 
government securities generally do so with a dealer on a principal 
basis. Communication Protocol Systems typically facilitate the first 
step in a principal trade, namely trading between the dealer and 
customer. In this capacity, the systems provide a way for customers to 
obtain quotes from dealers and to select a dealer to fill their order, 
in addition to the other reasons for using a Communication Protocol 
System described in Section VIII.B.1. The Commission understands that 
dealers and PTFs may also use Communication Protocol Systems to demand 
liquidity in government securities, a decision which may be motivated 
by the possibility of executing block trades with less information 
leakage compared to ATSs.\842\
---------------------------------------------------------------------------

    \842\ See supra Section VIII.B.1.a, discussing information 
leakage and RFQs.
---------------------------------------------------------------------------

    The Commission understands that dealer respondents on RFQ systems 
in the market for government securities typically provide a continuous 
stream of indicative, non-firm quotes that are aggregated into a single 
quote and made

[[Page 15602]]

available to all participants who may wish to initiate an RFQ on the 
trading system. Such quotes may also be disseminated over the internet 
to the general public. These indicative quote streams are an important 
service on RFQ systems for at least two reasons. First, they are a 
source of price information in government securities, and the 
Commission understands that some market data vendors may rely 
exclusively on such quote streams for the information they provide on, 
for example, the Treasury market. In providing such transparency in the 
Treasury market, these quote streams may be used as a risk-free rate 
benchmark, and to help price other financial instruments. Second, the 
quote streams give potential participants in the RFQ a sense of what 
quotes they would receive in response to a request without having to 
make a request, which helps these market participants get a sense of 
the market without revealing trading interest.
    Communication Protocol Systems do not meet the current definition 
of an exchange and thus are not subject to regulation either as an 
exchange or an ATS. This means they face a regulatory regime similar to 
that of Currently Exempted Government Securities ATSs as described in 
Section VIII.B.1.ii above. Furthermore, depending on how much of a role 
the Communication Protocol System takes in facilitating the transaction 
(e.g., acting as a counterparty to each side of the trade), and whether 
the Communication Protocol System operator and/or parties to the 
transaction are FINRA members, transactions taking place through the 
Communication Protocol System may not be reported to TRACE at all.
    The Commission estimates that a single Communication Protocol 
System trading in government securities is not currently operated by a 
registered broker-dealer. This system does not currently incur the 
costs of registering with the Commission as well as the costs of SRO 
membership, and is not subject to FINRA operational regulatory 
reporting requirements.
c. Other Methods of Trading in U.S. Government Securities
    Market participants may also transact in government securities via 
bilateral voice trading. As the Commission understands, a market 
participant wishing to make a purchase or sale of government securities 
would phone a potential counterparty, typically a dealer in government 
securities, to inquire about specific securities. The parties would 
then negotiate on price and size. If there were agreement, the parties 
would execute a trade. If not, the liquidity demander could repeat this 
process to find a more suitable counterparty. The Commission 
understands that a liquidity demander would typically contact more than 
one dealer, in order to compare quotes.
    Bilateral voice trading can be attractive to traders in government 
securities because this method of trading allows for flexibility, 
minimizes information leakage relative to other trading protocols, and 
may be conducive to maintaining relationships. The lack of information 
leakage may cause bilateral voice trading to be a useful method for 
traders seeking to execute large block trades of government securities.
d. Competition for U.S. Government Securities Trading Services
    Government securities are traded through a diverse set of methods, 
including ATSs, Communication Protocol Systems, and bilateral 
negotiation methods such as voice trading. The Commission preliminarily 
believes that each type of trading method may be more prevalent in 
separate segments of the government securities market.

                      Table VIII.5--U.S. Treasury Securities Trading Protocol Market Share
----------------------------------------------------------------------------------------------------------------
                                                                                    Stream axes
                        Limit order book                                RFQ             \a\            Voice
----------------------------------------------------------------------------------------------------------------
26.3............................................................            29.9            10.4            33.4
----------------------------------------------------------------------------------------------------------------
This table reports volume share by trading protocol type in the market for U.S. Treasury Securities. Market
 Share (%) is the measure of the dollar volume as a percent of total dollar volume. Data is based on Coalition
 Greenwich's Greenwich MarketView data from January 2021 through September 2021. Voice protocol is calculated as
 the remainder of volume after accounting for Limit Order Book, RFQ, and Stream Axes reported directly to
 Coalition Greenwich from aggregated FINRA TRACE volume.
----------------------------------------------------------------------------------------------------------------
\a\ Coalition Greenwich's Greenwich MarketView refers to this data value as ``Stream/Click-to-Engage.''

    ATSs and Communication Protocol Systems compete with one another to 
attract order flow. Table VIII.5 shows the percentage of TRACE-reported 
Treasury Securities transactions that are completed using different 
trading protocols, and shows that the use of ATSs and Communication 
Protocol Systems to transact in Treasury Securities are roughly evenly 
matched in terms of volume.\843\ LOB volume represents ATS trades, and 
the Commission understands that some amount of stream axes volume may 
also be from ATSs. The remaining portion of stream axes and the RFQ 
volume represent Communication Protocol Systems in this market.
---------------------------------------------------------------------------

    \843\ One commenter pointed out that, at around 30 percent, U.S. 
Treasury market ATS market share is at a similar level that NMS 
equities ATS market share was in 1999 when Regulation ATS was 
adopted. The commenter stated that the exemption of Treasury 
securities from Regulation ATS gave Treasury market structure time 
to develop, but the market has now matured to a point where the 
exemption should be reconsidered. See Bloomberg Letter at 21.
---------------------------------------------------------------------------

    The Commission understands that the primary customers of ATSs tend 
to be dealers and PTFs. The Commission understands that many of the 
PTFs trading on Government Securities ATSs utilize latency-sensitive 
trading strategies.\844\ Such strategies would likely not be possible 
to implement when trading on a Communication Protocol System, or via 
bilateral voice trading. This gives ATSs an advantage in attracting 
such order flow. Because orders on LOB ATSs are generally displayed to 
all participants on the ATS, ATSs with LOBs may have more price 
competition among liquidity providers than alternatives. Also, ATSs, 
unlike non-ATS trading services, can offer certain additional execution 
protocols, such as crossing mechanisms and auctions, which generally 
meet the current definition of an exchange.
---------------------------------------------------------------------------

    \844\ See supra Section VIII.B.2.a.i for additional discussion 
on the role of PTFs in the Treasury market.
---------------------------------------------------------------------------

    Government Securities ATSs compete on fees, trading features, and 
by attracting liquidity to their system. As described above in Section 
VIII.B.2.a, a substantial amount of order flow in government securities 
is concentrated on the largest Government Securities ATS.\845\
---------------------------------------------------------------------------

    \845\ See supra Section VIII.B.2.a.i.

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[[Page 15603]]

    The primary customers of Communication Protocol Systems are those 
market participants in the dealer-to-customer market. Customers seeking 
to trade government securities may find the sophistication and 
infrastructure required to trade on ATSs to not be cost-effective 
relative to the type and quantity of trading they wish to undertake. 
This may give the Communication Protocol Systems an advantage in 
attracting such traders. In addition, Communication Protocol Systems 
offer features that ATSs might not, such as the ability to trade on a 
fully disclosed, non-anonymous basis; or the ability to connect trading 
in Treasuries to related trades in corporate bonds.\846\
---------------------------------------------------------------------------

    \846\ See supra Sections VIII.B.1 and VIII.B.2.b for additional 
details on the nature of Communication Protocol Systems. See infra 
Section VIII.B.3.b for additional details on the trading of 
corporate bonds on Communication Protocol Systems.
---------------------------------------------------------------------------

    Communication Protocol Systems compete with each other through the 
fees they charge, and through innovation and improvement in the type 
and quality of the protocols they offer. The Commission preliminarily 
believes that such competition among Communication Protocol Systems may 
explain the proliferation of different types of protocols.
    Both ATSs and Communication Protocol Systems compete against the 
option of transacting through bilateral voice trading. Such methods of 
trading in government securities have been common historically and 
continue to be used today. As described above in Section VIII.B.2.c, 
these methods of trading provide traders with the ability to customize 
transactions on the basis of a relationship between the two parties. At 
the same time, these trades may be more cumbersome and may suffer from 
a lack of price competition relative to Communication Protocol Systems 
and ATSs.
    The Commission preliminarily believes that the differences in 
regulatory regimes among ATSs and between ATSs and Communication 
Protocol Systems \847\ can lead to an uneven competitive landscape and 
adversely impact the potential for robust competition in the market for 
government securities.\848\
---------------------------------------------------------------------------

    \847\ See supra Section VIII.B.2.a.ii, discussing the regulatory 
regime for Government Securities ATSs and Section VIIIB.2.b, 
discussing the regulatory regime for Communication Protocol Systems.
    \848\ See ICE Bonds Letter II at 2, stating that the significant 
regulatory burdens on fixed income ATSs puts them at a competitive 
disadvantage to non-ATS trading systems that are not subject to 
these same regulatory obligations. See also ICE Bonds Letter II at 
5, stating that market participants are harmed when electronic 
trading systems that perform market place functions in fixed income 
securities are not subject to the same requirements as a fixed 
income ATSs, and that if the regulatory obligations of operating a 
fixed income ATS become too burdensome or impair the ability of 
fixed income ATSs to compete, it may discourage the expansion of 
ATSs and potentially encourage operators of fixed income ATSs to 
restructure their operations to avoid being characterized as an ATS.
---------------------------------------------------------------------------

    The Commission believes that the current lack of public disclosure 
about the operations and potential conflicts of interest of Government 
Securities ATSs and Communication Protocol Systems that currently trade 
government securities might hinder competition among these ATSs and 
between Government Securities ATSs and Communication Protocol Systems 
in the market for government securities. Competition among Government 
Securities ATSs and between Government Securities ATSs and non-ATS 
trading systems would affect the trading costs of government securities 
market participants, including dealers, PTFs, hedge funds, and 
institutional investors. Their trading costs include bid-ask 
spreads,\849\ search costs in the selection of trading venues and 
counterparties, and trading venue fees. When deciding which trading 
system most suits their trading objectives, market participants 
consider various operational facets of the system, such as order 
handling, order types, order segmentation, trading functionalities, and 
any potential conflicts of interest that might arise from the operator 
of the trading service or its affiliates. Trading system fees would 
also be a factor for market participants in deciding between trading 
systems.
---------------------------------------------------------------------------

    \849\ The estimated average daily relative quoted spread for 
interdealer transactions for on-the-run U.S. Treasury Securities is 
small, approximately 0.8 bps for 2-year Treasury Securities and 2.4 
bps for 10-year Treasury Securities. The estimated average daily 
relative quoted spread for interdealer transactions for off-the-run 
U.S. Treasury Securities, approximately 1.7 bps for 2-year Treasury 
Securities and 5.4 bps for 10-year Treasury Securities, is larger 
compared to that of on-the-run Treasury Securities. Spreads have 
narrowed in the past couple of years with a change to a smaller 
minimum trading increment of \1/8\ of 1/32 of $1. The average daily 
relative quoted spread is computed as the daily average of the 
difference between the intraday offer and bid prices divided by the 
corresponding price mid-quote. See also Paolo Pasquariello & Clara 
Vega, The On-the-Run Liquidity Phenomenon, 92 J. Fin. Econ. 1 
(2009); Tobias Adria, Michael Fleming, & Or Shachar, Market 
Liquidity after the Financial Crisis (June, 28, 2017), Federal 
Reserve Bank of New York, Liberty Street Economics, available at 
https://libertystreeteconomics.newyorkfed.org/2017/06/market-liquidity-after-the-financial-crisis.html.
---------------------------------------------------------------------------

3. Current State of Corporate Debt Market
    Although smaller than the market for government securities, the 
market for corporate debt securities (``corporate bonds'') represents a 
significant part of the fixed income market. In September 2021, the 
average daily dollar volume of corporate bond trading was $26.4 
billion, including $19.8 billion in investment-grade bonds and $6.5 
billion in high-yield bonds.\850\ One commenter stated that levels of 
trading in corporate debt have typically been lower than in other fixed 
income markets, such as government securities: While corporate bonds 
made up 20 percent of new issuances in Q4 2020, they only made up 4.4 
percent of fixed income market trading.\851\ However, the commenter 
pointed out that the absolute dollar volume of corporate bond trading 
volume is still very significant, as is the overall size of the market: 
As of January 2021, the corporate bond market is valued at $9.3 
trillion in investment-grade and $2.4 trillion in high-yield debt 
outstanding.\852\ Estimates put the annualized growth rate of the 
corporate bond market at 5.2 percent between 2008 and 2019, a growth 
rate second only to that of government securities within the fixed 
income space.\853\
---------------------------------------------------------------------------

    \850\ See http://finramarkets.morningstar.com/BondCenter/TRACEMarketAggregateStats.jsp?bondType=C. While there are many types 
of corporate bonds, most tend to fall within two categories: 
Investment-grade bonds and high-yield bonds (also commonly referred 
to as ``non-investment-grade'' or ``junk'' bonds). High-yield bonds 
tend to have higher yields than both government securities and 
investment-grade bonds, but are also subject to a higher degree of 
risk.
    \851\ See Healthy Markets Letter at 8.
    \852\ See id.
    \853\ See https://vegaeconomics.com/trends-in-the-us-corporate-bond-market-since-the-financial-crisis.
---------------------------------------------------------------------------

    Trading in corporate bonds tends to be more illiquid than trading 
in government securities, with liquidity often concentrated in the 
largest and most recently issued bonds.\854\ One commenter referenced 
that only 18 percent of corporate bonds trade each day, and only 8 
percent have more than five trades on any given day.\855\ Several 
commenters stated that this is due in part to the highly idiosyncratic 
nature of corporate bond characteristics,\856\ which

[[Page 15604]]

can differ along many different dimensions, including issuer, tenor, 
coupon rate, and covenants.\857\ One commenter stated that, compared to 
the equity market, the large number of individual CUSIPs in the 
corporate debt market has resulted in a meaningful subset of corporate 
bonds without market makers, which in turn lowers the liquidity of 
these bonds.\858\
---------------------------------------------------------------------------

    \854\ See A Financial System That Creates Economic 
Opportunities: Capital Markets, U.S. Department of the Treasury, 
October 2017, available at https://www.treasury.gov/press-center/press-releases/documents/a-financial-system-capital-markets-final-final.pdf (``Treasury Report'') at 85.
    \855\ See Bloomberg Letter at 9, citing Financial Times at 
https://www.ft.com/content/3175772a-7ea0-3b61-ae53-063459e78c42. 
Another commenter gave a similar number, estimating that only 17 
percent of the more than 43,000 unique U.S. investment-grade bonds 
traded on any given day in 2020. See MarketAxess Letter at 3.
    \856\ See Bloomberg Letter at 20, mentioning that the corporate 
bond market is non-standard and highlighting the importance of 
market-making, and MarketAxess Letter at 3, stating that liquidity 
is lower for corporate bonds than for equities because, while there 
are only a few thousand common stocks, there are hundreds of 
thousands of CUSIPs for corporate and municipal bonds. See also ICI 
Letter at 8, stating that corporate bond liquidity varies 
dramatically across bonds due to their diverse nature, and that 
liquidity shifts can be exacerbated during times of market stress.
    \857\ See https://fredblog.stlouisfed.org/2015/10/illiquidity-in-the-bond-market/.
    \858\ See MarketAxess Letter at 3.
---------------------------------------------------------------------------

    Corporate bondholders, who are mainly institutional investors such 
as mutual funds, pension funds, insurance companies, and banks,\859\ 
have traditionally facilitated their trades through broker-dealers on a 
principal basis.\860\ The past decade has seen an increasing shift 
towards trading arrangements in which dealers quickly arrange 
offsetting trades when intermediating between buyers and sellers so as 
to avoid taking on significant inventory risk for extended periods of 
time. A more recent trend has seen a rise in the direct participation 
of institutional investors as corporate bond liquidity providers: In 
April 2020, one corporate bond RFQ platform reported a record 900 firms 
providing liquidity, including 700 asset managers.\861\
---------------------------------------------------------------------------

    \859\ One commenter stated that registered investment companies 
(``funds'') held 21 percent of bonds issued by both U.S. corporate 
issuers and foreign bonds held by U.S. residents as of year-end 
2019. See ICI Letter at 1-2.
    \860\ See, e.g., https://www.marketwatch.com/story/u-s-corporate-debt-soars-to-record-10-5-trillion-11598921886. 
(Retrieved from Factiva database); O'Hara, M., & Zhou, X.A. (2021). 
Anatomy of a liquidity crisis: Corporate bonds in the COVID-19 
crisis. Journal of Financial Economics.
    \861\ See McDowell, Hayley. (2020, April 30). ``MarketAxess 
reveals record number of buy-side acted as liquidity providers in 
COVID-19 crisis,'' THETRADE, available at https://www.thetradenews.com/marketaxess-reveals-record-buy-side-acted-liquidity-providers-covid-19-crisis/.
---------------------------------------------------------------------------

a. ATSs in the Market for Corporate Debt
    In September 2021, corporate bond trading on ATSs accounted for 7.7 
percent of total TRACE-reported corporate bond trading volume in terms 
of dollar volume.\862\ Currently, the Commission understands that there 
are 12 ATSs with a Form ATS on file trading corporate bonds.\863\ 
Protocols in corporate bond ATSs include limit order books (LOBs), 
displayed and non-displayed venues, and auctions, among others. 
According to Table VIII.6, the most commonly reported protocol used for 
trading corporate bonds via ATSs is an auction. Typically, auctions 
operate by periodically crossing at prices that maximizes the amount of 
buy and sell trading interest that can be executing at that price.
---------------------------------------------------------------------------

    \862\ See TRACE Monthly Volume Files, available at https://www.finra.org/finra-data/browse-catalog/trace-volume-reports/trace-monthly-volume-files. One commenter referenced similar numbers for 
2020, stating that corporate bond trades (including both investment-
grade and high-yield bonds) on all ATSs represented 6.4 percent of 
the trade volume and 18.7 percent of the trade count reported to 
TRACE. See MarketAxess Letter at 1.
    \863\ In addition, a small percentage of corporate bonds are 
exchange-traded on trading systems such as NYSE Bonds and the Nasdaq 
Bond Exchange. See, e.g., https://www.nyse.com/markets/bonds and 
https://www.nasdaq.com/solutions/nasdaq-bond-exchange. Trading 
volume in exchange-traded bonds was reported to be around $19 
billion as of January 2020. See Uhlfelder, Eric, (Jan. 2020), A 
Forgotten Investment Worth Considering: Exchange-Traded Bonds, The 
Wall Street Journal, available at https://www.wsj.com/articles/a-forgotten-investment-worth-considering-exchange-traded-bonds-11578279781. (Retrieved from Factiva database).
---------------------------------------------------------------------------

    Corporate bond ATSs are mostly used by dealers, who may be either 
using them to trade on behalf of retail investors or to rebalance 
excess inventories.\864\ A Division of Economic Risk and Analysis 
(``DERA'') white paper on corporate bond ATSs finds that large dealers 
(i.e., those in the highest quartile of trading volume and number of 
bonds traded) are more likely to provide corporate bond quotes on ATSs 
than smaller dealers.\865\
---------------------------------------------------------------------------

    \864\ See Kozora, M., Mizrach, B., Peppe, M., Shachar, O., & 
Sokobin, J.S. (2020). Alternative Trading Systems in the Corporate 
Bond Market. FRB of New York Staff Report, (938).
    \865\ See Craig, L., Kim, A., & Woo, S.W. (2020). Pre-trade 
Information in the Corporate Bond Market. U.S. Securities and 
Exchange Commission, Division of Economic and Risk Analysis White 
Paper. White papers and analyses are prepared by SEC staff in the 
course of rulemaking and other Commission initiatives. The U.S. 
Securities and Exchange Commission disclaims responsibility for any 
private publication or statement of any employee or Commissioner. 
White papers express the authors' views and do not necessarily 
reflect those of the Commission, the Commissioners, or other members 
of the staff.
---------------------------------------------------------------------------

    Similar to Current Government Securities ATSs, an ATS that trades 
in corporate debt securities must comply with the requirements of 
Regulation ATS, including registering as a broker-dealer.\866\ Also, 
similar to Current Government Securities ATSs, corporate bond ATSs are 
not required to make public disclosures, and, as discussed above, this 
lack of disclosure requirements might lead to information asymmetries 
amongst different subscribers.\867\ Further, corporate bond ATSs with 
significant volume \868\ are required to comply with the requirements 
of the Fair Access Rule.\869\ Moreover, ATSs that trade in corporate 
debt must also comply with Rule 301(b)(6) of Regulation ATS 
(``Capacity, Integrity, and Security Rule'') if they meet certain 
volume thresholds.\870\ The requirements of Rule 301(b)(6), while 
similar, are less rigorous and less costly than the requirements of 
Regulation SCI.
---------------------------------------------------------------------------

    \866\ See supra Section II.D.2. See also supra Section 
VIII.B.2.a.ii for a discussion about the effects of these 
regulations and the costs to comply.
    \867\ See supra Section VIII.B.2.b.ii for additional discussion 
on the effects of a lack of public disclosure.
    \868\ An ATS trading in corporate debt securities is subject to 
the Fair Access Rule if, during at least four of the preceding six 
months, the ATS had five percent or more of the average daily volume 
in corporate debt securities traded in the United States. See 17 CFR 
242.301(b)(5)(i) and https://www.sec.gov/tm/faq-regulation-ats-fair-access-rule.
    \869\ See supra Section II.D.2. Also, see supra Section 
VIII.B.2.b.ii describing the impact of the Fair Access Rule.
    \870\ See 17 CFR 242.301(b)(6) and supra note 157 and 
corresponding text. Rule 301(b)(6) currently applies to an ATS that 
trades only corporate debt securities with 20 percent or more of the 
average daily volume traded in the United States during at least 
four of the preceding six calendar months. One commenter stated 
that, given current aggregate ATS volumes, it is unlikely that any 
single ATS will approach 20 percent of overall corporate debt market 
volume. See MarketAxess Letter at 10.
---------------------------------------------------------------------------

    All transactions in corporate bonds that include at least one FINRA 
member are required to be reported to TRACE within 15 minutes of the 
time of execution.\871\ Furthermore, trades on ATSs operated by FINRA 
members may be required to be reported to TRACE, by either the ATS, 
counterparties to the trade, or both, depending on whether the 
counterparties are FINRA members and whether the ATS holds itself out 
as a party to the trade.\872\ Academic studies have shown that TRACE 
reporting requirements have reduced overall trading costs in corporate 
bond markets,\873\ but may increase the cost of

[[Page 15605]]

trading through large dealers, who previously were able to offer lower 
transaction costs due to their information advantages.\874\
---------------------------------------------------------------------------

    \871\ See FINRA Rule 6730(a)(1) requiring FINRA members to 
report transactions in TRACE-Eligible Securities, which FINRA Rule 
6710 defines to include corporate debt securities. For each 
transaction in corporate debt securities, a FINRA member would be 
required to report the CUSIP number or similar numeric identifier or 
FINRA symbol; size (volume) of the transaction; price of the 
transaction (or elements necessary to calculate price); symbol 
indicating whether transaction is a buy or sell; date of trade 
execution (``as/of'' trades only); contra-party's identifier; 
capacity (principal or agent); time of execution; reporting side 
executing broker as ``give-up'' (if any); contra side introducing 
broker (in case of ``give-up'' trade); the commission (total dollar 
amount), if applicable; date of settlement; if the member is 
reporting a transaction that occurred on an ATS pursuant to FINRA 
Rule 6732, the ATS's separate Market Participant Identifier 
(``MPID''); and trade modifiers as required. See FINRA Rule 6730(c).
    \872\ See supra note 829 describing exemptions for ATS 
transaction reporting to TRACE.
    \873\ See, e.g., Edwards, A.K., Harris, L.E., & Piwowar, M.S. 
(2007). Corporate bond market transaction costs and transparency. 
The Journal of Finance, 62(3), 1421-1451.
    \874\ See Bessembinder, H., Maxwell, W., & Venkataraman, K. 
(2006). Market transparency, liquidity externalities, and 
institutional trading costs in corporate bonds. Journal of Financial 
Economics, 82(2), 251-288.
---------------------------------------------------------------------------

b. Communication Protocol Systems in the Market for Corporate Debt
    Communication Protocol Systems play a significant role in the 
market for corporate debt. Table VIII.6, which breaks down corporate 
bond dollar volumes according to different trading protocols, shows 
that corporate bond trading on Communication Protocol Systems 
(including anonymous and disclosed RFQs, portfolio trading, and stream 
axes), accounted for 23.1 percent of total corporate bond trading 
volume during the first half of 2021. Currently, the Commission 
estimates that there are 8 Communication Protocol Systems trading 
corporate bonds that may meet the definition of exchange under the 
proposed changes to Exchange Act Rule 3b-16.
    One commenter stated that protocols such as electronic RFQs in the 
fixed income market evolved from single dealer order routing and the 
use of the ``three quote rule,'' in which institutional investors would 
seek three quotes from three dealers in order to assist them in getting 
the best prices. According to the commenter, in more liquid securities, 
electronification has allowed traders to better organize pre-trade 
data, allowing for new Communication Protocol Systems that enable 
functionalities such as RFQ Lists and other multiple-security trade 
messaging inquiries.\875\
---------------------------------------------------------------------------

    \875\ See Bloomberg Letter at 12.
---------------------------------------------------------------------------

    ``Portfolio trading'' is a multi-security protocol that may be 
particularly useful for corporate bond market participants. This 
protocol is similar to RFQ Lists as defined in Section II.B.2 and 
discussed in Section VIII.B.1.b; however, while RFQ Lists permit users 
to respond with quotes for only some of the securities listed, 
securities that are listed in a portfolio trading protocol are executed 
for the entire portfolio at a single price with a single 
counterparty.\876\ One industry report estimates that two to five 
percent of TRACE trading volume in investment-grade bonds is executed 
via portfolio trading protocols.\877\ Furthermore, one report estimates 
that portfolio trading volume increased by 159 percent between 2019 and 
2021.\878\ The ``all-or-none'' nature of portfolio trading can be 
especially beneficial for corporate bond market participants who wish 
to trade baskets of securities that include some difficult-to-trade 
bonds. Specifically, market participants may be able to receive better 
prices for more illiquid bonds, which may or may not be balanced out by 
receiving worse prices on more liquid bonds.\879\ Additionally, 
portfolio trading also tends to be faster than list trading, as there 
is less of a need to look at each individual security. However, these 
trades tend to be complex and may be more difficult to automate, as 
they often require extensive negotiations.\880\
---------------------------------------------------------------------------

    \876\ See Husveth, Ted (2021) ``Electronic Portfolio Trading 
Rewrites the Corporate Bond Liquidity Playbook,'' Tradeweb, 
available at https://www.tradeweb.com/newsroom/media-center/insights/blog/electronic-portfolio-trading-rewrites-the-corporate-bond-liquidity-playbook/.
    \877\ See McPartland, Kevin (2020), ``All Electronic Trading is 
Not Created Equal,'' Greenwich Associates, available at https://www.greenwich.com/fixed-income/all-electronic-trading-not-created-equal.
    \878\ See McPartland, Kevin (2021), ``Making the Case for 
Portfolio Trading,'' Greenwich Associates, available at https://www.greenwich.com/fixed-income/making-case-portfolio-trading.
    \879\ One commenter stated that submitting multiple securities 
as a portfolio of liquid and less-liquid securities enables a 
liquidity provider to potentially offer better prices than trading 
each security individually. See Bloomberg Letter at 13.
    \880\ See McPartland, Kevin (2020), ``All Electronic Trading is 
Not Created Equal,'' Greenwich Associates, available at https://www.greenwich.com/fixed-income/all-electronic-trading-not-created-equal; and Husveth, Ted (2021) ``Electronic Portfolio Trading 
Rewrites the Corporate Bond Liquidity Playbook,'' Tradeweb, 
available at https://www.tradeweb.com/newsroom/media-center/insights/blog/electronic-portfolio-trading-rewrites-the-corporate-bond-liquidity-playbook/.
---------------------------------------------------------------------------

    While not necessarily its own protocol, one functionality that is 
increasingly being added to corporate bond Communication Protocol 
Systems involves so-called ``net spotting.'' Spotting is the practice 
of hedging corporate bond transactions through offsetting government 
security transactions, which is useful for participants as corporate 
bonds--investment-grade bonds in particular--are typically traded ``on 
spread,'' i.e., quoted relative to a benchmark government bond yield. 
This practice has led to interlinkages between the corporate bond and 
government securities markets.\881\ However, the Commission understands 
that manual spotting can suffer from inefficiencies resulting from time 
delays in completing trades in the two markets.
---------------------------------------------------------------------------

    \881\ See Bloomberg Letter at 8, referencing the Joint Staff 
Report on the U.S. Treasury Market on October 15, 2014, available at 
https://www.treasury.gov/press-center/pressreleases/Documents/Joint_Staff_Report_Treasury_10-15-2014.pdf, stating that markets, 
including the U.S. Treasury market, are connected through 
``automated trading strategies that involve a nearly instantaneous 
response to common trading signals or that seek to arbitrage short-
lived opportunities across related interest-rate products.''
---------------------------------------------------------------------------

    ``Net spotting,'' which incorporates automated spotting 
functionalities into corporate bond Communication Protocol Systems, may 
reduce these inefficiencies. This practice calculates a net interest 
rate exposure resulting from a spot trade, producing a net position 
that can be traded as a single transaction.\882\ Net spotting may help 
to reduce transaction costs of spot trades. A growth in the popularity 
of this practice is also likely to increase interlinkages between 
trading protocols in the corporate bond and government securities 
markets. One trading system operator estimates that, only six months 
after adding net spotting functionality to its trading system, almost 
10 percent of the corporate bond trading volume on its trading system 
was using this functionality.\883\
---------------------------------------------------------------------------

    \882\ See ``Net Spotting: Reducing Trading Costs for U.S. 
Corporate Bonds,'' (2021), Tradeweb, available at https://www.tradeweb.com/newsroom/media-center/insights/commentary/net-spotting-reducing-trading-costs-for-u.s.-corporate-bonds/.
    \883\ See id.
---------------------------------------------------------------------------

    In recent years, driven in part by an increase in the popularity of 
corporate bond exchange-traded funds (ETFs), there is some evidence 
that PTFs have begun to enter the corporate bond market.\884\ One 
factor that may correlate with the entry of these firms is the ability 
to use portfolio trading protocols to more efficiently trade in the 
bonds underlying corporate bond ETFs.\885\ Therefore, unlike in the 
market for government securities, in which PTFs prefer to trade on 
Government Securities ATSs, PTFs may have a more active presence on 
corporate bond Communication Protocol Systems than on corporate bond 
ATSs.\886\
---------------------------------------------------------------------------

    \884\ See https://www.greenwich.com/blog/what%E2%80%99s-next-high-frequency-traders, which mentions that one PTF has begun to 
trade using corporate bond RFQs.
    \885\ See, e.g., Rennison, Joe, Armstrong, Robert, and 
Wigglesworth, Robin, January 22, 2020, ``The new kings of the bond 
market,'' Financial Times, available at https://www.ft.com/content/9d6e520e-3ba8-11ea-b232-000f4477fbca.
    \886\ See supra Section VIII.B.2.b for a discussion of PTFs' 
role in government securities ATSs.
---------------------------------------------------------------------------

    Corporate bond Communication Protocol Systems do not meet the 
current definition of an exchange and thus are not subject to exchange 
registration or the requirements of Regulation ATS, such as 
requirements for robust systems.\887\ The Commission

[[Page 15606]]

estimates that there are currently 2 Communication Protocol Systems 
with sufficient corporate bond trading volume such that they would 
otherwise be over the threshold for the Capacity, Integrity, and 
Security Rule 301(b)(6).\888\ Several commenters stated that the 
resiliency of the fixed income market during the COVID crisis showed 
that the current structure of the fixed income market, and of the 
electronic trading market in particular, is already resilient and 
robust.\889\
---------------------------------------------------------------------------

    \887\ See supra Section VIII.B.2.b for discussion of the effects 
of not being subject to such regulations. One commenter stated that, 
given the lack of a central clearing party for corporate and 
municipal bond trades, each participant has the discretion over 
which other participants they wish to extend credit to and trade; 
therefore, fair access to a corporate bond Communication Protocol 
System may not have the same meaning given to it in the equity ATS 
context as the system does not have the ability to ensure that all 
participant have the same access to liquidity. See MarketAxess 
Letter at 10. Another commenter stated that Communication Protocol 
Systems such as RFQs do not pose the same technological risks as, 
e.g., fully automated central limit order books (CLOBs) because 
trading is slower, there are fewer algorithms that may malfunction, 
and, if RFQ systems are unavailable, parties can continue to 
negotiate and execute transactions bilaterally away from the trading 
system. See Tradeweb Letter at 6.
    \888\ See supra notes 157 and 870. One commenter stated that, 
other than Rule 301(b)(6)(ii)(F) and (G), it expects that nearly all 
existing platforms already meet or are trying to meet the 
requirements of Rule 301(b)(6). See MarketAxess Letter at 11. 
Another commenter that runs a fixed-income Communication Protocol 
System stated that it invested in proper contingency planning, 
disaster recovery, robustness, and resiliency to ensure there is no 
disruption in service. See FlexTrade Systems Letter at 3.
    \889\ See, e.g., Bloomberg Letter at 18 and 23 and MarketAxess 
Letter at 12.
---------------------------------------------------------------------------

    The Commission estimates that 6 Communication Protocol Systems for 
corporate bonds are not currently operated by registered broker-
dealers. These systems do not currently incur the costs of registering 
with the Commission as well as the costs of SRO membership, and are not 
subject to FINRA operational regulatory reporting requirements.\890\
---------------------------------------------------------------------------

    \890\ One commenter stated that, even if Communication Protocol 
System providers do not meet the standard of brokerage activity, 
since registered broker-dealers are using these trading systems, 
they are supervised under FINRA standards for brokers relying on 
outsourced technology. The commenter states that these systems are 
also monitored by broker-dealer, who are incentivized to do so. See 
Bloomberg Letter at 30-31.
---------------------------------------------------------------------------

    A corporate bond transaction on a Communication Protocol System is 
reported to TRACE if at least one party to the transaction is a FINRA 
member, and/or if the Communication Protocol System itself is a member 
of FINRA.\891\ Depending on how much of a role the Communication 
Protocol System takes in facilitating the transaction (e.g., acting as 
a counterparty to each side of the trade), and whether the 
Communication Protocol System operator and/or parties to the 
transaction are FINRA members, transactions taking place through the 
Communication Protocol System may not be reported to TRACE at all.\892\
---------------------------------------------------------------------------

    \891\ One commenter pointed out that FINRA has recently proposed 
changes to TRACE reporting of portfolio trades. See Bloomberg Letter 
at 14, citing FINRA request for comment, Regulatory Notice 20-24, 
September 15, 2020, available at https://www.finra.org/sites/default/files/2020-07/Regulatory-Notice-20-24.pdf.
    \892\ See FINRA Rule 6730(a)(1) requiring FINRA members to 
report transactions in TRACE-Eligible Securities. See also supra 
note 228 and https://www.finra.org/rules-guidance/notices/14-53.
---------------------------------------------------------------------------

c. Other Methods of Trading in the Market for Corporate Debt Securities
    While the electronic trading of corporate bonds through ATSs and 
Communication Protocol Systems has grown over time,\893\ traditionally 
corporate bonds trading has taken place bilaterally through either 
dealer-to-dealer or dealer-to-customer negotiations, often using 
telephone calls. There is evidence that such manual transactions 
methods remain an important part of the corporate bond market: Table 
VIII.6 shows that 71.4 percent of trading in corporate bonds was 
facilitated via bilateral voice trading during the first half of 2021.
---------------------------------------------------------------------------

    \893\ One commenter stated that approximately 32 percent of 
investment-grade and 23 percent of high-yield corporate bond daily 
dollar volumes are executed electronically. See BDA Letter at 1.
---------------------------------------------------------------------------

    Transactions in corporate bonds that do not take place on 
electronic platforms will be reported to TRACE if at least one party to 
the trade is a member of FINRA.\894\
---------------------------------------------------------------------------

    \894\ See FINRA Rule 6730(a)(1) requiring FINRA members to 
report transactions in TRACE-Eligible Securities. See also supra 
note 228 and https://www.finra.org/rules-guidance/notices/14-53 and 
https://www.finra.org/filing-reporting/market-transparency-reporting/trace/faq/reporting-corporate-and-agencies-debt.
---------------------------------------------------------------------------

d. Competition for Corporate Debt Securities Trading Services
    The trading of corporate debt securities takes place through a 
variety of different methods, including ATSs, Communication Protocol 
Systems, and informal bilateral trading methods such as voice trading. 
These different methods compete with each other for customers, and may 
appeal to different segments of the corporate market depending on that 
segment's preferences and trading needs. Trading systems within the ATS 
and Communication Protocol System spaces also compete with one another 
on the basis of fees, trading features, and their ability to attract 
liquidity.
    One commenter stated that the choice of trading method is driven 
largely by liquidity considerations, with less liquid securities 
trading via manual protocols such as voice trading, more liquid 
securities using protocols such as RFQs, and the most liquid securities 
trading electronically on ATSs using protocols such as LOBs and call 
auctions.\895\ Other commenters stated that the majority of corporate 
bonds are not liquid enough to support order book trading,\896\ which 
may be one reason why there is not much corporate bond trading volume 
in ATSs as compared to Communication Protocol Systems, and why there is 
less ATS trading in corporate bonds as compared to other securities, 
such as government securities. As discussed in Section VIII.B.1, 
customers who want to trade electronically but are concerned about 
information leakage may be more likely to use Communication Protocol 
Systems, particularly RFQs, as opposed to ATSs. One study finds that 
corporate bond ATSs may be most utilized for smaller transactions in 
investment-grade bonds, which are less vulnerable to information 
asymmetry, and transaction in bonds that have (all else being equal) 
experienced a recent decrease in secondary market trading volume, for 
which search costs may be high.\897\
---------------------------------------------------------------------------

    \895\ See Bloomberg Letter, Figure 2. See also Bloomberg Letter 
at 14. See also MarketAxess Letter at 2, stating that institutional 
investors in credit markets prefer RFQs because they have found that 
liquidity on demand results in the best pricing for illiquid 
securities.
    \896\ See, e.g., ICI Letter at 6 and MarketAxess Letter at 3.
    \897\ See Kozora, M., Mizrach, B., Peppe, M., Shachar, O., & 
Sokobin, J.S. (2020). Alternative Trading Systems in the Corporate 
Bond Market. FRB of New York Staff Report, (938).
---------------------------------------------------------------------------

    As shown in Table VIII.6, the majority (65.4 percent) of non-voice 
trading in corporate bonds is conducted on RFQs. About one fourth of 
RFQ volume is anonymous, and, while the majority of corporate bond 
trading volume on RFQs is disclosed, even participants on disclosed 
RFQs often have greater flexibility over the extent to which they 
reveal their trading interest, for example by limiting how many 
entities can view their trading interest or by refraining from 
responding to a quote request.\898\ RFQs may also help facilitate a 
wider variety of functionalities that market bond participants find 
particularly useful, such as portfolio trading and net spotting. 
Automated executions and limited negotiation possibilities may make 
these functionalities more difficult to implement on many ATSs.
---------------------------------------------------------------------------

    \898\ See Section VIII.B.1 for a discussion on the difference 
between disclosed and anonymous RFQs.

[[Page 15607]]



                                   Table VIII.6--Corporate Debt Securities and Dollar Volume Share by Trading Protocol
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                            Limit order    Non-displayed     Portfolio      Stream axes
              Anonymous RFQ                Disclosed RFQ      Auction          book          venue \a\        trading           \b\            Voice
--------------------------------------------------------------------------------------------------------------------------------------------------------
4.8.....................................            13.9             3.0             2.4             0.1             2.2             2.2            71.4
--------------------------------------------------------------------------------------------------------------------------------------------------------
This table reports volume share by trading protocol type in the market for corporate debt securities. Market Share (%) is the measure of the dollar
 volume as a percent of total par dollar volume. Data is based on Coalition Greenwich's Greenwich MarketView data from April 2021 through September
 2021. Voice market share is calculated as a remainder of total market volume after accounting for electronic protocols volume reported to Coalition
 Greenwich.
--------------------------------------------------------------------------------------------------------------------------------------------------------
\a\ Non-displayed venues are referred to as ``dark pools'' in the Coalition Greenwich's Greenwich MarketView data.
\b\ Coalition Greenwich's Greenwich MarketView refers to this data value as ``Stream/Click-to-Engage.''

    Customers may prefer other methods such as bilateral voice trading 
because they wish to transact in less liquid bonds that may require 
more intermediation to find a counterparty, despite the possibility 
that the lack of price competition may lead to higher trading costs. 
One academic study shows that the movement of corporate bond trading 
volume from voice trading to an RFQ-type protocol system mainly reduced 
transaction costs for the most liquid securities.\899\ However, one 
commenter referenced that the electronification of manual trading 
methods, while improving operational efficiencies, does not 
fundamentally change liquidity in the corporate bond market as the same 
intermediaries and interactions between dealers and customers are still 
involved.\900\
---------------------------------------------------------------------------

    \899\ See Hendershott, T., & Madhavan, A. (2015). Click or call? 
Auction versus search in the over-the[hyphen]counter market. The 
Journal of Finance, 70(1), 419-447.
    \900\ See Bloomberg Letter at 9 and10, citing Treasury Report.
---------------------------------------------------------------------------

    Similarly to the market for government securities, the Commission 
preliminarily believes that the differences in regulatory regime 
between ATSs and other trading methods, including Communication 
Protocol Systems such as RFQs and others, can lead to an uneven 
competitive landscape and adversely impact the potential for robust 
competition in the market for corporate debt securities.\901\ 
Specifically, the lack of public disclosure about the operations and 
potential conflicts of interest of Communication Protocol Systems 
trading in corporate bonds might hinder competition among these trading 
systems and between Communication Protocol Systems and ATSs in the 
market for corporate bond trading services.
---------------------------------------------------------------------------

    \901\ See supra Section VIII.B.2.d.
---------------------------------------------------------------------------

    The fact that ATSs are subject to numerous regulatory requirements 
that Communication Protocol Systems, which may perform a similar market 
place function, are not subject to may place ATSs at competitive 
disadvantage compared to Communication Protocol Systems as a result of 
the associated compliance costs and potentially higher barriers to 
entry. Furthermore, one commenter stated that the different regulatory 
treatment of fixed income trading platforms, with some platforms 
regulated as ATSs, some regulated as broker-dealers, and others not 
regulated at all, leaves room for regulatory arbitrage.\902\
---------------------------------------------------------------------------

    \902\ See Tradeweb Letter at 6.
---------------------------------------------------------------------------

4. Current State of the Municipal Securities Market
    The market for municipal securities (``municipal bonds'') 
represents another important part of the fixed income market. Daily 
trading volumes in the municipal bond market averaged around $12.4 
billion during the 2020 calendar year.\903\ Average trade sizes in this 
market tend to be smaller than in other fixed income markets: In 
September 2021, 81 percent of trades were for $100,000 or less, 
reflecting the higher presence of retail investors in this market.\904\
---------------------------------------------------------------------------

    \903\ See Municipal Securities Rulemaking Board, Muni Facts, 
available at https://www.msrb.org/News-and-Events/Muni-Facts.
    \904\ See Municipal Securities Rulemaking Board, Municipal Trade 
Statistics, available at https://emma.msrb.org/MunicipalTradeStatistics/ByTradeCharacteristic.aspx.
---------------------------------------------------------------------------

    The relatively large role of retail investors in the market for 
municipal bonds represents one important way in which this market 
differs from the markets for government securities and corporate bonds. 
Unlike in the markets for other fixed income securities, which are 
mostly owned by institutional investors, retail investors play a 
prominent role in the ownership of municipal bonds, with 45.2 percent 
of municipal bonds held by households and nonprofits as of 2020.\905\ 
This is largely due to the tax-exempt status of most municipal bonds, 
which makes them attractive to households but less attractive to 
institutional investors such as pension funds, whose holdings are 
already tax-deferred or tax exempt. Municipal bond markets also tend to 
be highly localized, as investors that are located in geographic 
proximity to an issuer are more likely to be informed about that 
issuer, and tax benefits are often conferred on investors that are 
located in the same state as the issuer.\906\
---------------------------------------------------------------------------

    \905\ See ``Trends in Municipal Bond Ownership'' (2021), 
Municipal Securities Rulemaking Board, available at https://www.msrb.org/Market-Topics/Other-Market-Topics. Note that this 
source groups together households and nonprofit organizations. One 
commenter pointed out the role of registered investment companies 
(``funds'') in this market, stating that funds held 29 percent of 
municipal bonds outstanding as of year-end 2019. See ICI Letter at 
1-2.
    \906\ See Schultz, P. (2012). The market for new issues of 
municipal bonds: The roles of transparency and limited access to 
retail investors. Journal of Financial Economics, 106(3), 492-512.
---------------------------------------------------------------------------

    Households tend to be buy-and-hold investors, which may contribute 
to overall low liquidity levels in the secondary market for municipal 
bonds. In 2018, less than one percent of outstanding municipal bonds 
traded on a typical day, and, as in the corporate bond market, 
liquidity is mostly concentrated in newly-issued bonds.\907\ 
Furthermore, there is evidence that trading in municipal bonds has 
declined in recent years, as secondary market trading volume declined 
by about 19 percent between 2019 and 2021.\908\
---------------------------------------------------------------------------

    \907\ See Bessembinder, H., Spatt, C., & Venkataraman, K. 
(2020). A survey of the microstructure of fixed-income markets. 
Journal of Financial and Quantitative Analysis, 55(1), 1-45.
    \908\ See ``2021 Municipal Market Trading Update,'' (2021), 
Municipal Securities Rulemaking Board, available at https://www.msrb.org/Market-Topics/Reports.
---------------------------------------------------------------------------

    The market for municipal bonds is highly heterogeneous, and perhaps 
even more fragmented than the market for corporate bonds. In addition 
to a wide diversity of bond characteristics, including maturity, tax 
status, and coupon type, there are more than 50,000 different issuers 
in the municipal bond market, including state and local governments, 
towns, cities, and counties, who as of 2020 have issued

[[Page 15608]]

around one million unique bonds valuing $3.9 trillion.\909\
---------------------------------------------------------------------------

    \909\ See Municipal Securities Rulemaking Board, Muni Facts, 
available at https://www.msrb.org/News-and-Events/Muni-Facts. This 
is compared to the corporate bond market, in which there are around 
43,000 unique securities with a total market size around $10.6 
trillion. See also SIFMA letter at 9 (stating that there are 50,000 
issuers of municipal securities and one million unique municipal 
bonds, compared to 30,000 unique corporate bonds).
---------------------------------------------------------------------------

    The market for municipal bonds is largely an OTC market, in which 
investors place orders with dealers who execute these orders by either 
committing their own capital (via principal trades) or by searching the 
market for counterparties (via riskless principal trades or agency 
trades).\910\ Academic research of regulatory data has shown that the 
interdealer market in municipal bonds has a decentralized network 
structure composed of between 10 to 30 central dealers and more than 
2,000 periphery dealers.\911\ Further research shows that the highly 
geographically localized nature of this market can limit competition 
between dealers.\912\
---------------------------------------------------------------------------

    \910\ See ``Analysis of Municipal Securities Pre-Trade Data from 
Alternative Trading Systems'' (2018), Municipal Securities 
Rulemaking Board, available at https://www.sec.gov/spotlight/fixed-income-advisory-committee/msrb-staff-analysis-of-municipal-securities-pre-trade-data.pdf.
    \911\ See Li, D., & Sch[uuml]rhoff, N. (2019). Dealer networks. 
The Journal of Finance, 74(1), 91-144.
    \912\ See Schultz, P. (2013). State taxes, limits to arbitrage 
and differences in municipal bond yields across states. Unpublished 
working paper. University of Notre Dame.
---------------------------------------------------------------------------

a. ATSs in the Market for Municipal Securities
    ATSs play an increasingly important role in the municipal bond 
market. Between August 2016 and April 2021, an estimated 56.4 percent 
of municipal bond interdealer trades (26 percent in terms of dollar 
volume) were conducted via ATSs.\913\ One commenter stated that, in 
2020, more than 1.7 million trades were reported to the MSRB as being 
executed on an ATS, 1.55 million of which were for $100,000 or less, 
showing that ATSs are of particular significance for individual 
investors.\914\ The Commission understands that there are currently 6 
reporting ATSs trading in municipal securities. One commenter stated 
that tremendous consolidation in the municipal securities ATS market 
has occurred over time, such that there are only a few remaining ATSs 
with significant trading in municipal bonds.\915\
---------------------------------------------------------------------------

    \913\ See ``Characteristics of Municipal Securities Trading on 
Alternative Trading Systems and Broker's Broker Platforms'' (2021), 
Municipal Securities Rulemaking Board, available at https://www.msrb.org/Market-Topics/Reports. See also Letter from Edward J. 
Sisk, Chair, Municipal Securities Rulemaking Board, dated March 1, 
2021 (``MSRB Letter''), stating that MSRB trade data shows that ATSs 
were involved in 21 percent of all trades and 55 percent of all 
inter-dealer trades in the municipal bond market.
    \914\ The commenter also stated that the median size of trades 
reported as occurring on an ATS was $25,000 and that, for trades of 
$100,000 or less, ATSs accounted for 24 percent of all trades and 59 
percent of all inter-dealer trades. See MSRB Letter at 2-3.
    \915\ See SIFMA letter at 11.
---------------------------------------------------------------------------

    As mentioned in the introduction to Section VIII.B.4 above, 
municipal bond owners are typically retail investors. Retail investors 
are unlikely to subscribe directly to ATSs, and so almost all trades 
executed on ATSs are from dealer quotes.\916\ A DERA white paper found 
that, during a three-month period in 2014, 62 percent of trades on ATSs 
were between dealers and customers, including both retail and 
institutional investors, while the remainder were interdealer 
trades.\917\ The white paper also found that large broker-dealers are 
more likely to post quotes on ATSs than small broker-dealers.\918\
---------------------------------------------------------------------------

    \916\ See ``Characteristics of Municipal Securities Trading on 
Alternative Trading Systems and Broker's Broker Platforms'' (2021), 
Municipal Securities Rulemaking Board, available at https://www.msrb.org/Market-Topics/Reports.
    \917\ See Craig, L., Kim, A., & Woo, S.W. (2018). Pre-Trade 
Information in the Municipal Bond Market. DERA White Paper, 
available at https://www.sec.gov/files/DERA_WP_Pre-trade_Information_in_the_Municipal_Bond_Market.pdf.
    \918\ See id.
---------------------------------------------------------------------------

    In terms of available protocols, municipal bond ATSs offer LOB-
based protocols, but many also offer protocols similar to RFQs. For the 
latter, quote information is only available to a limited subset of ATS 
participants. This shortage of public pre-trade information may make it 
more difficult for retail investors in this market, who may not have 
access to quote information, to ensure that they are getting the best 
prices; in fact, the DERA white paper found that smaller retail-sized 
municipal bond trades tend to receive worse prices than large 
trades.\919\
---------------------------------------------------------------------------

    \919\ See id. The paper defines institutional-size trades as 
trades greater than $100,000, and retail-size trades as trades less 
than $100,000, citing Harris and Piwowar (2006), who use trade size 
of $100,000 to distinguish retail- and institutional-size customer 
trades. See Harris, L.E., & Piwowar, M.S. (2006). Secondary trading 
costs in the municipal bond market. The Journal of Finance, 61(3), 
1361-1397.
---------------------------------------------------------------------------

    80 percent of all quoted municipal bonds have only a single quote 
offered by a single broker at any given point in time, which 
corresponds to the heterogeneous nature of this market.\920\ Another 
reason why municipal bonds tend to be thinly quoted may be the 
difficulty in shorting municipal bonds, as Internal Revenue Service 
(IRS) rules regulating the shorting of tax-exempt securities and 
difficulties in locating securities to borrow makes shorting in this 
market costly.\921\ A dealer likely will not quote in a bond unless it 
already owns that bond.
---------------------------------------------------------------------------

    \920\ See ``Characteristics of Municipal Securities Trading on 
Alternative Trading Systems and Broker's Broker Platforms'' (2021), 
Municipal Securities Rulemaking Board, available at https://www.msrb.org/Market-Topics/Reports.
    \921\ See ``Municipal Securities Pre-Trade Market Activity: What 
Has Changed Since 2015?'' (2020), Municipal Securities Rulemaking 
Board, available at https://www.msrb.org/Market-Topics/~/
link.aspx?_id=9089AC4BA1F144B388D090177FADCDD6&_z=z.
---------------------------------------------------------------------------

    ATSs that trade in municipal bonds face many of the same regulatory 
requirements as those that trade in corporate bonds, including 
complying with Regulation ATS.\922\ This includes requirements that 
ATSs with significant volume in municipal securities markets must 
comply with the Fair Access Rule \923\ and with Rule 301(b)(6) of 
Regulation ATS (``Capacity, Integrity, and Security Rule'').\924\
---------------------------------------------------------------------------

    \922\ See supra note 866 and Section VIII.B.2.a.ii for a 
discussion of the impact of some of the elements of Regulation ATS.
    \923\ An ATS trading in municipal debt securities is subject to 
the Fair Access Rule if, during at least four of the preceding six 
months, the ATS had five percent or more of the average daily volume 
in municipal debt securities traded in the United States. See 17 CFR 
242.301(b)(5)(i) and https://www.sec.gov/tm/faq-regulation-ats-fair-access-rule. See supra Section VIII.B.2.a.ii for a discussion of the 
impact of the Fair Access Rule.
    \924\ See 17 CFR 242.301(b)(6) and supra note 157 and 
corresponding text. Rule 301(b)(6) currently applies to an ATS that 
trades only municipal debt securities with 20 percent or more of the 
average daily volume traded in the United States during at least 
four of the preceding six calendar months. See supra Section 
VIII.B.3.a for a discussion of the current impact of being subjected 
to Rule 301(b)(6).
---------------------------------------------------------------------------

    Broker-dealers operating in the municipal bond market must be 
registered with the Municipal Securities Rulemaking Board (MSRB), which 
creates rules governing their conduct and transparency.\925\ Since 
2005, all MSRB-registered dealers must report municipal bond trades 
within 15 minutes of the time of execution to the MSRB's Real-Time 
Transaction Reporting System (RTRS).\926\ Since

[[Page 15609]]

2016, dealer-reported trades to the MSRB have been required to include 
an indicator to identify trades that have been executed on an ATS.\927\ 
Trades that take place on an ATS are required to be reported both by 
the member dealers that transact with the ATS, as well as by the ATS if 
that ATS has taken a principal position between the buyer and seller. 
If the ATS only facilitates the connection between the buyer and seller 
but does not take a principal or agency position, it has no reporting 
requirement under MSRB rules.\928\
---------------------------------------------------------------------------

    \925\ The MSRB is an SRO that is overseen by the SEC. See 
Municipal Securities Rulemaking Board, The Role and Jurisdiction of 
the MSRB, available at https://www.msrb.org/About-MSRB/About-the-MSRB.
    \926\ See MSRB Rule G-14 requiring brokers, dealers and 
municipal securities dealers (``dealers'') to report transactions in 
municipal securities. The following transactions in municipal debt 
securities are exempt from reporting requirements: Transactions in 
securities without assigned CUSIP numbers; transactions in Municipal 
Fund Securities; and inter-dealer transactions for principal 
movement of securities between dealers that are not inter-dealer 
transactions eligible for comparison in a clearing agency registered 
with the Commission. Dealers are exempt from reporting if they do 
not affect any transactions in municipal securities or if they only 
deal in exempt transactions.
    \927\ See MSRB Letter at 3. One commenter stated that a 
difference between ATS trade reporting requirements between FINRA 
and MSRB is that, while the MSRB, like FINRA, requires an ATS flag 
for reports to their Real-time Trade Reporting System, this only 
applies to interdealer trades conducted on ATSs, not trades with 
customers. See BDA Letter at 3.
    \928\ See Regulatory Notice 2015-07, Municipal Securities 
Rulemaking Board, May 26, 2015, available at https://www.msrb.org/Rules-and-Interpretations/Regulatory-Notices?type=All&filter=2015.
---------------------------------------------------------------------------

b. Communication Protocol Systems in the Market for Municipal 
Securities
    At least 43.6 percent of interdealer trades (74.1 percent in terms 
of dollar volume) in the municipal bond market take place via trading 
methods that are not ATSs, including 38.3 percent direct dealer-to-
dealer and 5.3 percent on broker's broker platforms.\929\ At least some 
of these transaction are likely to take place via Communication 
Protocol Systems. The Commission estimates that there are currently 3 
Communication Protocol Systems operating in the municipal debt market 
that may meet the definition of exchange under the proposed changes to 
Exchange Act Rule 3b-16.
---------------------------------------------------------------------------

    \929\ See id.
---------------------------------------------------------------------------

    Of particular interest in this context are broker's broker 
platforms. A broker's broker is defined by the MSRB as a dealer that 
principally effects transactions for other dealers or that holds itself 
out as a broker's broker.\930\ The broker's broker does not participate 
in the decision to buy or sell and does not exercise discretion as to 
the price at which a transaction is executed or determine the timing of 
a trade.\931\ While broker's brokers traditionally conducted their 
activities via bilateral means such as voice trading, they have 
increasingly made use of electronic systems.\932\ Most electronic 
broker's broker platforms use only quote solicitation protocols and do 
not post quotes; those that do post quotes typically are registered as 
an ATS with the SEC.\933\ However, only about 1.6 percent of all inter-
dealer trades take place on broker's broker platforms that are 
registered as ATSs.
---------------------------------------------------------------------------

    \930\ See Municipal Securities Rulemaking Board, MSRB Rule G-43.
    \931\ See SIFMA, ``The Role of Municipal Securities Broker's 
Brokers in the Municipal Markets,'' 2017.
    \932\ See ``Characteristics of Municipal Securities Trading on 
Alternative Trading Systems and Broker's Broker Platforms'' (2021), 
Municipal Securities Rulemaking Board, available at https://www.msrb.org/Market-Topics/Reports.
    \933\ See ``Characteristics of Municipal Securities Trading on 
Alternative Trading Systems and Broker's Broker Platforms'' (2021), 
Municipal Securities Rulemaking Board, available at https://www.msrb.org/Market-Topics/Reports.
---------------------------------------------------------------------------

    The Commission estimates that 1 Communication Protocol System 
trading in municipal bonds is not currently operated by a registered 
broker-dealer. This system is not subject to exchange registration or 
the requirements of Regulation ATS, and is not subject to FINRA 
operational regulatory reporting requirements.\934\
---------------------------------------------------------------------------

    \934\ In this respect they are similar to Communication Protocol 
Systems in the market for corporate debt. See supra Sections 
VIII.B.3.b and VIII.B.3.d for a discussion of the impact of not 
being subject to these regulations.
---------------------------------------------------------------------------

    If the Communication Protocol System only facilitates the 
connection between the buyer and seller but does not take a principal 
or agency position to the transaction, the Communication Protocol 
System may not currently be required to report post-trade data under 
MSRB rules.\935\ However, trades that take place on a Communication 
Protocol System will currently be reported to MSRB's RTRS if at least 
one party to the transaction is a municipal bond dealer.
---------------------------------------------------------------------------

    \935\ See Regulatory Notice 2015-07, Municipal Securities 
Rulemaking Board, May 26, 2015, available at https://www.msrb.org/Rules-and-Interpretations/Regulatory-Notices?type=All&filter=2015.
---------------------------------------------------------------------------

c. Other Methods of Trading in the Market for Municipal Securities
    Similar to other fixed income markets, the market for municipal 
securities has traditionally relied on bilateral voice trading.\936\ As 
mentioned above in the introduction to Section VIII.B.4, due to the 
particularly fragmented and localized nature of the municipal bond 
market, competition between individual dealers may be limited.\937\ 
Therefore, it is likely that the lack of pre-trade price transparency 
in a market traditionally dominated by bilateral voice trading has been 
particularly costly for municipal bond customers, who lack both price 
information and bargaining power when negotiating prices with their 
dealers over the phone. In fact, transaction costs in the municipal 
bond market have typically been large compared to other markets, and 
academic studies have indeed attributed these large transaction costs 
to a lack of price transparency and subsequent information asymmetry 
between dealers and customers.\938\ One MSRB report found that 
technological advancements in this market and the movement away from 
voice trading and towards electronic trading have helped reduce 
transaction costs for dealer-customer trades by 51 percent between 2005 
and 2018.\939\
---------------------------------------------------------------------------

    \936\ One commenter estimated only 15 percent of daily dollar 
trading volume in municipal bonds is executed electronically. See 
BDA Letter at 1.
    \937\ See Schultz, P. (2012). The market for new issues of 
municipal bonds: The roles of transparency and limited access to 
retail investors. Journal of Financial Economics, 106(3), 492-512.
    \938\ See Harris, L.E., & Piwowar, M.S. (2006). Secondary 
trading costs in the municipal bond market. The Journal of Finance, 
61(3), 1361-1397.
    \939\ See ``Transaction Costs for Customer Trades in the 
Municipal Bond Market: What is Driving the Decline?'' (2018), 
Municipal Securities Rulemaking Board, available at https://
www.msrb.org/Market-Topics/~/
link.aspx?_id=9089AC4BA1F144B388D090177FADCDD6&_z=z.
---------------------------------------------------------------------------

    Transactions that take place via bilateral negotiations will only 
be reported to MSRB's RTRS if at least one party to the transaction is 
a MSRB-member dealer.
d. Competition for Municipal Securities Trading Services
    The trading of municipal debt securities takes place through a 
variety of different methods, including electronic protocols through 
ATSs and Communication Protocol Systems, as well as more traditional 
methods such as telephone calls. These various methods compete with one 
another in attracting order flow.
    Due to the buy-and-hold nature of municipal bond trading, usually 
brokers' main task is to locate investors that are willing to buy new 
issues.\940\ ATSs may help to reduce search costs. Indeed, one study 
finds that dealers are more likely access ATS systems for trades that 
are more difficult to price and that face substantial search costs, 
such as smaller-sized trades and trades involving municipal bonds with 
complex features.\941\ Accordingly, 90 percent of quotes on municipal 
bond ATSs are offer quotes.\942\ On the other hand, the vast majority 
of RFQs on municipal bond ATSs are requests for

[[Page 15610]]

bids, reflecting that RFQ protocols are more likely to be used when 
customers want to sell.\943\
---------------------------------------------------------------------------

    \940\ See Schultz, P. (2012). The market for new issues of 
municipal bonds: The roles of transparency and limited access to 
retail investors. Journal of Financial Economics, 106(3), 492-512.
    \941\ See ``Characteristics of Municipal Securities Trading on 
Alternative Trading Systems and Broker's Broker Platforms'' (2021), 
Municipal Securities Rulemaking Board, available at https://www.msrb.org/Market-Topics/Reports.
    \942\ See ``Municipal Securities Pre-Trade Market Activity: What 
Has Changed Since 2015?'' (2020), Municipal Securities Rulemaking 
Board, available at https://www.msrb.org/Market-Topics/~/
link.aspx?_id=9089AC4BA1F144B388D090177FADCDD6&_z=z.
    \943\ See id.
---------------------------------------------------------------------------

    Meanwhile, empirical results show that broker's broker platforms, 
which may have functionalities similar to Communication Protocol 
Systems, are more likely to be used for large-sized trades, and less 
likely to be used for municipal bonds with complex features.\944\ The 
study implied that this is because the lower price transparency on many 
broker's broker platforms, which do not post quotes, makes these 
systems less useful for trading securities that are difficult to price.
---------------------------------------------------------------------------

    \944\ See id.
---------------------------------------------------------------------------

    Meanwhile, similar to the case of corporate bond markets, RFQs may 
instead be preferred by traders that want to limit information leakage, 
such as in case of large-sized trades.\945\ Furthermore, as in the 
market for corporate bonds, one commenter stated that the majority of 
municipal bonds are not liquid enough to support order book 
trading.\946\
---------------------------------------------------------------------------

    \945\ See Section VIII.B.3.
    \946\ See ICI Letter at 6-7.
---------------------------------------------------------------------------

    More generally, for the reasons described in Section VIII.B.4.c, 
the movement of municipal bond trading onto electronic platforms has 
helped to reduce transaction costs. Specifically, an increase in 
transparency in this market has particularly been beneficial for retail 
investors who otherwise have little access to municipal bond 
information.\947\
---------------------------------------------------------------------------

    \947\ See Craig, L., Kim, A., & Woo, S.W. (2018). Pre-Trade 
Information in the Municipal Bond Market. DERA White Paper, 
available at https://www.sec.gov/files/DERA_WP_Pre-trade_Information_in_the_Municipal_Bond_Market.pdf.
---------------------------------------------------------------------------

    The Commission preliminarily believes that, as in other fixed 
income markets, the differences in regulatory regime between ATSs and 
other trading methods can lead to an uneven competitive landscape and 
adversely impact the potential for robust competition in the market for 
municipal debt securities.
5. Current State of the Equity Market
    The market for U.S. equity securities represents one of the largest 
U.S. and global financial markets. As of 2020, the capitalization of 
the U.S. equity market was estimated to be more than $40 trillion.\948\ 
The market for equity trading services is served by exchanges, ATSs, 
other trading systems, such as OTC systems, and other liquidity 
providers (such as internalizers). The type of trading system on which 
an equity security is eligible to trade will depend on the equity 
security's characteristics, including whether the issuing company 
periodically reports its financial information and whether the security 
is exchange-listed and/or registered with the SEC. U.S. equity 
securities contain NMS stocks (including ETFs), OTC securities, and 
restricted stocks, in addition to other types of securities.
---------------------------------------------------------------------------

    \948\ See ``Market capitalization of listed domestic companies 
(current US$)--United States,'' The World Bank, available at https://data.worldbank.org/indicator/CM.MKT.LCAP.CD?locations=US.
---------------------------------------------------------------------------

a. Categorization and Trading Characteristics of U.S. Equity Securities
    The largest and most liquid part of the U.S. equity market consists 
of national market system (NMS) stocks. In general, NMS stocks are 
exchange-listed equity securities for which transactions are reported 
pursuant to an effective transaction reporting plan.\949\ As of August 
2021, there were around 5,669 equities listed across five 
exchanges.\950\ In September 2021, the average daily trading volume in 
NMS stocks across all market centers was $545 billion.\951\ The market 
for trading services in NMS stocks consists of 16 national securities 
exchanges, and 34 ATSs, as well as other off-exchange trading venues, 
including broker-dealer internalizers and wholesalers.\952\
---------------------------------------------------------------------------

    \949\ See Regulation NMS Rules 600(b)(46) and (47) (17 CFR 
242.600(b)(46) and (47)).
    \950\ See https://www.finra.org/filing-reporting/oats/oats-reportable-securities-list. This includes NYSE Arca, NYSE MKT, BZX 
Exchange (BATS), NASDAQ, and New York Stock Exchange (NYSE).
    \951\ See CBOE Historical Market Volume Data, available at 
https://www.cboe.com/us/equities/market_statistics/historical_market_volume/market_history_monthly_2019.csv. The 
statistic is calculated by summing the ``Total Notional'' value for 
all entries in September 2021, and then dividing this sum by the 
number of trading days in September 2021 (21).
    \952\ There are 34 NMS Stock ATSs operating with a Form ATS-N on 
file. See Form ATS-N Filings and Information, available at https://www.sec.gov/divisions/marketreg/form-ats-n-filings.htm. Wholesalers 
are broker-dealers to whom retail brokers send their clients' orders 
to be filled internally (as opposed to sending the trade orders to 
an exchange). Typically, a wholesaler promises to provide price 
improvement relative to the NBBO for filled orders. Wholesalers 
often pay retail brokers for sending their clients' orders to the 
wholesaler.
---------------------------------------------------------------------------

    One subset of NMS stocks that has been increasing in popularity in 
recent years includes exchange-traded funds (ETFs). ETFs are securities 
that are registered as open-end investment companies or unit investment 
trusts under the Investment Company Act of 1940 (the ``1940 
Act''),\953\ that typically track financial instruments or bundles of 
financial instruments (such as an index), and are listed on national 
securities exchanges. ETFs are investment vehicles that issue shares 
that can be bought or sold throughout the day on securities exchanges 
in the secondary market at a market-determined price. The ETF market 
has seen significant growth in the past decade, as the number of ETFs 
nearly doubled from 1,134 to 2,204 and net assets more than quintupled, 
from $939 billion to more than $5.3 trillion.\954\ ETF secondary market 
trading made up 26 percent of total daily U.S. stock market trading on 
average in 2020.\955\ At the same time, ETF liquidity may be highly 
concentrated, with studies estimating that more than 85 percent of all 
ETF value traded is concentrated in around 150 ETFs, or around five 
percent of all ETFs.\956\ As with other NMS securities, ETFs can be 
traded on exchanges and at off-exchange venues.
---------------------------------------------------------------------------

    \953\ This discussion does not address other types of exchange-
traded products that are not registered under the 1940 Act, such as 
exchange-traded commodity funds or exchange-traded notes. See 
https://www.sec.gov/investor/alerts/etfs.pdf. It is estimated that 
at year-end 2020, less than 3% of net assets were held in ETFs that 
are not registered with or regulated by the SEC under the Investment 
Company Act of 1940; see https://www.icifactbook.org/21_fb_ch4.html.
    \954\ See https://www.icifactbook.org/21_fb_ch4.html.
    \955\ See id.
    \956\ See id.
---------------------------------------------------------------------------

    There is also a significant market for stocks that are not listed 
on a national securities exchange, which are often referred to as over-
the-counter (OTC) equities.\957\ As of August 2021, there were 8,777 
unlisted stocks that fell under FINRA reporting requirements.\958\ 
Unlike NMS stocks, which may trade on- or off-exchange, OTC equities 
may only trade off-exchange, on ATSs or through Communication Protocol 
Systems for example.\959\ Liquidity in OTC equities can be limited: A 
2019 Commission analysis estimated that only 44 percent of quoted OTC 
equities are traded per day, and two percent did not trade at all 
during the 2019 calendar year.\960\
---------------------------------------------------------------------------

    \957\ The Commission estimates that quoted OTC securities were 
valued at approximately $32.3 trillion in 2019, with 94.7 percent of 
the total market capitalization coming from companies that also have 
securities listed on public foreign exchanges.
    \958\ See https://www.finra.org/filing-reporting/oats/oats-reportable-securities-list/.
    \959\ See ``Unraveling the Mystery of Over-the-Counter Trading'' 
(2016), FINRA, available at https://www.finra.org/investors/insights/unraveling-mystery-over-counter-trading.
    \960\ See SEC Release No. 34-87115, ``Publication or Submission 
of Quotations Without Specified Information'' Proposed Rule and 
Concept Release, available at https://www.sec.gov/rules/proposed/2019/34-87115.pdf.
---------------------------------------------------------------------------

    OTC equities tend to be held by small investors. One academic study 
found that institutions only held about 26 percent of OTC stocks, as 
compared to 71 percent of listed stocks, implying

[[Page 15611]]

that most owners of OTC stocks are retail investors.\961\ A study found 
that retail investors may be attracted to the low price of OTC 
equities, which include equities that trade under $5 per share (so-
called ``penny stocks'').\962\
---------------------------------------------------------------------------

    \961\ See Andrew Ang et al., Asset Pricing in the Dark: The 
Cross-Section of OTC Stocks, 26 Rev. Fin. Studs. 2985-3028 (2013).
    \962\ See ``Unraveling the Mystery of Over-the-Counter Trading'' 
(2016), FINRA, available at https://www.finra.org/investors/insights/unraveling-mystery-over-counter-trading.
---------------------------------------------------------------------------

    Transparency in the market for OTC securities can be limited. While 
some OTC equity trading systems require issuers to register their 
securities with the SEC and/or periodically file their financial 
statements (either with the SEC or with the trading venue), other 
systems may trade in OTC equities without any reporting standards or 
eligibility requirements.\963\ The market for OTC equities is largely 
regulated by FINRA under Section 15A of the Securities Exchange Act of 
1934, which requires FINRA to, among other things, establish rules 
governing the form and content of quotations for securities sold 
otherwise than on an exchange.
---------------------------------------------------------------------------

    \963\ See https://www.sec.gov/reportspubs/investor-publications/investorpubsmicrocapstockhtm.html. Note that, as discussed in infra 
Section VIII.5.d, recent amendments to 17 CFR 240.15c2-11 (Rule 
15c2-11 of the Exchange Act) adopted in September 2020 limit public 
quoting in OTC equities for which current financial statement 
information is not publically available.
---------------------------------------------------------------------------

    One particular type of unlisted securities is referred to as 
restricted (or sometimes ``control'') stocks. Restricted stocks are 
either unregistered shares issued by public companies in private 
placements \964\ or shares (both registered and unregistered) held by 
an issuer or its affiliates (such as insiders and large shareholders). 
The secondary market for restricted stocks is governed by SEC Rule 144, 
and allows restricted stocks to be sold to the public if several 
conditions are met.\965\ While investments in restricted stocks are 
typically limited to only accredited investors, new SEC rules adopted 
in 2015 under Section 401 of the Jumpstart Our Business Startups (JOBS) 
Act, often referred to as ``Regulation A+,'' expanded the ability for 
non-accredited investors to trade in certain unregistered equities. 
Eligible restricted stocks can be traded on a number of electronic 
platforms that specialize in the secondary market for restricted 
shares, as well as through broker-dealers.\966\
---------------------------------------------------------------------------

    \964\ Unregistered securities typically avoid SEC registration 
through one of two exemptions: Regulation D offerings, which are 
mostly limited to accredited (i.e., institutional or high-net-worth) 
investors, and Regulation A offerings, which are open to 
unaccredited investors.
    \965\ See https://www.sec.gov/reportspubs/investor-publications/investorpubsrule144htm.html. These conditions include a minimum 
holding period, the availability of up-to-date information about the 
issuing company, and certain limits to the size of the trade. In 
addition, notice of trades by affiliates are required to be filed 
with the SEC, and the trades themselves must be handled by a broker 
as a routine transaction (e.g., no special commissions).
    \966\ See, e.g., Private Equity Exchange (http://peqx.com/); 
Nasdaq Private Market (https://www.nasdaq.com/secondmarket).
---------------------------------------------------------------------------

b. ATSs in the Equity Market
    As mentioned above, NMS stocks that are listed on national 
securities exchanges may trade both on exchanges and at off-exchange 
trading venues, including on ATSs. Currently there are 34 NMS Stock 
ATSs, collectively handling an average of around 453 million trades 
during Q3 2021.\967\ Since the adoption of Regulation NMS in 2005, the 
market for trading services has become more fragmented, and the 
proportion of NMS stocks trading off-exchange has increased. For 
example, as of July 2020, NMS Stock ATSs comprised approximately 10 
percent of consolidated dollar volume, and other off-exchange volume 
totaled approximately 23 percent of consolidated dollar volume.\968\
---------------------------------------------------------------------------

    \967\ See https://www.finra.org/filing-reporting/otc-transparency/ats-quarterly-statistics.
    \968\ See Market Data Infrastructure Final Rule, Release No. 
90610 (Dec. 9, 2020), available at https://www.sec.gov/rules/final/2020/34-90610.pdf.
---------------------------------------------------------------------------

    NMS Stock ATSs generally operate as non-displayed venues, which do 
not display quotes. Traditionally, market participants that used non-
displayed venues to trade listed stocks have been large institutional 
investors seeking to execute block trades. However, average trade sizes 
in many ATSs have shrunk from block-size trades to smaller trade sizes 
that match those of traditional exchanges. In 2018, the Commission 
found that, while eight NMS Stock ATSs had average trade sizes larger 
than 10,000 shares, the vast majority had average trade sizes between 
100 and 460 shares, which is similar to average trade sizes on the 
national securities exchanges.\969\ One feature, among others, that may 
attract some market participants to non-displayed venues is their lower 
information leakage as compared to trades on exchanges.
---------------------------------------------------------------------------

    \969\ See SEC Release No. 34-83663, ``Regulation of NMS Stock 
Alternative Trading Systems,'' available at https://www.sec.gov/rules/final/2018/34-83663.pdf.
---------------------------------------------------------------------------

    NMS Stock ATSs are subject to Regulation ATS and are also required 
to file and publicly disclose Form ATS-N. Furthermore, those with 
significant volume are required to comply with the requirements of 
Regulation SCI \970\ and the Fair Access Rule.\971\ Trades in NMS 
stocks that are transacted off-exchange, which includes transactions on 
ATSs, are required to be reported to one of three FINRA Trade Reporting 
Facilities (TRF).\972\ If the execution is handled by an ATS, then in 
most cases the ATS has the reporting obligation and must report itself 
as a counterparty to both sides of the trade.\973\
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    \970\ An ATS trading in NMS stock is subject to Regulation SCI 
if, during at least four of the preceding six months, the ATS had 
five percent or more in any single NMS stock, and 0.25 percent or 
more in all NMS stocks, of the average daily dollar volume reported 
by applicable effective transaction reporting plans, or one percent 
or more, in all NMS stocks, of the average daily dollar volume 
reported by applicable effective transaction reporting plans. See 
https://www.sec.gov/divisions/marketreg/regulation-sci-faq.shtml. 
See supra Section VIII.B.2.a.ii for a discussion of the impact of 
Regulation SCI.
    \971\ An ATS trading in NMS stock is subject to the Fair Access 
Rule if, during at least four of the preceding six months, the ATS 
had five percent or more of the average daily volume in an NMS stock 
reported by an effective transaction reporting plan. See 17 CFR 
242.301(b)(5)(i) and https://www.sec.gov/tm/faq-regulation-ats-fair-access-rule. See supra Section VIII.B.2.a.ii for a discussion of the 
impact of the Fair Access Rule.
    \972\ These include FINRA/Nasdaq TRF Carteret, FINRA/Nasdaq TRF 
Chicago, and FINRA/NYSE TRF. See https://www.finra.org/filing-reporting/trf/trf-exchange-participants.
    \973\ See https://www.finra.org/filing-reporting/market-transparency-reporting/trade-reporting-faq. Certain transactions are 
exempt from FINRA TRF reporting requirements; see https://www.finra.org/filing-reporting/market-transparency-reporting/trade-reporting-faq#500 and FINRA Rules 6282(f)(1), 6380A(e)(1), 
6380B(e)(1), and 6622(e)(1).
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    Furthermore, national securities exchanges, national securities 
associations and Industry Members \974\ that receive or originate 
orders \975\ in Eligible Securities \976\ are required to

[[Page 15612]]

report any Reportable Event \977\ to the Consolidated Audit Trail 
(CAT), which is designed to capture customer and order event 
information from the time of order inception through routing, 
cancellation, modification, or execution in a single, consolidated data 
source. The Participants \978\ have issued guidance stating that 
trading interest must be ``firm'' to fall within the definition of an 
``order,'' and thus be reportable to CAT, and so certain trading 
interest (e.g., conditional orders) that may be available on some ATSs 
is not reportable to the CAT until it is ``firmed up''/confirmed.\979\
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    \974\ The National Market System Plan Governing the Consolidated 
Audit Trail (CAT NMS Plan) is a national market system plan approved 
by the Commission pursuant to Section 11A of the Exchange Act and 
the rules and regulations thereunder. See Securities Exchange Act 
Release No. 79318 (November 15, 2016), 81 FR 84696 (November 23, 
2016). The CAT NMS Plan and subsequent amendments to the Plan are 
available at https://catnmsplan.com/about-cat/cat-nms-plan. Section 
1.1 of the CAT NMS Plan defines an Industry Member as a member of a 
national securities exchange or a member of a national securities 
association. ``CAT Reporters'' include national securities 
exchanges, national securities associations and Industry Members 
that are required to record and report information to the Central 
Repository pursuant to SEC Rule 613(c).
    \975\ Section 1.1 of the CAT NMS Plan defines the term 
``order,'' with respect to Eligible Securities, as having the 
meaning set forth in 17 CFR 242.613(j)(8) (SEC Rule 613(j)(8)). SEC 
Rule 613(j)(8) defines an ``order'' as any order received by a 
member of a national securities exchange or national securities 
association from any person; any order originated by a member of a 
national securities exchange or national securities association; or 
any bid or offer.
    \976\ Section 1.1 of the CAT NMS Plan defines Eligible 
Securities as'' (a) all NMS Securities and (b) all OTC Equity 
Securities,'' where OTC Equity Securities are defined as any equity 
security, other than an NMS Security, subject to prompt last sale 
reporting rules of a registered national securities association and 
reported to one of such association's equity trade reporting 
facilities.'' This includes both OTC Equity Securities and 
transactions in Restricted Equity Securities effected pursuant to 
Securities Act Rule 144A. See CAT NMS Plan, supra note 974.
    \977\ According to Section 1.1 of the CAT NMS Plan, ``Reportable 
Event'' includes, but is not limited to, the original receipt or 
origination, modification, cancellation, routing, execution (in 
whole or in part) and allocation of an order, and receipt of a 
routed order. See CAT NMS Plan, supra note 974.
    \978\ The Participants are the national securities exchanges and 
national securities associations who collectively control and 
operate the CAT.
    \979\ See CAT FAQ B40, available at https://www.catnmsplan.com/faq. This release refers to the FAQs published by the Participants 
because the Commission believes those FAQs are guiding the how 
Industry Members are reporting information to the CAT. The 
Commission has not approved the FAQs so is expressing no view in 
this release regarding such FAQs.
---------------------------------------------------------------------------

    OTC equities also trade on ATSs. There are currently five ATSs 
operating in the OTC equity market. As of Q3 2021, FINRA reports that 
OTC equity ATSs collectively handled around 4 million trades.\980\ ATSs 
that offer trading services in OTC equities also typically operate as 
interdealer quotation systems (IDQS), which regularly disseminate 
broker-dealer quotes.\981\ The majority of OTC equity trading on ATSs 
is concentrated on one platform, which executed more than 60 percent of 
OTC equity ATS trading in Q1 2021. ATSs that trade in OTC equities 
usually segment securities into different markets or use eligibility 
status symbols to inform investors regarding issuers' regulatory 
compliance and disclosure.\982\ This is designed to inform investors 
whether companies are current or delinquent in their filing 
requirements in the interest of transparency.\983\ One academic study 
found that OTC equities that are subject to stricter disclosure 
requirements have higher market quality, including higher liquidity and 
lower crash risk.\984\
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    \980\ See https://www.finra.org/filing-reporting/otc-transparency/ats-quarterly-statistics. Note that this dataset 
aggregates volume across two OTC Link LLC-operated ATSs under the 
label OTC LINK ECN ATS.
    \981\ Rule 15c2-11 of the Exchange Act defines an inter-dealer 
quotation system as any system of general circulation to brokers or 
dealers that regularly disseminates quotations of identified brokers 
or dealers, and further defines a qualified inter-dealer quotation 
system as any inter-dealer quotation system that meets the 
definition of an ``alternative trading system'' and operates 
pursuant to the exemption from the definition of an ``exchange.''
    \982\ For example, the OTC Link LLC ATS is organized into 
several market places, broadly organized according to the issuers' 
regulatory compliance and disclosure: OTCQX, which includes equities 
that are subject to and current with the reporting requirements of 
the Exchange Act, and that additionally meet numerous other 
eligibility requirements; OTCQB, which includes equities that are 
subject to and current with the reporting requirements of the 
Exchange Act, but not subject to any additional eligibility 
requirements; and Pink Sheets, which includes equities without any 
reporting or eligibility requirements. A fourth tier, the so-called 
``Expert Market'' or ``Grey Market,'' contains equities that are not 
or cannot be publically quoted, either due to regulatory 
restrictions or lack of investor interest. See https://www.sec.gov/reportspubs/investor-publications/investorpubsmicrocapstockhtm.html. 
Additionally, for another example, see https://www.globalotc.com/brokers/eligible-securities.
    \983\ See Cass Sanford, Understanding the Expert Market, OTC 
Markets Blog (March 25, 2021), available at https://blog.otcmarkets.com.
    \984\ See Br[uuml]ggemann, U., Kaul, A., Leuz, C., & Werner, 
I.M. (2018). The twilight zone: OTC regulatory regimes and market 
quality. The Review of Financial Studies, 31(3), 898-942.
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    FINRA is the SRO that regulates trading in OTC securities. The 
Commission understands that the current ATS market place for OTC 
equities has evolved to replace the functions formally performed by the 
OTC Bulletin Board (OTCBB), a FINRA-operated inter-dealer quotation 
system for OTC equities that was retired by FINRA in November 
2021.\985\ In its filing with the SEC, FINRA cited technological 
advancements and ``the subsequent increase in alternative electronic 
venues with more extensive functionality than the OTCBB'' as reasons 
for its retirement, which highlights market participants' preference 
for electronic trading systems in this market.\986\ Concurrently to its 
retirement of the OTCBB, FINRA has adopted new Rule 6439 (Requirements 
for Member Inter-Dealer Quotation Systems), which implements additional 
requirements for firms that operate systems that regularly disseminate 
quotes in OTC equities, including requirements related to fair access, 
transparency, and systems integrity.\987\ Furthermore, trades to which 
a FINRA member is a party must be reported to FINRA's OTC Reporting 
Facility (ORF) within ten seconds of execution.\988\ This includes 
executions in OTC equities, as well as executions in restricted stocks 
effected under 17 CFR 230.144A (Securities Act Rule 144A); however, 
trades in restricted equity securities effected under Rule 144A are 
reported to the ORF for regulatory purposes only and are not publicly 
disseminated. Similarly to requirements for FINRA's TRF described 
above, if the execution is handled by an ATS, then in most cases the 
ATS has the reporting obligation and must report itself as a 
counterparty to both sides of the trade.\989\ In addition, OTC equities 
fall within the definition of ``Eligible Securities'' under the CAT NMS 
Plan, and therefore any eligible events in OTC equities are reportable 
to CAT.\990\
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    \985\ See https://www.finra.org/rules-guidance/notices/21-38.
    \986\ See SEC Release No. 34-90067, October 1, 2020, ``Self-
Regulatory Organizations; Financial Industry Regulatory Authority, 
Inc.; Notice of Filing of a Proposed Rule Change to Adopt FINRA Rule 
6439 (Requirements for Member Inter-Dealer Quotation Systems) and 
Delete the Rules Related to the OTC Bulletin Board Service,'' 
available at https://www.sec.gov/rules/sro/finra/2020/34-90067.pdf.
    \987\ See https://www.finra.org/rules-guidance/notices/21-28.
    \988\ FINRA Rule Series 6620 and 7300 govern OTC and restricted 
equity trade reporting to FINRA Facilities. See https://www.finra.org/filing-reporting/market-transparency-reporting/trade-reporting-faq.
    \989\ See supra note 973.
    \990\ See supra notes 974 to 979 and corresponding discussion.
---------------------------------------------------------------------------

    In addition to its requirements under FINRA, ATSs that trade in OTC 
equities must comply with Regulation ATS, including filing Form ATS and 
periodically filing Form ATS-R, and complying with Regulation SCI \991\ 
and the Fair Access Rule if volume thresholds are met.\992\ However, 
ATSs that trade in OTC equities are not required to file and publicly 
disclose Form ATS-N.
---------------------------------------------------------------------------

    \991\ An ATS trading in non-NMS stock is subject to Regulation 
SCI if, during at least four of the preceding six months, the ATS 
had five percent or more of the average daily volume in transactions 
that are reported to and calculated by a self-regulatory 
organization, such as FINRA. See https://www.sec.gov/divisions/marketreg/regulation-sci-faq.shtml. See supra Section VIII.B.2.a.ii 
for a discussion of the impact of Regulation SCI.
    \992\ An ATS trading in non-NMS stock is subject to the Fair 
Access Rule if, during at least four of the preceding six months, 
the ATS had five percent or more of the average daily volume in non-
NMS stock transactions that are reported to and calculated by a 
self-regulatory organization, such as FINRA. See 17 CFR 
242.301(b)(5)(i) and https://www.sec.gov/tm/faq-regulation-ats-fair-access-rule. See supra Section VIII.B.2.a.ii for a discussion of the 
impact of the Fair Access Rule.
---------------------------------------------------------------------------

c. National Securities Exchanges for NMS Stock
    NMS Stock ATSs compete with national securities exchanges in the 
market for trading services in NMS securities. Currently, 16 national 
securities exchanges effect transactions in NMS stocks. These exchanges

[[Page 15613]]

accounted for 58 percent of NMS security share volume and 65 percent of 
NMS security dollar volume in September 2021.\993\ National securities 
exchanges have greater regulatory obligations than NMS Stock ATSs. They 
must register with the Commission on Form 1, file proposed rule changes 
with the Commission under Section 19(b) of the Exchange Act, and are 
SROs. The proposed rule changes of national securities exchanges must 
be made available for public comment,\994\ and in general, these 
proposed rule changes publicly disclose, among other things, details 
relating to the exchange's operations, procedures, and fees. The 
Commission reviews the rules of national securities exchanges, a 
process which requires, among other things, that to approve certain 
rule changes, the Commission find that the national securities 
exchange's proposed rule changes are consistent with the Exchange 
Act.\995\ National securities exchanges and other SROs also have 
regulatory obligations, such as enforcing their rules and the Federal 
securities laws with respect to their members, which do not apply to 
market participants such as ATSs.\996\
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    \993\ See CBOE Historical Market Volume Data, available at 
https://www.cboe.com/us/equities/market_statistics/historical_market_volume/, market_history_monthly_2021.csv. This 
statistic is calculated by dividing the sum of all non-FINRA entries 
for the month of September 2021 divided by the sum of all entries 
for the month of September 2021.
    \994\ See 15 U.S.C. 78s(b)(1).
    \995\ See 15 U.S.C. 78s(b).
    \996\ See, e.g., Section 19(b) of the Exchange Act, 15 U.S.C. 
78s(b)(1), and Section 6(b) of the Exchange Act, 15 U.S.C. 78f(b).
---------------------------------------------------------------------------

    While national securities exchanges have more regulatory 
obligations than NMS Stock ATSs, they also enjoy certain unique 
benefits that are not afforded to NMS Stock ATSs. While national 
securities exchanges are SROs, and are thus subject to surveillance and 
oversight by the Commission, they can still establish norms regarding 
conduct, trading, and fee structures for external access. Trading 
venues that elect to register as national securities exchanges may gain 
added prestige by establishing listing standards for their securities. 
Additionally, national securities exchanges can be direct participants 
in NMS plans, which provides additional sources of revenue and input 
into the operation of the national market system that is not available 
to NMS Stock ATSs.\997\
---------------------------------------------------------------------------

    \997\ See Regulation ATS Adopting Release, supra note 31, at 
70880, 70902-70903 (Section discussing generally some of the 
obligations and benefits of registering as a national securities 
exchange).
---------------------------------------------------------------------------

d. Communication Protocol Systems in the Equity Market
    The Commission estimates that there are currently 4 Communication 
Protocol Systems operating in the market for NMS stocks that may meet 
the definition of exchange under the proposed changes to Exchange Act 
Rule 3b-16. Furthermore, the Commission understands that some NMS Stock 
ATSs offer functionalities similar to Communication Protocol Systems, 
such as conditional orders and indications of interest (IOIs), both of 
which can interact with their limit order books. As mentioned in 
Section II.B.2, the Commission has observed that 26 NMS Stock ATSs have 
disclosed on their public Form ATS-N that they send or receive messages 
indicating trading interest, such as conditional orders.
    While NMS Stock ATSs may make use of Communication Protocol System 
functionalities, there is limited evidence that Communication Protocol 
Systems play a significant role in the non-ATS OTC market for liquid 
NMS stocks in the U.S.\998\ One commenter stated that NMS stocks and 
ETFs with limited liquidity are now beginning to use protocols such as 
RFQ to bridge liquidity gaps.\999\ However, because the Commission 
lacks data on the use of protocols that would qualify as Communication 
Protocol Systems by non-ATS trading systems operating in the OTC equity 
market, it is unable to quantify to what extent Communication Protocol 
Systems are used in the non-ATS OTC market for NMS stocks. The 
Commission requests comment on this issue.
---------------------------------------------------------------------------

    \998\ On the contrary, RFQ platforms are increasingly playing a 
role in block trading in European equities, particularly in the wake 
of the 2018 adoption of MiFID II, which placed limits on other off-
exchange sources of liquidity. See, e.g., Basar, Shanny. (2020, 
March 31). MarketsMedia, available at https://www.marketsmedia.com/icap-adds-to-equity-rfqs/.
    \999\ See Bloomberg Letter at 3, 10, 20, and 23. The commenter 
also referenced that trading in small and micro NMS stocks on 
exchanges has been difficult and has not necessarily improved with 
recent technological changes. See Bloomberg Letter at 21, citing 
https://www.nasdaq.com/articles/nasdaqs-proposal-improve-trading-environment-small-and-medium-growth-companies-and.
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    Communication Protocol System operators cite their protocols' 
abilities to service very large orders, the option for participants to 
pick and choose which aspects of their order to disclose (e.g., price 
or size), and higher discretion as advantages of these protocols over 
trading on exchanges or ATSs.\1000\ However, some market participants 
have expressed skepticism over information leakage in the use of RFQs 
for equity transactions, as their use may signal that the participants 
are unable to locate ``natural'' sources of liquidity.\1001\
---------------------------------------------------------------------------

    \1000\ See ``RFQ for Equities: One Year On,'' (2019), Tradeweb, 
available at https://www.tradeweb.com/newsroom/media-center/insights/blog/rfq-for-equities-one-year-on/.
    \1001\ See, e.g., McDowell, Hayley. (2018, October 23). ``Buy-
side throws doubt on RFQ for equities as `last chance saloon' for 
liquidity,'' THETRADE, available at https://www.thetradenews.com/buy-side-throws-doubt-rfq-equities-last-chance-saloon-liquidity/.
---------------------------------------------------------------------------

    Communication Protocol Systems may also play a role in the trading 
of U.S.-listed ETFs. However, the Commission lacks data to quantify 
what proportion of ETF volume trades via Communication Protocol 
Systems. At least one trading system operator claims to offer several 
protocols, including RFQ, for trading in U.S.-listed ETFs.\1002\ The 
use of Communication Protocol Systems for trading in ETFs may be 
motivated by a lack of liquidity in some ETF securities, and associated 
risks involved in trading in illiquid ETFs.\1003\ Similar to the 
corporate bond market, the use of Communication Protocol Systems may 
also be used for the trading of bundles of securities in order to 
facilitate transaction services for participants that may be using the 
same Communication Protocol System to trade in the securities 
underlying ETFs.\1004\
---------------------------------------------------------------------------

    \1002\ See, e.g., ``ETFs'', Tradeweb, available at https://www.tradeweb.com/our-markets/institutional/equities/ETPs_Funds/. 
Additional market participants may also be developing Communication 
Protocol Systems for U.S.-listed ETFs. See, e.g., Rennison, Joe, 
April 4, 2019, ``MarketAxess muscles into ETF industry with Virtu 
tie-up,'' Financial Times, available at https://www.ft.com/content/b88d53b6-5709-11e9-a3db-1fe89bedc16e.
    \1003\ See, e.g., Bae, K., & Kim, D. (2020). Liquidity risk and 
exchange-traded fund returns, variances, and tracking errors. 
Journal of Financial Economics, 138(1), 222-253.
    \1004\ See supra Section VIII.B.3.b for a discussion of 
portfolio trading on Communication Protocol Systems in the corporate 
bond market.
---------------------------------------------------------------------------

    Unlike NMS Stock ATSs, Communication Protocol Systems that trade 
NMS stocks are not subject to any of the requirements of Regulation SCI 
or Regulation ATS, including the requirement to file the public Form 
ATS-N. Trades in NMS stocks that are transacted elsewhere than on an 
exchange, which may include transactions executed on a Communication 
Protocol System, are required to be reported to FINRA TRF as discussed 
in Section VIII.B.5.a if at least one of the parties to the transaction 
is a FINRA member.
    Trading interest on Communication Protocol Systems may not be 
required to be reported to CAT, depending on the nature of the 
solicitation and/or response(s) as firm or non-firm. CAT guidance 
issued by the Participants

[[Page 15614]]

provides that non-firm expressions of trading interest that contain 
information about the security name, side, size, capacity and/or price, 
which includes IOIs and RFQs, do not fall within the definition of an 
``order'' and are therefore not reportable to CAT.\1005\ However, this 
guidance also states that any response to an RFQ or other form of 
solicitation response that is accessible electronically and is 
immediately actionable (i.e., no further manual or electronic action is 
required by the responder providing the quote in order to execute or 
cause a trade to be executed) is reportable whether or not it is 
ultimately accepted. Furthermore, once an order is ``firmed up'' by the 
initiating participant and winning bidder, the origination of the new 
order by the initiating participant, the routing of that new order to 
the winning bidder, and the acceptance of that order by the winning 
bidder are all reportable events, with the initiating participant 
reporting the new order and routing events, and the winning bidder 
reporting the order acceptance, as well as any subsequent actions taken 
to process the order.\1006\
---------------------------------------------------------------------------

    \1005\ See CAT FAQ B3, available at https://www.catnmsplan.com/faq.
    \1006\ See CAT FAQ B45, available at https://www.catnmsplan.com/faq.
---------------------------------------------------------------------------

    The Commission understands that the majority of trading in OTC 
equities takes place on IDQS, most of which are registered as ATSs. 
However, there may be some IDQS or other OTC equity trading systems 
that are not registered as ATSs and that operate using trading 
protocols that would qualify as Communication Protocol Systems.\1007\ 
The Commission estimates that there may currently be 1 Communication 
Protocol System operating in the OTC equity market. Such a trading 
system may not be subject to FINRA Rule 6439 or trade reporting 
requirements, or quoting requirements under the amended Rule 15c2-11 
discussed in the next paragraph, if it is not operated by a FINRA 
member and does not meet the definition of a ``qualifying'' IDQS. The 
Commission lacks the data to estimate the number or trading volume of 
IDQS or other OTC equity trading systems that operate as Communication 
Protocol Systems and are not registered as broker-dealers. The 
Commission requests comment on this topic.
---------------------------------------------------------------------------

    \1007\ See SEC Release No. 34-87115, ``Publication or Submission 
of Quotations Without Specified Information'' Proposed Rule and 
Concept Release, available at https://www.sec.gov/rules/proposed/2019/34-87115.pdf.
---------------------------------------------------------------------------

    Communication Protocol Systems may also play a role in the Grey 
Market for OTC equities.\1008\ Recent amendments to Rule 15c2-11 of the 
Exchange Act adopted in September 2020 limit public quoting in OTC 
equities for which current financial statement information is not 
publically available.\1009\ This limits the ability of many OTC 
equities to trade on ATSs,\1010\ but many OTC securities are still 
traded even without publically available quotes.\1011\ However, due to 
the opacity of this market, the Commission lacks data to estimate the 
extent to which broker-dealers trading in Grey Market equities are 
using protocols that would qualify as Communication Protocol Systems 
and requests comment on this issue.
---------------------------------------------------------------------------

    \1008\ See supra note 982.
    \1009\ See https://www.sec.gov/news/press-release/2020-212.
    \1010\ In compliance with the amendments, in March 2021 OTC 
Markets announced that OTC equities without current public 
information would be moved off its Pink Sheets market place. See 
https://blog.otcmarkets.com/2021/03/25/understanding-the-expert-market/.
    \1011\ In 2018, the Commission estimated that 5,915 OTC 
securities were traded at some point during the year without having 
published quotations, and 3% of these securities had average daily 
trading volumes above $100,000. See SEC Release No. 34-87115, 
``Publication or Submission of Quotations Without Specified 
Information'' Proposed Rule and Concept Release, available at 
https://www.sec.gov/rules/proposed/2019/34-87115.pdf.
---------------------------------------------------------------------------

    Communication Protocol Systems may play a role in the secondary 
market for restricted shares. The Commission preliminarily estimates 
that there are currently 10 Communication Protocol Systems operating in 
the market for restricted shares. Furthermore, an estimated 2 of these 
are run by non-broker-dealers, who therefore would not currently be 
subject to the associated costs of complying with broker-dealer filing 
and conduct obligations, including becoming a member of an SRO, such as 
FINRA.\1012\
---------------------------------------------------------------------------

    \1012\ See supra Section III.B.1.
---------------------------------------------------------------------------

    Unlike ATSs that trade OTC equities, Communication Protocol Systems 
that trade OTC equities are not subject to any of the requirements of 
Regulation ATS. Trades in OTC equities and restricted equities effected 
under Securities Act Rule 144A that are transacted elsewhere than on an 
exchange, which may include transactions executed on a Communication 
Protocol System, are required to be reported to FINRA's OTC ORF as 
described in Section VIII.B.5.a, if at least one of the parties to the 
transaction is a FINRA member.
e. Other Methods of Trading in Equities
    The majority of off-exchange trading in NMS stocks occurs outside 
of ATSs. A DERA white paper estimated that, in 2014, non-ATS off-
exchange trading in NMS stocks represented nearly 17 percent of total 
equity market dollar volume; \1013\ by July 2020, this number increased 
to 23 percent, while trading on ATSs was composed of only 10 percent of 
total equity market dollar volume.\1014\ The DERA white paper found 
that more than a third of non-ATS trading volume in NMS stock comprised 
of retail orders executed by OTC market makers.\1015\ Block trades 
(i.e., trades larger than 10,000 shares) made up a higher percentage of 
non-ATS trading volume than ATS trading volume.\1016\ Additionally, 
single-dealer platforms (SDPs) accounted for nine percent of off-
exchange trading volume in Q3 2021.\1017\
---------------------------------------------------------------------------

    \1013\ See Tuttle, L.A. (2014). OTC trading: Description of non-
ATS OTC trading in National Market System stocks. DERA White Paper.
    \1014\ See Market Data Infrastructure Final Rule, Release No. 
90610 (Dec. 9, 2020), available at https://www.sec.gov/rules/final/2020/34-90610.pdf.
    \1015\ See Tuttle, L.A. (2014). OTC trading: Description of non-
ATS OTC trading in National Market System stocks. DERA White Paper. 
A more recent study found that retail wholesalers accounted for 49.9 
percent of off-exchange trading in Q3 2021. See Rosenblatt 
Securities, November 4, 2021, ``A Closer Look at Off Exchange and 
Retail Market Share.''
    \1016\ See Tuttle, L.A. (2014). OTC trading: Description of non-
ATS OTC trading in National Market System stocks. DERA White Paper. 
Specifically, defining block trades as trades of 10,000 or more 
shares, block trades comprised only 0.10 percent of dark ATS trading 
while they comprise 2.53 percent of non-ATS OTC trading.
    \1017\ SDPs do not permit participants to post liquidity, but 
rather offer bilateral trading with the counterparty operating the 
venue. See id.
---------------------------------------------------------------------------

    The Commission believes that manually negotiated trades via the 
telephone are still taking place in the market for NMS stocks, in 
particular for large block trades by institutional investors.\1018\ A 
survey taken in April 2014 estimated that more than 55 percent of buy-
side U.S. equity trading was still being executed via phone 
calls.\1019\
---------------------------------------------------------------------------

    \1018\ See, e.g., https://www.ft.com/content/44841008-3cf7-11e4-a2ab-00144feabdc0.
    \1019\ In the survey, market participants cited the expertise 
and consulting services offered by brokers as some of the benefits 
of using the phone to conduct ``high touch'' trades. See https://www.greenwich.com/press-release/high-touch-execution-consulting-services-and-performance-driving-technologies-spell.
---------------------------------------------------------------------------

    Additionally, it is likely that traditional bilateral negotiations 
are still actively used in the market for OTC equities as well, 
particularly in the Grey Market and the market for restricted equities, 
where electronic trading may be limited due to restrictions on public 
quoting activity. However, due to the opacity of this market, it is 
difficult to estimate the extent to which voice trading still plays a 
role in the market for OTC and restricted equities.
    As described above in Section VIII.B.5.a, trades in equities that 
are transacted elsewhere than on an

[[Page 15615]]

exchange, which may include transactions executed via voice trading, 
are required to be reported to either FINRA's TRF (in the case of NMS 
stocks) or ORF (in the case of OTC or restricted equities) if at least 
one of the parties to the transaction is a FINRA member. As described 
above, trades in restricted equity securities are reported for 
regulatory purposes only and are not publicly disseminated.
f. Competition in the Market for Equity Trading Services
    As discussed above, since Regulation NMS was adopted in 2005, the 
market for equity trading services has become more fragmented, with 
trading fragmented not only across exchanges, but across different 
trading systems (exchanges, ATSs, and non-ATS off-exchange trading 
venues). For instance, from 2005 to 2013, there was a decline in the 
market share of trading volume for exchange-listed stocks on 
NYSE.\1020\ At the same time, there was an increase in the market share 
of newer national securities exchanges such as NYSE Arca, Cboe BYX, and 
Cboe BZX.\1021\ This development increased competition in the market 
for trading services. Several academic studies have shown that an 
increase in competition between exchanges, or between exchanges and 
ATSs, improves market quality by reducing transactions costs and 
increasing liquidity.\1022\
---------------------------------------------------------------------------

    \1020\ See Securities Exchange Act Release No. 76474 (Nov. 18, 
2015), 80 FR 80998, 81112 (Dec. 28, 2015) (Regulation of NMS Stock 
Alternative Trading Systems Proposing Release).
    \1021\ See id.
    \1022\ See, e.g., Foucault, T., & Menkveld, A.J. (2008). 
Competition for order flow and smart order routing systems. The 
Journal of Finance, 63(1), 119-158; O'Hara, M., & Ye, M. (2011). Is 
market fragmentation harming market quality? Journal of Financial 
Economics, 100(3), 459-474.
---------------------------------------------------------------------------

    Trading venues compete with each other along a number dimensions in 
order to attract order flow. For example, in addition to other ways, 
trading venues can compete via fees, rebates, speed, and trading 
protocols in order to attract order flow.\1023\ However, the actual 
level of competition that any given trading venue faces may depend on 
multiple factors including the liquidity of a stock as well as the type 
of trading venue and market participant engaging in the trade. A market 
participant's preference for where to trade can depend on a number of 
factors, including, among other things, speed, anonymity, and price 
impact. The choice of trading venue may also be limited by regulatory 
restrictions on where certain equities may be traded and by whom, as 
quoting activities in some OTC stocks are restricted, and some 
investors are prohibited from trading in certain types of equities, 
such as restricted stocks.
---------------------------------------------------------------------------

    \1023\ See, e.g., Cantillon, E., & Yin, P.L. (2011). Competition 
between exchanges: A research agenda. International journal of 
industrial organization, 29(3), 329-336; Budish, E., Lee, R.S., & 
Shim, J.J. (2019). A Theory of Stock Exchange Competition and 
Innovation: Will the Market Fix the Market? National Bureau of 
Economic Research.
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6. Current State of Options Markets
    There are currently 16 exchanges (``options exchanges'') and 1 ATS 
offering listed options trading services. During the month of October 
2021, approximately 39 million options contracts, equating to 
approximately $21 billion in total premiums, were traded daily on 
exchanges.\1024\ The market for listed options has been historically 
dominated by institutional investors; \1025\ however, the market has 
seen a dramatic increase in retail investor participation in recent 
years.\1026\
---------------------------------------------------------------------------

    \1024\ See OCC Monthly & Weekly Volume Statistics, available at 
https://www.theocc.com/Market-Data/Market-Data-Reports/Volume-and-Open-Interest/Monthly-Weekly-Volume-Statistics. These statistics 
were calculated by downloading the monthly files for ``Equity,'' 
``Index,'' and ``ETF'' options for October 2021. The OCC combined 
value from each file was added together and divided by the trading 
days in October 2021 to generate these statistics.
    \1025\ See Bennett, Jay, John Colon, and John Feng. (2010). FIA, 
available at https://secure.fia.org/files/css/magazinearticles/article-1446.pdf.
    \1026\ See Thyagaraju Adinarayan, ``Retail trading fever drives 
U.S. equity option volumes to record monthly high'', Reuters, (2021, 
February 3). (Retrieved from Factiva database).
---------------------------------------------------------------------------

a. Currently Regulated Trading Systems in the Market for Listed Options
    The market for listed options trading services is dominated by 
registered exchanges. This dominance stems from the role of the Options 
Clearing Corporation (OCC), which is the sole entity clearing trades 
for exchange-listed options, security futures, and OTC options.\1027\ 
Central clearing of listed options incentivizes the use of exchanges. 
Exchanges offer traders a centralized location to interact with other 
traders in the market. Exchanges compete with each other by offering 
different cost structures to participate on the exchange, and differing 
order types to allow customers advanced trading strategies. Largely due 
to regulation,\1028\ options exchanges offer the ability to route 
orders to competing options exchanges in the event of a competing 
option exchange having the best price for a given options order. Thus, 
while there is competition amongst options exchanges for trading 
services, they are joined together in an integrated market system.
---------------------------------------------------------------------------

    \1027\ See ``What Is OCC?'' The Options Clearing Corporation, 
available at https://www.theocc.com/Company-Information/What-Is-OCC.
    \1028\ See https://www.sec.gov/rules/final/34-43591.htm.
---------------------------------------------------------------------------

    There is one ATS in the market for listed options. As the 
Commission understands, this ATS offers participants an RFQ 
protocol.\1029\ A customer may accept the quote the ATS returns from 
the RFQ protocol. However, the orders are routed to an exchange for 
execution.
---------------------------------------------------------------------------

    \1029\ See ``Liquidity Management Software For US Listed Options 
Market'', DASH Financial, available at https://dashfinancial.com/execution-services/dash-ats/.
---------------------------------------------------------------------------

    As described above, the ATS in the market for listed option trading 
services competes with exchanges by offering the potential of price 
improvement on orders, the ability to view market liquidity without 
submitting a firm order, and the ability to interact with multiple 
market makers, across multiple exchanges, simultaneously. It should be 
noted, however, that this competition is not direct; the ATS ultimately 
sends orders to exchanges, and thus could be seen as complementary to 
exchanges.
    Options exchanges are subject to many of the same regulations as 
NMS Stock trading systems. Options exchanges are part of the NMS and 
are required to participate in many NMS plans. Options exchanges also 
are subject to Regulation SCI.
    Similar to other security types, an ATS that trades in listed 
option securities must comply with Regulation ATS and broker-dealer 
filing and conduct obligations, including becoming a member of an SRO, 
such as FINRA. In addition, listed options fall within the definition 
of ``eligible securities'' under the CAT NMS Plan, and therefore any 
eligible events in listed options are reportable to CAT.\1030\
---------------------------------------------------------------------------

    \1030\ See supra notes 974 to 979 and corresponding discussion.
---------------------------------------------------------------------------

b. Communication Protocol Systems in the Market for Listed Options
    As the Commission understands, there is currently 1 Communication 
Protocol System trading in listed options that may meet the definition 
of exchange under the proposed changes to Exchange Act Rule 3b-
16.\1031\ This Communication Protocol System operates in a similar 
fashion to the single ATS in the market for listed options described 
above in Section VIII.B.6.a. This system offers an RFQ protocol that 
allows a customer to request a quote for a specified option. The system 
then surveys market makers

[[Page 15616]]

of options exchanges. The system returns the quotes to the customer, 
where the customer has the ability to accept one of the proposed 
trades. The trade is then executed on the option exchange. The 
Commission requests comment on the full role of Communication Protocol 
Systems in the market for listed options.
---------------------------------------------------------------------------

    \1031\ See ``Request-for-Quote Options Trading'', Tradeweb, 
available at https://www2.tradeweb.com/optionsweb.
---------------------------------------------------------------------------

    Communication Protocol Systems compete with options exchanges and 
ATSs for trading services. Similar to ATSs, Communication Protocol 
Systems in the market for listed options ultimately interact with 
exchanges in their trading operations; thus, the competition between 
Communication Protocol Systems and exchanges might be better 
characterized as a complementary relationship. As the Commission 
understands, competition between ATSs and Communication Protocol 
Systems in the market for listed options occurs primarily through the 
quality of their trading systems, cost structures, and speed of RFQ 
protocol completion.
    Communication Protocol Systems in the market for listed options are 
not formally regulated by any regulatory authority. This lack of 
regulation puts listed option ATSs at a disadvantage compared to 
Communication Protocol Systems. The Commission believes that the 
participation of the OCC in centrally clearing options trades on 
exchanges is a major factor contributing to the decision of traders to 
trade on options exchanges compared to using Communication Protocol 
Systems and ATSs.
    As in the market for equities, trading interest in listed options 
on Communication Protocol Systems may not be required to be reported to 
CAT, depending on the nature of the solicitation and/or response(s) as 
firm or non-firm.\1032\
---------------------------------------------------------------------------

    \1032\ See supra notes 1005 and 1006 and corresponding 
discussion.
---------------------------------------------------------------------------

7. Other Securities
a. Repurchase and Reverse Repurchase Agreements
    The market for repurchase and reverse repurchase agreements \1033\ 
plays a role both in the stability of the banking and financial system 
and in the transmission of U.S. monetary policy. Repurchase agreements 
account for between $4 trillion and $6 trillion in notional value 
trades daily.\1034\ Moreover, reverse repurchase agreements have become 
an important tool of monetary policy. Specifically, the market for 
reverse repurchase agreements is used by banks to lend out excess 
reserves, while the market for repurchase agreements is used to borrow 
to meet reserve requirements.\1035\
---------------------------------------------------------------------------

    \1033\ See supra Section III.A for a discussion of ``repos'' 
(repurchase agreements and reverse repurchase agreements on 
government securities). While U.S. Treasury Securities are 
frequently used as the underlying collateral of repurchase and 
reverse repurchase agreements, other securities may also be used, 
such as corporate bonds and stocks.
    \1034\ See Board of Governors of the Federal Reserve System 
(US), All Sectors; Federal Funds and Security Repurchase Agreements; 
Asset, Level [BOGZ1FL892050005Q], retrieved from FRED, Federal 
Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/BOGZ1FL892050005Q, December 2, 2021.
    \1035\ See, e.g., Cheng, Jeffrey and David Wessel. ``What is the 
repo market, and why does it matter?'' (2020). Brookings Institute, 
available at https://www.brookings.edu/blog/up-front/2020/01/28/what-is-the-repo-market-and-why-does-it-matter/.
---------------------------------------------------------------------------

    The Commission estimates that there are currently 4 ATSs \1036\ 
facilitating trades in repurchase and reverse repurchase agreements. 
Furthermore, the Commission estimates that 3 Communication Protocol 
Systems facilitate trading in repurchase and reverse repurchase 
agreements that may meet the definition of exchange under the proposed 
changes to Exchange Act Rule 3b-16.\1037\ The Commission understands 
that these systems typically use U.S. Treasury securities as collateral 
for trades in repurchase and reverse repurchase agreements conducted on 
their systems. The Commission understands that RFQ systems for 
repurchase and reverse repurchase agreements are a relatively recent 
and rapidly growing phenomenon.\1038\
---------------------------------------------------------------------------

    \1036\ These ATSs are Current Government Securities ATSs. See 
supra note 5.
    \1037\ See, e.g., ``Tradeweb Reports September 2021 Total Volume 
of $21.7 Trillion and Average Daily Volume of $1.02 Trillion,'' 
(2021). Tradeweb, available at https://www.tradeweb.com/newsroom/
media-center/news-releases/tradeweb-reports-september-2021-total-
volume-of-$21.7-trillion-and-average-daily-volume-of-$1.02-trillion/
; CME Group. (2021, July 2). ``CME Group Reports Q2 and June 2021 
Monthly Market Statistics,'' CME Group, available at https://www.cmegroup.com/media-room/press-releases/2021/7/02/cme_group_reportsq2andjune2021monthlymarketstatistics.html; 
``MarketAxess Announces Monthly Volume Statistics for September 
2021,'' (2021). MarketAxess, available at https://investor.marketaxess.com/news-releases/news-release-details/marketaxess-announces-monthly-volume-statistics-september-2021; 
``MarketAxess 3Q21: Stat Sheet,'' (2021), MarketAxess, available at 
https://www.marketaxess.com/pdf/match-repo-stat-sheet.pdf; ``GLMX 
Gains ATS and Broker-Dealer Status,'' (2018). THETRADE, available at 
https://www.thetradenews.com/glmx-gains-ats-broker-dealer-status/.
    \1038\ See ``Bloomberg launches electronic repo trading 
system,'' (2005), Finextra, available at https://www.finextra.com/newsarticle/14580/bloomberg-launches-electronic-repo-trading-system.
---------------------------------------------------------------------------

    Repurchase and reverse repurchase agreement transactions usually 
involve collateral haircuts and counterparty risk inherent in the 
contract. Counterparty risk may give market participants an incentive 
to maintain balances across multiple liquidity providers to reduce 
exposure to a single liquidity provider. This incentive to maintain 
balances across multiple liquidity providers may be alleviated, at 
least partially, if trades in repurchase and reverse repurchase 
agreements with liquidity providers are centrally cleared as in 
triparty repo trades.\1039\ The interest in maintaining balances across 
multiple liquidity provider in bilateral transactions has spurred the 
introduction and adoption of electronic RFQ platforms.\1040\
---------------------------------------------------------------------------

    \1039\ See supra note 521 defining triparty repos.
    \1040\ See also Trott, Tom, (2018), ``Electronic RFQ Repo 
Markets,'' Tradeweb, available at https://www.tradeweb.com/newsroom/media-center/insights/commentary/electronic-rfq-repo-markets/ and 
Trott, Tom, (2018). ``Electronic RFQ Repo Markets: The Solution for 
Reporting Challenges and Laying the Building Blocks for 
Automation,'' Tradeweb, available at https://www.tradeweb.com/4a6f74/globalassets/newsroom/media-center/insights/commentary/repo_-tradeweb.pdf.
---------------------------------------------------------------------------

    Under FINRA Rule 6730(e), repurchase and reverse repurchase 
agreement transactions involving TRACE-Eligible Securities are not 
reportable to TRACE.\1041\ However, repurchase and reverse repurchase 
agreement holdings and transactions are currently subject to several 
other reporting requirements.\1042\
---------------------------------------------------------------------------

    \1041\ See ``6730. Transaction Reporting'', FINRA, available at 
https://www.finra.org/rules-guidance/rulebooks/finra-rules/6730.
    \1042\ See https://www.financialresearch.gov/briefs/files/OFRbr-2015-03-repo-sec-lending.pdf. The Treasury's Office of Financial 
Research (OFR) requires daily reporting by covered central 
counterparties of centrally cleared U.S. repurchase and reverse 
repurchase agreement transactions, which covers about half of the 
estimate U.S. market for repurchase and reverse repurchase 
agreements. See 84 FR 4975 (Feb. 20, 2019) (https://www.federalregister.gov/documents/2019/02/20/2019-02639/ongoing-data-collection-of-centrally-cleared-transactions-in-the-us-repurchase-agreement-market). OFR publishes daily aggregate data on 
rates and volumes of repurchase and reverse repurchase agreement 
transactions in each segment, by tenor or collateral. See https://www.financialresearch.gov/data/us-repo-data/. The Federal Reserve 
Bank of New York (FRBNY) reports daily demand, utilization, rates 
and participants of the Federal Reserve's Reverse Repo Facility. 
Primary dealers are subject to weekly reporting requirements by the 
Federal Reserve Bank of New York using Form FR2004, which describes 
the repurchase and reverse repurchase agreement positions, 
cumulative transactions, and outstanding financial arrangements and 
becomes publically available a day after reporting. FR2004 does not, 
however, include information on haircuts, rates, and counterparty 
exposures. Non-primary dealers are not required to submit FR2004, 
and consequently there is less available data on their bilateral 
transactions. U.S. chartered depository institutions and bank 
holding companies are required to report netted repurchase and 
reverse repurchase agreement positions on a quarterly basis, which 
becomes publically available. Much of the publically available data 
from regulatory agencies is consolidated and produced quarterly by 
the Federal Reserve Board in the form of the Financial Accounts of 
the United States (Z.1).
---------------------------------------------------------------------------

    The Commission is unable to determine the full scope of the role

[[Page 15617]]

played by Communication Protocol Systems in the market for repurchase 
and reverse repurchase agreements because the Commission lacks data on 
the volume facilitated by these systems. The Commission requests 
comment on the full role of Communication Protocol Systems in this 
market.
b. Asset-Backed Securities
    Asset-backed securities (ABS) are securities that are 
collateralized by an underlying pool of assets, usually constructed 
from bundled loans such as mortgages, leases, credit card balances, and 
student loans. A broad definition of asset-backed securities may 
include assets such as Collateralized Bond Obligations (CBO), 
Collateralized Debt Obligations (CDO), Collateralized Loan Obligations 
(CLO), and Non-Agency Commercial Mortgage Backed Securities (CMBS), 
along with non-agency mortgage-backed securities (MBS). The majority of 
holders of ABS are large institutional investors. Data from 2015 shows 
that asset managers are the largest holders of ABS, making up around 60 
percent of buyers, followed by hedge funds (18 percent) and banks (10 
percent).\1043\
---------------------------------------------------------------------------

    \1043\ See https://www.greenwich.com/fixed-income-fx-cmds/understanding-us-fixed-income-market.
---------------------------------------------------------------------------

    The presence of large institutions in this market is also evident 
in looking at the secondary market trading data. In September 2021, 
average daily trading volume in the ABS market was around $8 billion. 
At the same time, there was only an average of 823 trades per day, 
reflecting that average trade sizes in this market are very 
large.\1044\ Due to the complexity and heterogeneity of ABS products, 
liquidity in this market tends to be low. The majority of ABS never 
trade after issuance.\1045\
---------------------------------------------------------------------------

    \1044\ See https://www.finra.org/finra-data/browse-catalog/trace-volume-reports/trace-monthly-volume-files. We include trading 
data for Asset Backed Securities (``ABS'') and Collateralized Bond 
Obligations (CBO), Collateralized Debt Obligations (CDO), 
Collateralized Loan Obligations (CLO), and Non-Agency Commercial 
Mortgage Backed Securities (CMBS). See https://www.finra.org/finra-data/browse-catalog/trace-volume-reports/about-trace-monthly-volume-reports for definitions.
    \1045\ See Bessembinder, H., Maxwell, W.F., & Venkataraman, K. 
(2013). Trading activity and transaction costs in structured credit 
products. Financial Analysts Journal, 69(6), 55-67.
---------------------------------------------------------------------------

    There is evidence that the size of the ABS market has shrunk since 
the 2008 financial crisis. Not only have new issues of ABS declined 
sharply after the financial crisis, but overall daily trading volume in 
secondary ABS markets fell by 16 percent between 2013 and 2017.\1046\ 
The Commission understands that very little ABS trading takes place on 
ATSs. In September 2021, less than 0.1 percent of the average daily 
trading volume in ABS was reported to TRACE as having taken place on 
ATSs.\1047\ The Commission estimates that there are currently 3 ATSs 
offering trading in ABS. Additionally, the Commission estimates that 1 
ATS trades non-agency MBS securities.\1048\
---------------------------------------------------------------------------

    \1046\ See He, A., & Mizrach, B. (2017). Analysis of securitized 
asset liquidity. Research Note, FINRA Office of the Chief Economist.
    \1047\ See https://www.finra.org/finra-data/browse-catalog/trace-volume-reports/trace-monthly-volume-files.
    \1048\ Note that Form ATS doesn't have a specific category for 
ABS. The number of ATSs trading in ABS is estimated from a 
combination of the number of ATSs that report Form ATS-R volume for 
``Other Debt Securities,'' which could include asset-backed 
securities, and TRACE MPIDs with ABS-related volumes and ATS flags.
---------------------------------------------------------------------------

    As the data mentioned above shows, 99.9 percent of ABS trading 
volume takes place through trading methods other than ATSs, and some of 
this trading volume may take place using protocols that qualify as 
Communication Protocol Systems. The Commission estimates that there are 
3 Communication Protocol Systems trading in ABS that may meet the 
definition of exchange under the proposed changes to Exchange Act Rule 
3b-16. As in other fixed income markets, Communication Protocol Systems 
trading in ABS do not meet the current definition of an exchange and 
thus are not subject to the exchange regulatory framework. The 
Commission estimates that 1 Communication Protocol System trading in 
ABS is not currently operated by a registered broker-dealer. This 
system does not currently incur the costs of registering with the 
Commission as well as the costs of SRO membership, and is not subject 
to FINRA operational regulatory reporting requirements.
    It is likely that the vast majority of trading in ABS still takes 
place via bilateral voice trading. Industry participants have pointed 
out that the complexity of this market makes it more likely that 
traders want discussions with and access to individualized guidance 
from dealers and analysts in deciding whether to trade, which can be 
difficult to achieve on more automated electronic platforms.\1049\
---------------------------------------------------------------------------

    \1049\ See ``ABS East 2014: Securitization Shrugs off Electronic 
Trading,'' (2014). American Banker, available at https://asreport.americanbanker.com/news/abs-east-2014-securitization-shrugs-off-electronic-trading.
---------------------------------------------------------------------------

    Since 2011, FINRA has required FINRA members to report transaction 
prices and quantities in ABS to TRACE.\1050\ In 2015, FINRA began 
publishing post-trade price information for ABS, which is available to 
the public no later than 15 minutes after the trade is executed.\1051\
---------------------------------------------------------------------------

    \1050\ See FINRA Rule 6730(a)(1) requiring FINRA members to 
report transactions in TRACE-Eligible Securities, which FINRA Rule 
6710 defines to include asset-backed securities. For each 
transaction in asset-backed securities, a FINRA member would be 
required to report the CUSIP number or similar numeric identifier or 
FINRA symbol; size (volume) of the transaction; price of the 
transaction (or elements necessary to calculate price); symbol 
indicating whether transaction is a buy or sell; date of trade 
execution (``as/of'' trades only); contra-party's identifier; 
capacity (principal or agent); time of execution; reporting side 
executing broker as ``give-up'' (if any); contra side introducing 
broker (in case of ``give-up'' trade); the commission (total dollar 
amount), if applicable; date of settlement; if the member is 
reporting a transaction that occurred on an ATS pursuant to FINRA 
Rule 6732, the ATS's separate Market Participant Identifier 
(``MPID''); and trade modifiers as required. See FINRA Rule 6730(c).
    \1051\ See https://www.finra.org/media-center/news-releases/2015/finra-brings-transparency-asset-backed-securities-market.
---------------------------------------------------------------------------

C. Economic Effects and Effects on Efficiency, Competition, and Capital 
Formation

    The Commission has considered the economic effects of the proposed 
amendments to Exchange Act Rule 3b-16, Regulation ATS, and Regulation 
SCI.
    The Commission recognizes that under the proposed amendments, a 
bank-operated Currently Exempted Government Securities ATS or 
Communication Protocol System could choose to register as an exchange 
rather than choose to comply with the Regulation ATS exemption, which 
includes registering as a broker-dealer.\1052\ A bank-operated 
Currently Exempted Government Securities ATS or Communication Protocol 
System that chooses to register as an exchange would be an SRO and 
subject to the requirements under Section 6 of the Exchange Act.\1053\ 
The Commission preliminarily believes that registering as a national 
securities exchange would enhance regulatory oversight, market 
surveillance, and investor protection.\1054\ Registering as an exchange 
would also result in costs associated with applying to register as a 
national securities exchange and complying with the requirements under 
Section 6(b) of the Exchange Act, such as the requirement to be so 
organized and have the capacity to carry out the

[[Page 15618]]

purposes of the Exchange Act and enforce member compliance with Federal 
securities laws and the rules of the exchange.\1055\ However, the 
Commission expects that many Communication Protocol Systems would not 
elect to register as an exchange but instead would register as a 
broker-dealer and comply with Regulation ATS because the regulatory 
costs associated with registering and operating as an exchange would be 
higher than those associated with registering as a broker-dealer and 
complying with Regulation ATS.\1056\ Similarly, the Commission 
preliminarily believes that a bank-operated Currently Exempted 
Government Securities ATS would also choose to structure its business 
to comply with the relatively lighter regulatory requirements of 
Regulation ATS.
---------------------------------------------------------------------------

    \1052\ As proposed, Currently Exempted Government Securities 
ATSs that are operated by banks would be required to structure their 
business to either comply with Regulation ATS or register as a 
national securities exchange. See supra footnote 261. The Commission 
also expects Currently Exempted Government Securities ATSs currently 
registered as broker-dealers will continue to operate as broker-
dealers under the proposal rather than register as a national 
securities exchange.
    \1053\ See supra Section II.A.
    \1054\ See Regulation ATS Adopting Release at 70903-07 for a 
discussion of benefits and costs for registering as a national 
securities exchange.
    \1055\ See generally supra Section II.D.1 (discussing the 
national securities exchange registration requirements under 
Sections 6 of the Exchange Act).
    \1056\ See supra Section II.B.3.
---------------------------------------------------------------------------

    The Commission has attempted, where possible, to quantify the 
benefits and costs anticipated to result from the amendments to 
Exchange Act Rule 3b-16, Regulation ATS, and Regulation SCI. However, 
as explained in more detail below, because the Commission does not 
have, and in certain cases does not believe it can reasonably obtain 
data to inform the Commission on certain economic effects, the 
Commission is unable to quantify certain economic effects. Further, 
even in cases where the Commission has some data, it might not be 
practicable to perform a quantitative analysis due to the number and 
type of assumptions necessary to quantify certain economic effects, 
which would likely render any such quantification unreliable. 
Therefore, certain parts of the discussion below are qualitative in 
nature and focus on the direction of the various effects of the 
amendments. The inability to quantify certain benefits and costs, 
however, does not mean that the overall benefits and costs of the 
proposed amendments are insignificant.
1. Benefits
    The Commission has considered the benefits of the proposed 
amendments to Exchange Act Rule 3b-16, Regulation ATS, and Regulation 
SCI.
a. Enhancement of Regulatory Oversight and Investor Protection
    The proposed amendments to Exchange Act Rule 3b-16, which would 
include Communication Protocol Systems within the definition of 
exchange, along with the proposed amendments to remove the exemption 
from compliance with Regulation ATS for Currently Exempted Government 
Securities ATSs and apply the enhanced disclosure and filing 
requirements of Rule 304 to all Government Securities ATSs would 
enhance regulatory oversight and investor protection.\1057\
---------------------------------------------------------------------------

    \1057\ The proposed amendments would enhance regulatory 
oversight and investor protection by requiring: Non-broker-dealer-
operated Communication Protocol Systems and bank-operated Currently 
Exempted Government Securities ATSs to register as a broker-dealers; 
Communication Protocol Systems and Currently Exempted Government 
Securities ATSs to safeguard subscribers' confidential trading 
information; Communication Protocol Systems and Currently Exempted 
Government Securities ATSs to comply with recordkeeping and 
reporting requirements; Communication Protocol Systems that are not 
Government Securities ATSs nor NMS Stock ATSs to file Form ATS; and 
Government Securities ATSs and Communication Protocol Systems that 
are NMS Stock ATSs to file Form ATS-N. One commenter on the 2020 
Proposal stated that removing the exemption for Currently Exempted 
Government Securities ATSs would significantly improve market 
transparency and resiliency, and that requirements to provide 
transparency to market participants regarding key aspects of the 
platform, and comply with fair access requirements would promote 
market integrity and help to ensure that multilateral U.S. Treasury 
trading venues are subject to appropriate regulatory oversight. See 
Citadel Letter at 1. Another commenter stated that the extension of 
Regulation ATS to include Currently Exempted Government Securities 
ATSs would help foster investor protection and market integrity. See 
FINRA Letter at 2.
---------------------------------------------------------------------------

    The proposed amendments would enhance regulatory oversight and 
investor protection and help facilitate market surveillance by 
extending the broker-dealer registration requirement of Regulation ATS 
to Currently Exempted Government Securities ATSs that are operated by 
banks (i.e., bank-operated Currently Exempted Government Securities 
ATSs) and Communication Protocol Systems that are not operated by 
registered broker-dealers (i.e., non-broker-dealer-operated 
Communication Protocol Systems).\1058\ Registering as a broker-dealer 
would require, among other things, the filing of Form BD and SRO 
membership. Such requirements would allow the Commission and an SRO to 
examine bank-operated Currently Exempted Government Securities ATSs and 
non-broker-dealer-operated Communication Protocol Systems for 
compliance with Federal securities laws.\1059\ Furthermore, upon 
registering as broker-dealers and becoming members of an SRO, these 
Currently Exempted Government Securities ATSs and Communication 
Protocol Systems would be required to report certain transactions to an 
SRO for public dissemination, which would help facilitate market 
surveillance by the SRO.\1060\
---------------------------------------------------------------------------

    \1058\ Non-broker-dealer-operated Communication Protocol Systems 
without a broker-dealer affiliate would be required to register as 
broker-dealers with the Commission and become members of an SRO 
under the proposed Rule 301(b)(1). Proposed Rule 301(b)(1) would 
enhance regulatory oversight over the estimated 1 bank-operated 
Currently Exempted Government Securities ATS and 9 non-broker-
dealer-operated Communication Protocol Systems (6 non-broker-dealer-
operated Communication Protocol Systems without a broker-dealer 
affiliate and 3 non-broker-dealer-operated Communication Protocol 
Systems with a broker-dealer affiliate). See also Section 
VIII.C.2.a.ii for a discussion about a bank-operated Currently 
Exempted Government Securities ATS and non-broker-dealer-operated 
Communication Protocol Systems with a broker-dealer affiliate 
adopting a registered affiliate structure to comply with the 
proposed Rule 301(b)(1).
    \1059\ The broker-dealer registration would enable the 
Commission to examine the trading operations of registered broker-
dealer operators and FINRA to examine its members and markets that 
its members operate. See also supra Section II.D.2.
    \1060\ FINRA Rule 6730(a)(1) would require its members to report 
transactions of certain securities to FINRA. See FINRA Rule 
6730(a)(1) requiring FINRA members to report transactions in TRACE-
Eligible Securities, which FINRA Rule 6710 defines to include any 
debt security that is U.S. dollar-denominated and is: Issued by a 
U.S. or foreign private issuer, and, if a restricted security, sold 
pursuant to Securities Act Rule 144A; issued or guaranteed by an 
Agency or a Government-Sponsored Enterprise; or a U.S. Treasury 
Security. Debt securities issued by foreign sovereigns and Money 
Market Instruments are explicitly excluded. Note that, under FINRA 
Rule 6730(e), repurchase and reverse repurchase transactions 
involving TRACE-Eligible Securities are not reportable to TRACE. See 
also MSRB Rule G-14 requiring brokers, dealers and municipal 
securities dealers (``dealers'') to report transactions in municipal 
securities. See supra note 829 describing exemptions for ATS 
transaction reporting to TRACE and supra note 926 describing 
exemptions for transaction reporting to MSRB's RTRS. Trades in 
restricted equities effected under Securities Act Rule 144A that are 
transacted elsewhere than on an exchange are required to be reported 
to FINRA's OTC Reporting Facility (ORF) if at least one of the 
parties to the transaction is a FINRA member. See supra note 988.
---------------------------------------------------------------------------

    The magnitude of benefits from this increase in transaction 
transparency depends on the portion of transactions executed by bank-
operated Currently Exempted Government Securities ATSs and non-broker-
dealer-operated Communication Protocol Systems. However, these 
platforms are not subject to transaction reporting obligations, and 
thus, the Commission cannot estimate the magnitude of this benefit 
because the Commission does not have data on transactions executed by 
the estimated 1 bank-operated Currently Exempted Government Securities 
ATS and 9 non-broker-dealer-operated Communication Protocol 
Systems.\1061\
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    \1061\ The Commission estimates that there is currently 1 non-
broker-dealer-operated Communication Protocol System trading in 
government and agency securities, corporate and municipal debt 
securities, and ABS/MBS. The Commission also estimates that there 
are 5 additional non-broker-dealer-operated Communication Protocol 
Systems trading in corporate debt securities, 2 trading in 
restricted equities, and 1 trading in repos. One commenter on the 
2020 Proposal stated that, even if benefits from expanding 
Regulation ATS to bank-operated Currently Exempted Government 
Securities ATSs are limited by the Commission's estimate that there 
is only one bank-operated Currently Exempted Government Securities 
ATS today, the Proposal will also help maintain and promote the 
integrity of the Treasuries audit trail in the future to the extent 
it limits the opportunity for trades to be done on non-broker-dealer 
ATSs to avoid inclusion in the TRACE audit trail. See FINRA Letter 
at 4.

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[[Page 15619]]

    Furthermore, the proposed requirements with respect to safeguarding 
subscribers' confidential trading information would enhance investor 
protection by helping to prevent Currently Exempted Government 
Securities ATSs and Communication Protocol Systems from potentially 
abusing such information. The requirements to establish written 
safeguards and procedures to protect subscribers' confidential trading 
information and to separate ATS functions from other broker-dealer 
functions for Currently Exempted Government Securities ATSs and 
Communication Protocol Systems would reduce the chance that a 
subscriber's confidential information is accessed or shared 
inappropriately.\1062\ While the Commission lacks information on the 
extent to which the confidential trading information of subscribers to 
Currently Exempted Government Securities ATSs and Communication 
Protocol Systems is currently accessed or shared inappropriately,\1063\ 
the requirements would promote the protection of confidential 
information even if such information is not being inappropriately 
accessed or shared.
---------------------------------------------------------------------------

    \1062\ One commenter on the 2020 Proposal stated that requiring 
Currently Exempted Government Securities ATSs to adopt written 
safeguards and written procedures to protect subscribers' 
confidential trading information and to separate ATS functions from 
other broker-dealer functions can help protect the integrity of a 
subscriber's confidential trading information that could otherwise 
be at risk of unauthorized disclosure and subject to potential 
misuse, and that such safeguards and practices also can help prevent 
the sharing of confidential subscriber trading information by ATSs 
with other customers or having the operator of the ATS use the 
confidential trading information of other subscribers to advantage 
its own trading on the ATS. See MFA Letter at 3.
    \1063\ Although the Commission currently lacks this information, 
we describe above a potential scenario where the confidential 
trading information of a subscriber could be impermissibly shared 
with the personnel of the broker-dealer operator or any of its 
affiliates, and the broker-dealer operator, in turn, could 
potentially abuse that relationship to provide itself or its 
affiliates with a direct competitive advantage over that subscriber. 
See supra Section VIII.B.2.a.ii.
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    Moreover, the proposed amendment to apply the recordkeeping \1064\ 
and reporting requirements \1065\ of Regulation ATS to Currently 
Exempted Government Securities ATSs and Communication Protocol Systems 
would help improve regulatory oversight because the requirements to 
keep and preserve records of customer trading interest and transactions 
would create an audit trail of trading activities on these 
systems.\1066\ This information would allow the Commission to better 
monitor the types of investors that trade on these systems, help the 
Commission understand the role these systems play in their respective 
securities markets, and improve the ability of the Commission or an SRO 
to detect and investigate potential irregularities that might occur in 
markets in which these systems operate.
---------------------------------------------------------------------------

    \1064\ See supra Section II.D.2 for a discussion about the 
requirements of Rule 302 and 303.
    \1065\ Rule 301(b)(9) would require filing of Form ATS-R.
    \1066\ One commenter on the 2020 Proposal stated that requiring 
currently exempted Government Securities ATSs to comply with the 
recordkeeping and reporting requirements of Regulation ATS and 
requiring such ATSs to file a confidential Form ATS-R with the 
Commission would improve the Commission's ability to monitor 
currently exempted Government Securities ATSs and improve its 
oversight of the market for government securities execution services 
overall. See MFA Letter 3.
---------------------------------------------------------------------------

    By requiring Currently Exempted Government Securities ATSs and 
Communication Protocol Systems to provide certain information on Form 
ATS-R, such as a list of all securities traded and all subscribers that 
were participants on the ATS during a reporting quarter, the Commission 
would be able to better monitor the trading on ATSs and evaluate for 
compliance with the Federal securities laws including Fair Access Rule 
and Regulation SCI, if applicable. The information collected on Form 
ATS-R regarding fair access grants, denials, and limitations of access 
to ATSs along with the proposed amendment to ask the ATS to indicate 
whether it was subject to the Fair Access Rule during any portion of 
the period covered by the report would help the Commission oversee 
those ATSs to evaluate for compliance with the Fair Access Rule. 
Furthermore, requiring information with respect to repurchase and 
reverse repurchase transactions on Form ATS-R would help the Commission 
identify and monitor important ATSs in the market for repurchase and 
reverse repurchase agreements.
    The proposed amendments to require Government Securities ATSs 
\1067\ and Communication Protocol Systems that are NMS Stock ATSs 
\1068\ to file Form ATS-N would help facilitate the Commission's 
regulatory oversight and enhance investor protection. Under the 
proposed amendments, Current Government Securities ATSs would file Form 
ATS-N in lieu of Form ATS for their government securities trading 
operations. In addition, under the proposed amendments, Currently 
Exempted Government Securities ATSs and Communication Protocol Systems 
that are either Government Securities ATSs or NMS Stock ATSs would be 
required to file Form ATS-N. Information reported on Form ATS-N would 
provide the Commission with increased and better quality information on 
Current Government Securities ATSs and improve the effectiveness and 
efficiency of the examination process of Government Securities ATSs and 
Communication Protocol Systems that are NMS Stock ATSs by facilitating 
the Commission and the ATS SRO's ability to better examine for 
compliance with the Federal securities laws.
---------------------------------------------------------------------------

    \1067\ Government Securities ATSs would include Currently 
Exempted Government Securities ATSs, Current Government Securities 
ATSs, and Communication Protocol Systems that trade government 
securities.
    \1068\ The filing of Form ATS-N would be a new requirement for 
Government Securities ATSs. Currently, NMS Stock ATSs are required 
to file Form ATS-N. See NMS Stock ATS Adopting Release, supra note 
2.
---------------------------------------------------------------------------

    Furthermore, the Commission's review process to declare Form ATS-N 
ineffective that is set forth in the proposed amendments would help 
ensure the quality of information disclosed in Form ATS-N. One 
commenter on the 2020 Proposal stated that market participants are 
incentivized to make disclosures that are robust, readable and 
sufficient because of the competitive forces and the variety of 
regulatory tools the Commission and other regulators have at their 
disposal to police the quality and content of statements made on the 
previously proposed Form ATS-G.\1069\ While competitive forces would 
likely incentivize Government Securities ATSs to make robust, readable 
and sufficient disclosures, the Commission preliminarily believes that 
extending the ability for the Commission to be able to declare a 
Government Securities ATS's Form ATS-N or Form ATS-N amendment 
ineffective would improve the quality of information disclosed by these 
ATSs as compared to the information currently filed on Form ATS by 
Current Government Securities ATSs, which is not subject to the 
Commission's review and effectiveness process. The Commission's recent 
experience with Form ATS-N for NMS Stock ATSs informs this belief. 
Since February 2019, the Commission has reviewed initial Form ATS-N 
filings and amendments thereto and engaged in direct conversation with 
all NMS Stock

[[Page 15620]]

ATSs about their Form ATS-N filings. The Commission believes that this 
review process has helped ensure that such disclosures are complete and 
comprehensible. Many NMS Stock ATSs have opted to seek the Commission 
staff's input about pending material amendments prior to filing, which 
has contributed to clearer and more effective disclosures. When new NMS 
Stock ATSs seek to begin operations, the initial Form ATS-N provides 
the Commission with detailed information about how the ATS will 
operate. With this knowledge, the Commission is better able to monitor 
for compliance and evaluate how NMS Stock ATSs as a group are evolving. 
Requiring Communication Protocol Systems that are not NMS Stock ATSs 
nor Government Securities ATSs to file confidential Form ATS would 
improve the Commission oversight of those Communication Protocol 
Systems and promote investor protection. The information regarding the 
manner of operation, the procedures governing execution, reporting, 
clearance, and settlement of transactions, types of securities traded, 
and subscriber information disclosed in Form ATS would help the 
Commission monitor securities markets for which Communication Protocol 
Systems provide trading services, and oversee the compliance with 
Federal securities laws. These benefits from requiring Form ATS, while 
similar in kind, would be smaller in magnitude compared to the benefits 
from requiring Form ATS-N because of the differences between the 
information disclosed in Form ATS and Form ATS-N.\1070\
---------------------------------------------------------------------------

    \1069\ See SIFMA Letter at 4.
    \1070\ Form ATS-N requires detailed disclosure about the manner 
of operations of ATSs, including display, execution and priority 
procedures, order segmentation, counterparty selection, fair access, 
eligibility of services, fees, and suspension of trading. See NMS 
Stock ATS Adopting Release, supra note 2.
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b. Reduction of Trading Costs and Improvements to Execution Quality
    The proposed amendments would help enhance operational 
transparency, reduce trading costs, and improve execution quality for 
market participants \1071\ by requiring public disclosure of Form ATS-N 
and applying the Fair Access Rule to certain ATSs. The public 
disclosure of Form ATS-N for Government Securities ATSs and 
Communication Protocol Systems that trade NMS stocks would also help 
enhance operational transparency, and thus, reduce search costs and 
trading costs for market participants.\1072\ The reduced search costs 
and trading costs would result in better execution quality for market 
participants. Specifically, based on Commission staff's experience with 
its review of initial Form ATS-N filings for NMS Stock ATSs, Form ATS-N 
would result in more standardized public information about Government 
Securities ATSs and Communication Protocol Systems that trade NMS 
stocks including how trading interests are handled, fee structures, the 
ATS's interaction with related markets, liquidity providers, activities 
the ATS undertakes to surveil and monitor its market, and any potential 
conflicts of interest that might arise from the activities of the 
broker-dealer operator or its affiliates. As a result, search costs for 
market participants would be lower because consistent disclosure 
requirements for all Government Securities ATSs and NMS Stock ATSs, 
including Communication Protocol Systems, would facilitate market 
participants' comparison of Government Securities ATSs and NMS Stock 
ATSs when deciding which venue best suits their trading objectives. In 
addition, based on the Commission's experience, fees can be a primary 
factor for market participants in deciding where to send their 
orders.\1073\ Fee disclosures on Form ATS-N and requiring consistent 
and timely fee amendments on Form ATS-N would help market participants 
compare and analyze the fee structures and fee ranges across Government 
Securities ATSs and NMS Stock ATSs in an expedited manner and decide 
which ATS offers them the best pricing according to the characteristics 
of their order flow and the type of participant they are, which would 
lower their search costs and hence trading costs.
---------------------------------------------------------------------------

    \1071\ Market participants would include prospective subscribers 
of Government Securities ATSs and Communication Protocol Systems 
that trade NMS stocks. For example, prospective subscribers would 
benefit from the public disclosure of Form ATS-N in their selection 
of trading venues.
    \1072\ One commenter on the 2020 Proposal stated that it agrees 
with the Commission that the proposed public disclosure of the 
operational aspects of Government Securities ATSs could improve 
investors' ability to select trading venues and lower trading costs. 
See FINRA Letter at 2. Another commenter stated that increasing 
accessibility to and standardizing information regarding the 
operations and activities of fixed income trading venues benefits 
investors by helping them make more informed decisions about where 
to send their orders. See MFA Letter at 9. A third commenter stated 
that more operational transparency would aid investors in conducting 
analysis of executions, and that transparency regarding pricing, 
market activity and market quality promotes healthy competition in 
the market place, supports fair and equitable access to potential 
participants and offers investor protection. See SIFMA Letter at 1 
and 2.
    \1073\ As discussed above, market participants may select 
trading venues based on factors other than fees. For example, 
investors interested in effecting transactions in U.S. Treasury 
Securities and corporate debt securities simultaneously may find 
information regarding a trading venue's interaction with related 
markets on Form ATS-N useful in the selection of trading venue.
---------------------------------------------------------------------------

    Furthermore, the proposed requirement that Government Securities 
ATSs \1074\ and Communication Protocol Systems that trade NMS stocks 
file Form ATS-N subject to the Commission's review and effectiveness 
process would help ensure the quality of information disclosed in Form 
ATS-N with attendant benefits to market participants who utilize Form 
ATS-N, including helping market participants select a trading venue 
that best suits their trading objectives.\1075\
---------------------------------------------------------------------------

    \1074\ Government Securities ATSs would include Currently 
Exempted Government Securities ATSs, Current Government Securities 
ATSs, and Communication Protocol Systems that trade government 
securities.
    \1075\ For more discussion on the impact of the effective 
process on the quality of Form ATS-N disclosures, see supra Section 
VIII.C.1.a.
---------------------------------------------------------------------------

    With regard to the Commission's proposal to require Government 
Securities ATSs and NMS Stock ATSs to file fee amendments with respect 
to fee changes, under the current filing requirements of Form ATS-N, 
there could be a considerable lapse of time from the actual fee change 
to the public disclosure of the fee change on Form ATS-N if an NMS 
Stock ATS files a fee change as an updating amendment.\1076\ If there 
is such delay in the public disclosure of fee changes on Form ATS-N, 
requiring NMS Stock ATSs to file a fee amendment no later than the date 
it makes a change to a fee or fee disclosure would result in more 
timely public disclosure of fee changes for NMS Stock ATSs. Because the 
fee is an important factors in the selection of trading venues, the 
proposed fee amendment on Form ATS-N would allow market participants to 
use more up-to-date fee information in the selection of trading venues, 
which could lower trading costs for market participants.
---------------------------------------------------------------------------

    \1076\ In the Commission staff's experience reviewing Form ATS-N 
amendments, some NMS Stock ATSs have filed updating amendments no 
later than 30 days from the end of the calendar quarter in which the 
ATS implemented the fee change. See also supra Section IV.A.
---------------------------------------------------------------------------

    However, the Commission is unable to quantify these benefits to 
market participants because the Commission lacks data on the amount of 
information that is currently available to different market 
participants regarding the operations of Government Securities ATSs and 
Communication Protocol Systems that are NMS Stock ATSs operations and 
the activities of their broker-dealer operators and their affiliates. 
The magnitude of the anticipated benefits discussed above

[[Page 15621]]

would also depend on a number of factors, including the extent to which 
market participants would change their behavior as a result of 
receiving the public disclosure of more comprehensive, comparable, and 
uniform information of this type in Form ATS-N. It is inherently 
difficult to predict how different market participants would use the 
information contained in Form ATS-N in evaluating and choosing the 
Government Securities ATSs and NMS Stock ATSs that best serve their 
trading objectives.
    The Commission believes that applying the Fair Access Rule to 
Government Securities ATSs, which would require the establishment and 
objective application of fair access standards, would increase trading 
venue options available to market participants who are currently 
excluded. To the extent that there are market participants that wish to 
trade on significant Government Securities ATSs but are currently 
excluded from doing so, applying the Fair Access Rule to Government 
Securities ATSs would lower their trading costs.\1077\ As discussed in 
Section VIII.B.2.a.ii, market forces alone may not be sufficient to 
prevent a significant Government Securities ATS from unreasonably 
denying access to some market participants.\1078\ Under the proposed 
amendments, if a Government Securities ATS meets certain aggregate 
volume thresholds,\1079\ the ATS would be required to establish and 
apply reasonable written standards for granting, limiting, and denying 
access to subscribers and applicants.\1080\ As a result, for example, 
there would be a mechanism to prevent a Government Securities ATS that 
met the aggregate volume thresholds \1081\ from unreasonably denying 
access to one institutional investor while granting access to another 
similarly-situated institutional investor.\1082\
---------------------------------------------------------------------------

    \1077\ The Commission estimates 8 Government Securities ATSs 
would be subject to the Fair Access Rule. One commenter on the 2020 
Proposal stated that registered investment companies generally are 
not able to directly access liquidity on most Treasury interdealer 
platforms. See ICI Letter at 4. Other commenters stated that 
applying the Fair Access Rule to Government Securities ATSs would 
ensure that market participants are not unreasonably denied access 
from important sources of liquidity for a particular security (see 
SIFMA Letter at 5) and would ensure that qualified market 
participants have access to the U.S. Government Securities market 
(see FIA PTG Letter at 2). Another commenter stated that including 
the trading of U.S. Treasury Securities and Agency Securities in the 
Fair Access Rule can prevent discriminatory actions that would 
otherwise result in higher trading costs for investors and the 
reduction in trading efficiency. See MFA Letter at 4.
    \1078\ See also supra note 833 and accompanying text.
    \1079\ The proposed Fair Access threshold for U.S. Treasury 
Securities is 3 percent or more of the average weekly dollar volume 
traded in the United States. The proposed Fair Access threshold for 
Agency Securities is 5 percent or more of the average daily dollar 
volume traded in the United States. The Fair Access threshold for 
NMS stocks and equity securities are 5 percent or more of the 
average daily share volume in an individual security. The Fair 
Access threshold for corporate debt and municipal securities is 5 
percent or more of the average daily dollar volume. See supra 
Section III.B.4 for a discussion about the volume thresholds for 
government securities in applying the Fair Access Rule. See also 
supra Section V.A.2 for a discussion about the aggregation of volume 
threshold.
    \1080\ See supra Section V.A.3.
    \1081\ See supra Section III.B.4 for discussion about volume 
thresholds.
    \1082\ One commenter on the 2020 Proposal stated that applying 
fair access requirements to Government Securities ATSs would enhance 
the ability of funds to onboard and participate on these platforms 
directly, and that the fair access to these additional pools of 
liquidity would benefit fund shareholders. See ICI Letter at 4.
---------------------------------------------------------------------------

    Significant ATSs that trade NMS stocks, non-NMS stock equity 
securities, corporate debt securities, or municipal securities are 
subject to the Fair Access Rule of Regulation ATS.\1083\ However, 
Communication Protocol Systems and passive systems that trade NMS 
stocks are currently not subject to the Fair Access Rule, but would be 
under the proposed amendments.\1084\ Applying the Fair Access Rule to 
those significant Communication Protocol Systems would generate the 
benefits discussed above for market participants in the markets for 
corporate debt securities, municipal securities, and non-NMS stocks. 
Additionally, the proposed amendments would help ensure that the 
benefits of the Fair Access Rule would also apply if a Communication 
Protocol System or passive system reached significant size and met the 
aggregate volume thresholds in the future.
---------------------------------------------------------------------------

    \1083\ The Commission estimates 2 Communication Protocol Systems 
that trade corporate debt securities and 1 Communication Protocol 
System that trades municipal securities would be subject to the Fair 
Access Rule. Furthermore, the Commission estimates that 3 
Communication Protocol Systems that trade non-NMS stock equity 
securities would be subject to the Fair Access Rule, but that no 
Communication Protocol System and no passive system that trades NMS 
stocks would be subject to the Fair Access Rule.
    \1084\ Communication Protocol Systems would be subject to Rule 
3b-16 and Regulation ATS. See supra Section II.D. The exemption for 
passive systems under Rule 301(b)(5)(iii) of Regulation ATS would be 
removed. See supra Section V.A.5.
---------------------------------------------------------------------------

    To the extent that there are market participants currently excluded 
from trading on significant ATSs, the proposed amendments to aggregate 
volume across affiliated ATSs in calculating certain volume thresholds 
under the Fair Access Rule would increase the number of smaller 
affiliate ATSs available to market participants who are currently 
excluded, which would lower their trading costs for them. The proposed 
amendments to apply certain aggregate volume thresholds would increase 
the number of smaller affiliate ATSs that would be subject to the Fair 
Access Rule. Smaller affiliate ATSs that would not have met the current 
volume thresholds individually would be subject to the Fair Access Rule 
if they meet the proposed aggregate volume thresholds. The Commission 
estimates that no current smaller affiliate ATS that trades NMS stocks, 
non-NMS stock equity securities, corporate debt securities, or 
municipal securities and does not already currently meet the Fair 
Access volume thresholds would meet the volume thresholds if volume is 
aggregated across affiliated ATSs.\1085\
---------------------------------------------------------------------------

    \1085\ This estimate is computed using the regulatory version of 
FINRA's Trade Reporting Facility data and NYSE's TAQ data (accessed 
via WRDS). See supra note 1079 for details on the Fair Access 
thresholds. See supra note 310 for the application of the Fair 
Access Rule on the trading of NMS stocks, non-NMS stock equity 
securities, municipal securities, and corporate debt securities. See 
also supra Section V.A.2 for a discussion about the aggregation of 
volume threshold.
---------------------------------------------------------------------------

c. Enhancement of Price Discovery and Liquidity
    Applying broker-dealer registration requirements of Regulation ATS, 
Regulation SCI, and the Capacity, Integrity, and Security Rule (i.e., 
Rule 301(b)(6) of Regulation ATS) under the proposed amendments would 
help enhance the price discovery process and liquidity in securities 
markets.\1086\
---------------------------------------------------------------------------

    \1086\ The proposed amendments would help enhance the price 
discovery process and liquidity in securities markets through: 
Applying the broker-dealer registration requirements of Regulation 
ATS to bank-operated Currently Exempted Government Securities ATSs 
and non-broker-dealer-operated Communication Protocol Systems; 
applying Regulation SCI to Government Securities ATSs that meet 
certain volume thresholds; applying Rule 301(b)(6) to significant 
Communication Protocol Systems that trade corporate debt securities 
or municipal securities; and applying Regulation SCI to significant 
Communication Protocol Systems that trade NMS stocks and non-NMS 
stock equity securities.
---------------------------------------------------------------------------

    The proposed broker-dealer registration requirements of Regulation 
ATS, including SRO membership requirements, for bank-operated Currently 
Exempted Government Securities ATSs and non-broker-dealer-operated 
Communication Protocol Systems would enhance the price discovery 
process in securities markets. As discussed in Section II.B.3, upon 
registering as broker-dealers and becoming members of an SRO, bank-
operated Currently Exempted Government Securities ATSs and non-broker-
dealer-operated Communication Protocol Systems would be required to 
report certain transactions to an SRO for

[[Page 15622]]

public dissemination, which would help enhance price discovery by 
providing the market with better post-trade price transparency in the 
government securities market and other securities markets in which the 
Communication Protocol Systems provide trading services.\1087\
---------------------------------------------------------------------------

    \1087\ FINRA members are subject to transaction reporting 
obligation under FINRA Rule 6730, while municipal bond dealers are 
subject to transaction reporting obligations under MSRB Rule G-14. 
See supra note 1060, discussing transaction reporting requirements 
for fixed income securities and supra note 1061, describing the non-
broker-dealer-operated Communication Protocol Systems that are not 
currently subject to reporting requirements. As discussed in supra 
Section VIII.C.1.a, the Commission is unable to estimate the 
magnitude of this benefit because the Commission lacks the necessary 
data. Except for government securities, reported transactions in all 
other TRACE-Eligible Securities (which includes Agency securities, 
corporate debt securities, and ABS) are publically disseminated via 
FINRA TRACE. FINRA disseminates weekly summary of U.S. Treasury 
Securities transactions produced from TRACE data. See FINRA Rule 
6740. Reported transactions in municipal debt securities are 
publicly disseminated via EMMA, which is a service operated by the 
MSRB. See supra note 658. Trades in restricted equity securities 
effected pursuant to Rule 144A are reported to the FINRA's ORF for 
regulatory purposes only and are not publicly disseminated.
---------------------------------------------------------------------------

    The Commission believes that applying the proposed requirements of 
Regulation SCI to Government Securities ATSs that meet certain volume 
thresholds would help prevent systems issues from occurring and reduce 
their severity when they do occur, and thus, limit interruptions to the 
price discovery process and liquidity flow in the government securities 
market.\1088\ As discussed in Section VIII.B.2.a.ii, market forces 
alone may not be sufficient to induce significant Government Securities 
ATSs to establish standards that would help significantly reduce 
systems issues.\1089\ A systems outage at a significant Government 
Securities ATS would not only disrupt price discovery \1090\ and 
liquidity flow, but also would reduce trading venue options resulting 
in higher trading costs for market participants.
---------------------------------------------------------------------------

    \1088\ The Commission estimates that 4 Government Securities 
ATSs would be subject to Regulation SCI. See Table VIII.1 in supra 
Section VIII.B.2.a.i and Section VIII.B.2.d. See Sections VIII.B.2.a 
and VIII.B.2.b for discussions about the importance of real-time 
price information on Government Securities ATS and indicative quotes 
on Communication Protocol Systems that trade U.S. Treasury 
Securities in price discovery of various securities. The proposed 
amendments to Regulation SCI would promote the establishment of more 
robust systems that are less likely to experience a system 
disruption by requiring Government Securities ATSs that meet the 
definition of SCI entity to establish and enforce written policies 
and procedures to ensure that their SCI systems have adequate levels 
of capacity, integrity, resiliency, availability, and security to 
maintain the SCI entity's operational capability. Furthermore, the 
extension of Regulation SCI would help strengthen the infrastructure 
and improve the resiliency of the automated systems of Government 
Securities ATSs that are important to the government securities 
markets. See also Section III.C.
    \1089\ See also supra note 838 and accompanying text.
    \1090\ See supra Sections VIII.B.2.a and VIII.B.2.b for 
discussions about the importance of real-time price information on 
Government Securities ATS and indicative quotes on Communication 
Protocol Systems that trade U.S. Treasury Securities in price 
discovery of various securities.
---------------------------------------------------------------------------

    The Commission recognizes that one Government Securities ATS is 
operated by a broker-dealer operator of an NMS Stock ATS that is a SCI 
entity, and therefore, might already have modified some of the policies 
and procedures of Regulation SCI as needed for systems related to 
trading of U.S. Treasury Securities and Agency Securities.\1091\ 
However, imposing the requirements of Regulation SCI on this ATS's 
systems related to trading of U.S. Treasury Securities and Agency 
Securities would further strengthen these policies and procedures, 
which would help improve the robustness of SCI systems and SCI indirect 
systems.
---------------------------------------------------------------------------

    \1091\ See supra Section VIII.B.2.a.ii for a discussion of 
Government Securities ATSs of existing SCI entities.
---------------------------------------------------------------------------

    Furthermore, extending Regulation SCI to significant Government 
Securities ATSs would help prevent disruptions in trading of linked 
fixed income securities, such as corporate debt securities, and thus, 
enhance the price discovery process and liquidity in those fixed income 
securities markets. U.S. Treasury Securities are used as a hedging 
instrument for hedging interest rate risk. The Commission understands 
that investors trading corporate debt securities simultaneously trade 
U.S. Treasury Securities in the direction that offsets the interest 
rate risk from the corporate debt securities trades. Systems issues at 
significant Government Securities ATSs would disrupt these hedging 
activities that use U.S. Treasury Securities, which in turn, would 
disrupt and the price discovery process and liquidity flow in corporate 
debt securities.
    One commenter on the 2020 Proposal stated that it did not support 
applying Regulation SCI to Government Securities ATSs because trading 
venues for government securities are not interconnected.\1092\ This 
commenter stated that unlike the equities markets, where linkages among 
venues under Regulation NMS can cause systems issues at a single ATS 
with a relatively more modest trading volume to present issues for the 
broader market, the government securities market has no similar 
linkages among venues.\1093\ Other commenters on the 2020 Proposal 
expressed the view that application of Regulation SCI is 
appropriate.\1094\
---------------------------------------------------------------------------

    \1092\ See Tradeweb Letter at 3.
    \1093\ See Tradeweb Letter at 3.
    \1094\ See supra notes 357-362 and corresponding text. One 
commenter stated that applying Regulation ATS and Regulation SCI to 
interdealer Treasury platforms is appropriate and would promote 
operational transparency, fair access, and system security and 
resiliency and that, given the linkage between the interdealer and 
the dealer-to-customer segments of the market, these benefits in 
turn would help dealers and other liquidity providers better 
facilitate trading with customers such as funds. See ICI Letter at 3 
and 4. Other commenters on the 2020 Proposal opposed requiring 
Government Securities ATSs to comply with Regulation SCI. See supra 
notes 363-367 and corresponding text.
---------------------------------------------------------------------------

    The Commission believes that a system outage at a significant 
Government Securities ATS could disrupt trading at another significant 
Government Securities ATS even if these Government Securities ATSs are 
not connected. For example, if a significant Government Securities ATS 
is experiencing a system outage, there could be a sudden surge in 
message traffic (e.g., quoting activities) and trading at other 
significant Government Securities ATSs. If a sudden surge in message 
traffic and trading exceeds the system capacity of the Government 
Securities ATS, this could result in systems issues and disrupt trading 
at the ATS. The requirements of Regulation SCI, including the 
requirements with respect to capacity planning, would help prevent such 
systems issues at significant Government Securities ATSs and enhance 
the price discovery process and liquidity in the government securities 
market.
    NMS Stock ATSs that meet certain volume thresholds are subject to 
the requirements of Regulation SCI for SCI ATS.\1095\ Subjecting 
significant Communication Protocol Systems that are NMS Stock ATSs to 
Regulation SCI would likely generate the benefits discussed in the 
Regulation SCI Adopting Release.\1096\
---------------------------------------------------------------------------

    \1095\ The Commission estimates that no Communication Protocol 
System that trades NMS stocks would be subject to Regulation SCI.
    \1096\ See Regulation SCI Adopting Release, supra note 3.
---------------------------------------------------------------------------

    Significant ATSs that trade corporate debt securities or municipal 
securities are subject to Rule 301(b)(6).\1097\ The application of Rule 
301(b)(6) to significant Communication Protocol Systems that trade 
corporate debt securities or municipal securities would help reduce 
disruptions in the price discovery process of corporate debt

[[Page 15623]]

securities and municipal securities due to failures or capacity issues 
with respect to automated systems of significant Communication Protocol 
Systems, and thus, enhance the price discovery process and liquidity in 
those markets.
---------------------------------------------------------------------------

    \1097\ See supra Section II.D.2 for a discussion about volume 
threshold for Rule 301(b)(6) of Regulation ATS. The Commission 
estimates that 2 Communication Protocol Systems that trade corporate 
debt securities and no Communication Protocol Systems that trade 
municipal securities would be subject to Rule 301(b)(6).
---------------------------------------------------------------------------

d. Electronic Filing Requirements
    With respect to the filing location and data language of the 
proposed disclosure requirements for Government Securities ATSs and 
Communication Protocol Systems that are NMS Stock ATSs, requiring these 
disclosures to be filed on Form ATS-N would benefit market participants 
by improving the usability, accessibility, and reliability of the new 
disclosures. Form ATS-N is filed on the EDGAR system in a structured, 
machine-readable XML-based data language that is specific to Form ATS-N 
(``custom XML,'' here ``ATS-N-specific XML'').\1098\ By requiring a 
structured data language and a publicly accessible filing location for 
the required disclosures, the Commission would allow market 
participants to download the disclosed information directly into their 
databases and analyze the information using various tools and 
applications. This would make it easier for market participants to 
aggregate the information and compare multiple ATSs to help select the 
venue that best suits their trading objectives, thereby potentially 
avoiding the cost of paying a third party data vendor to extract and 
structure the disclosed information on their behalf.
---------------------------------------------------------------------------

    \1098\ See supra Section V.B.
---------------------------------------------------------------------------

    The Commission believes requiring all Government Securities ATSs 
and Communication Protocol Systems that are NMS Stock ATSs to submit 
the required disclosures in ATS-N-specific XML will facilitate more 
effective and thorough review and analysis of those ATSs by the 
Commission, which should yield greater insights into the operations of 
those ATSs and the activities of their operators and affiliates. 
Additionally, Commission staff would be better able to assemble and 
review a larger pool of data regarding Government Securities ATSs and 
Communication Protocol Systems that are NMS Stock ATSs. Both of these 
outcomes would benefit market participants by facilitating the 
Commission's examination process, and thus, would help protect 
investors and ensure the sufficiency of information in the market 
related to Government Securities ATSs and Communication Protocol 
Systems that are NMS Stock ATSs.
    Requiring all Government Securities ATSs to file the required 
disclosures on EDGAR would benefit market participants by ensuring that 
the disclosures are in a centralized, publicly accessible filing 
location with validation capabilities. Providing a centralized filing 
location would prevent market participants from incurring additional 
costs to locate and retrieve Government Securities ATS disclosures from 
various filing or posting locations. Similarly, because EDGAR is a 
publicly accessible system, an EDGAR requirement would prevent market 
participants from incurring additional costs that will arise if an 
operator or other party were to place any barriers to access the 
Government Securities ATS disclosures (such as a website registration 
requirement). Because EDGAR provides basic validation capabilities, an 
EDGAR requirement would reduce the incidence of non-discretionary 
errors, thereby improving the quality of the Government Securities ATS 
disclosures.
    Requiring all Forms ATS and ATS-R to be filed on EDGAR would 
provide a centralized filing location with validation capabilities for 
submitted filings, and would also increase filing efficiencies for ATSs 
by removing the need to print and mail paper versions.\1099\ All ATSs 
subject to Regulation ATS are required to file a Form ATS-R, and all 
ATSs that do not trade NMS stocks or government securities (which, 
under the proposal, would include Communication Protocol Systems), 
would file a Form ATS.
---------------------------------------------------------------------------

    \1099\ See id.
---------------------------------------------------------------------------

2. Costs
    The Commission has considered the costs of the proposed amendments 
to Exchange Act Rule 3b-16, Regulation ATS, and Regulation SCI. The 
aggregate compliance costs are presented in Table VIII.7 below.

                   Table VIII.7--Total Implementation Costs \a\ and Other Compliance Costs \b\
----------------------------------------------------------------------------------------------------------------
                                            Number of
              Type of entity                 entities     Aggregate initial costs      Aggregate ongoing costs
----------------------------------------------------------------------------------------------------------------
Communication Protocol Systems                       4  $2.4 million ~ $6.6 million  $2.4 million ~ $5.1
 (Government Securities ATS).                            \c\.                         million.\d\
Currently Exempted Government Securities             7  $1.5 million ~ $3.5 million  $1.3 million ~ $2.7
 ATSs.                                                   \e\.                         million.\f\
Current Government Securities ATSs.......           17  $1.4 million ~ $3.5 million  $1.3 million ~ $2.6
                                                         \g\.                         million.\h\
Communication Protocol Systems (NMS Stock            4  $209,000 \i\...............  $59,000.\j\
 ATS).
Current NMS Stock ATSs...................           34  $77,000 \k\................  $16,000.\l\
Other Communication Protocol Systems.....           14  $2 million \m\.............  $660,000.\n\
Other Current ATSs.......................           59  $374,000 \o\...............  $115,000.\p\
Subscriber...............................  ...........  ...........................  $10,000.\q\
                                          ----------------------------------------------------------------------
    Total................................          139  $8 million ~ $16 million...  $5.9 million ~ $11 million.
----------------------------------------------------------------------------------------------------------------
\a\ See infra note 1127.
\b\ See id.
\c\ See infra Table VIII.9.
\d\ See id.
\e\ See infra Table VIII.10.
\f\ See id.
\g\ See infra Table VIII.11.
\h\ See id.
\i\ See infra Table VIII.12.
\j\ See id.
\k\ See infra Table VIII.13.
\l\ See id.
\m\ See infra Table VIII.14.
\n\ See id.
\o\ See infra Table VIII.15.
\p\ See id.
\q\ This figure represents costs per ATS subscriber. See also infra note aa in Table VII.8.


[[Page 15624]]

a. Compliance Costs \1100\
---------------------------------------------------------------------------

    \1100\ Compliance costs consist of implementation costs, which 
are the monetized costs of PRA burdens and other compliance costs 
(non-PRA based costs).
---------------------------------------------------------------------------

    The proposed amendments to extend Regulation ATS to Communication 
Protocol Systems, Currently Exempted Government Securities ATSs, and 
Current Government Securities ATSs and Regulation SCI to significant 
Government Securities ATSs and certain Communication Protocol Systems 
would result in a number of compliance costs. The Commission believes 
that compliance costs could be passed through (e.g., via higher fees) 
to market participants, resulting in higher trading costs.
    The requirements with respect to becoming a broker-dealer, filing 
Form ATS and Form ATS-N, and complying with the Fair Access Rule of 
Regulation ATS and Regulation SCI under the proposed amendments would 
result in compliance costs.\1101\ The initial and ongoing 
implementation costs and other compliance costs per entity associated 
with these requirements are presented in Table VIII.8.\1102\ The 
aggregates of these compliance costs are presented in Table VIII.9 
through Table VIII.15.
---------------------------------------------------------------------------

    \1101\ The proposed requirements would include: broker-dealer 
registration requirements for non-broker-dealer-operated 
Communication Protocol Systems and bank-operated Currently Exempted 
Government Securities ATSs; the requirements with respect to written 
safeguards and procedures for subscribers' trading information, 
recordkeeping, record preservation, and Form ATS-R for Communication 
Protocol Systems and Currently Exempted Government Securities ATSs; 
the requirements of Form ATS for Communication Protocol Systems that 
are not Government Securities ATSs nor NMS Stock ATSs; the 
requirements with respect to capacity, integrity, and security of 
automated systems for Communication Protocol Systems that trade 
corporate debt securities or municipal securities; the requirements 
of Form ATS-N for Government Securities ATSs and Communication 
Protocol Systems that are NMS Stock ATSs; the requirements to amend 
Form ATS-N for NMS Stock ATSs; the requirements to amend Form ATS 
and Form ATS-R and such forms be filed electronically; the 
requirements of the Fair Access Rule for significant Government 
Securities ATSs and significant Communication Protocol Systems; and 
the requirements of Regulation SCI for significant Government 
Securities ATSs and significant Communication Protocol Systems.
    \1102\ The Commission estimates the wage rate associated with 
PRA burden hours based on salary information for the securities 
information compiled by SIFMA. The estimated wage figure for 
attorneys, for example, is based on published rates for attorneys, 
modified to account for a 1,800 hour work-year and multiplied by 
5.35 to account for bonuses, firm size, employee benefits, and 
overhead yielding an effective hourly rate for 2013 of $380 for 
attorneys. See Securities Industry and Financial Markets 
Association, Management & Professional Earnings in the Securities 
Industry--2013, available at https://www.sifma.org/resources/research/management-and-professional-earnings-in-the-securities-industry-2013/. The 2013 professional wage rates are adjusted for an 
inflation rate of 17.45 percent based on the Bureau of Labor 
Statistics data on Consumer Price Index for all Urban Consumers 
(CPI-U) between September 2013 and September 2021. Therefore, the 
current inflation adjusted effective hourly wage rates for attorneys 
are estimated at $446 ($380 x 1.1745), $570 ($485 x 1.1745) for 
chief compliance managers, $332 ($283 x 1.1745) for compliance 
managers, $305 ($260 x 1.1745) for senior systems analysts, $328 
($279 x 1.1745) for senior marketing manager, and $75 ($64 x 1.1745) 
for compliance clerks.

                            Table VIII.8--Per ATS Implementation Costs and Other Compliance Costs for Each Proposed Amendment
--------------------------------------------------------------------------------------------------------------------------------------------------------
                 Rule                          Compliance action                Initial costs per entity                 Ongoing costs per entity
--------------------------------------------------------------------------------------------------------------------------------------------------------
Reg ATS, 301(b)(1)....................  Form BD filing................  $900 \a\...............................  $300 \d\
                                        Form ID filing................  50 \b\.................................  .......................................
                                        Other compliance costs (non-    316,000 \c\............................  57,700 \e\
                                         PRA based).
Reg ATS, 301(b)(2)....................  Form ATS filing...............  6,400 \f\..............................  1,500 \g\
Reg ATS, 301(b)(5)....................  Fair Access...................  .......................................  17,000 \h\
Reg ATS, 301(b)(6)....................  Capacity, Integrity, and        .......................................  5,000 \i\
                                         Security of automated systems.
Reg ATS, 301(b)(9)....................  Form ATS-R filing.............  .......................................  6,000 \j\
                                                                        .......................................  500 \k\
Reg ATS, 301(b)(10)...................  Written safeguards and          3,200 \l\..............................  1,000 \m\
                                         procedures to protect
                                         subscribers' trading
                                         information.
Reg ATS, 302..........................  Recordkeeping.................  .......................................  3,400 \n\
Reg ATS, 303..........................  Record preservation...........  .......................................  1,100 \o\
Reg ATS, 304..........................  Form ATS-N filing.............  49,000 \p\.............................  3,300 \s\
                                                                        43,000 \q\.............................  3,300 \t\
                                                                        2,300 \r\..............................  .......................................
Reg SCI...............................  Implementation costs (PRA       777,000 \u\............................  924,000 \w\
                                         based).
                                                                        388,000 \v\............................  924,000 \x\
Reg SCI...............................  Other compliance costs (non-    320,000 ~ 2.4 million \y\..............  214,000 ~ 1.6 million \z\
                                         PRA based).
Reg SCI...............................  Subscriber costs (non-PRA       .......................................  10,000 \aa\
                                         based).
--------------------------------------------------------------------------------------------------------------------------------------------------------
\a\ Compliance Manager at $332 x 2.75 hours = $914. See also supra note 787.
\b\ Compliance Manager at $332 x 0.15 hour = $50. See also supra note 790.
\c\  See infra note 1120.
\d\ Compliance Manager at $332 x 0.95 hour = $316. See also supra note 788.
\e\  See infra note 1120.
\f\ (Attorney at $446 x 13 hours) + (Compliance Clerk at $75 x 7.5 hours) = $6,366. See also supra note 759.
\g\ (Attorney at $446 x 3 hours) + (Compliance Clerk at $75 x 2 hours) = $1,489. See also supra note 760.
\h\ Attorney at $446 x 37 hours = $16,513. See also supra note 764.
\i\ Attorney at $446 x 11.25 hours = $5,021. See also supra note 766.
\j\ ((Attorney at $446 x 3 hours) + (Compliance Manager at $332 x 0.25 hour)) x 4 times = $6,114. See also supra note 770.
\k\ ((Compliance Manager at $332 x 0.25 hour) + (Compliance Clerk at $75 x 0.5 hour)) x 4 times = $483. See also supra note 771.
\l\ (Attorney at $446 x 7 hours) + (Compliance Clerk at $75 x 1 hour) = $3,199. See also supra note 773.
\m\ (Attorney at $446 x 2 hours) + (Compliance Clerk at $75 x 2 hours) = $1,043. See also supra note 774.
\n\ Compliance Clerk at $75 x 45 hours = $3,383. See also supra note 776.
\o\ Compliance Clerk at $75 x 15 hours = $1,128. See also supra note 777.
\p\ (Attorney at $446 x 57.1 hours) + (Chief Compliance Manager at $570 x 0.5 hour) + (Compliance Manager at $332 x 36.05 hours) + (Sr. Systems Analyst
  at $305 x 33.75 hours) + (Sr. Marketing Manager at $328 x 1 hour) + (Compliance Clerk at $75 x 8 hours) = $48,987. See also supra note 781.
\q\ (Attorney at $446 x 44.1 hours) + (Chief Compliance Manager at $570 x 0.5 hour) + (Compliance Manager at $332 x 36.05 hours) + (Sr. Systems Analyst
  at $305 x 33.75 hours) + (Sr. Marketing Manager at $328 x 1 hour) + (Compliance Clerk at $75 x 1 hour) = $42,659. See also supra note 782.
\r\ (Attorney at $446 x 2.5 hours) + (Compliance Manager at $332 x 1.5 hours) + (Sr. Systems Analyst at $305 x 1.5 hours) + (Compliance Clerk at $75 x
  2.5 hours) = $2,260. See also supra note 783.

[[Page 15625]]

 
\s\ ((Attorney at $446 x 5.5 hours) + (Compliance Manager at $332 x 2 hours) + (Compliance Clerk at $75 x 1.9 hours)) x 5 times = $3,262. See also supra
  note 784.
\t\ See id.
\u\ The PRA burden hours are based on the 2018 SCI PRA Supporting Statement. The Commission estimates an initial PRA burden for new SCI entities of
  2,034.3 hours. See also supra note 794. The PRA burden hours are monetized by applying inflation adjusted professional wage rates obtained via the
  methodology presented in supra note 1102.
\v\ See id. The Commission estimates an initial PRA burden for existing SCI entities of 1,017.15 hours. See also supra note 793.
\w\ See id. The Commission estimates an ongoing PRA burden for all SCI entities of 2,458.65 hours. See also supra note 795.
\x\ See id.
\y\ See infra Section VIII.C.2.a.vi for discussion about non-PRA based initial compliance costs per entity.
\z\ See infra Section VIII.C.2.a.vi for discussion about non-PRA based ongoing compliance costs per entity.
\aa\ See infra Section VIII.C.2.a.vi for discussion about non-PRA based compliance costs per ATS subscriber.


                Table VIII.9--Communication Protocol Systems That Are Government Securities ATSs
----------------------------------------------------------------------------------------------------------------
                                             Number of
               Compliance                    entities       Aggregate initial costs     Aggregate ongoing costs
----------------------------------------------------------------------------------------------------------------
Regulation SCI..........................               2  $2.2 million ~ $6.4         $2.3 million ~ $5
                                                           million \a\.                million.\b\
BD Registration.
Fair Access.............................               2  ..........................  33,000.\c\
Other...................................               4  209,000.\d\...............  59,000.\e\
                                         -----------------------------------------------------------------------
    Total...............................               4  2.4 million ~ 6.6 million.  2.4 million ~ 5.1 million.
----------------------------------------------------------------------------------------------------------------
\a\ This cost figure is obtained by the summing initial implementation costs ($777,000) and non-PRA based
  compliance costs ($320,000 ~ $2.4 million) associated with Regulation SCI presented in supra Table VIII.8 for
  2 Communication Protocol Systems that trade government securities.
\b\ This cost figure is obtained by summing the ongoing implementation costs ($924,000) and non-PRA based
  compliance costs ($214,000 ~ $1.6 million) associated with Regulation SCI presented in supra Table VIII.8 for
  2 Communication Protocol Systems that trade government securities.
\c\ This cost figure is the ongoing implementation cost associated with Rule 301(b)(5) presented in supra Table
  VIII.8 for 2 Communication Protocol Systems that trade government securities.
\d\ This cost figure is obtained by summing the initial implementation costs associated with Rule 301(b)(10) and
  304 ($49,000) presented in supra Table VIII.8 for 4 Communication Protocol Systems that trade government
  securities.
\e\ This cost figure is obtained by summing the ongoing implementation costs associated with Rule 301(b)(9)
  ($6,000), 301(b)(10), 302, 303, and 304 ($3,300) presented in supra Table VIII.8 for 4 Communication Protocol
  Systems that trade government securities.


                          Table VIII.10--Currently Exempted Government Securities ATSs
----------------------------------------------------------------------------------------------------------------
                                             Number of
               Compliance                    entities       Aggregate initial costs     Aggregate ongoing costs
----------------------------------------------------------------------------------------------------------------
Regulation SCI..........................               1  $1.1 million ~ $3.2         $1.1 million ~ $2.5
                                                           million \a\.                million.\b\
BD Registration.
Fair Access.............................               3  ..........................  50,000.\c\
Other...................................               7  365,000 \d\...............  103,000.\e\
                                         -----------------------------------------------------------------------
    Total...............................               7  1.5 million ~ 3.5 million.  1.3 million ~ 2.7 million.
----------------------------------------------------------------------------------------------------------------
\a\ This cost figure is obtained by summing the initial implementation costs ($777,000) and non-PRA based
  compliance costs ($320,000 ~ $2.4 million) associated with Regulation SCI presented in supra Table VIII.8 for
  1 Currently Exempted Government Securities ATS.
\b\ This cost figure is obtained by summing the ongoing implementation costs ($924,000) and non-PRA based
  compliance costs ($214,000 ~ $1.6 million) associated with Regulation SCI presented in supra Table VIII.8 for
  1 Currently Exempted Government Securities ATS.
\c\ This cost figure is the ongoing implementation cost associated with Rule 301(b)(5) presented in supra Table
  VIII.8 for 3 Currently Exempted Government Securities ATSs.
\d\ This cost figure is obtained by summing the initial implementation costs associated with Rule 301(b)(10) and
  304 ($49,000) presented in supra Table VIII.8 for 7 Currently Exempted Government Securities ATSs.
\e\ This cost figure is obtained by summing the ongoing implementation costs associated with Rule 301(b)(9)
  ($6,000), 301(b)(10), 302, 303, and 304 ($3,300) presented in supra Table VIII.8 for 7 Currently Exempted
  Government Securities ATSs.


                                Table VIII.11--Current Government Securities ATS
----------------------------------------------------------------------------------------------------------------
                                             Number of
               Compliance                    entities       Aggregate initial costs     Aggregate ongoing costs
----------------------------------------------------------------------------------------------------------------
Regulation SCI..........................               1  $708,000 ~ $2.8 million     $1.1 million ~ $2.5
                                                           \a\.                        million.\b\
Fair Access.............................               3  ..........................  50,000.\c\
Other...................................              17  725,000 \d\...............  64,000.\e\
                                         -----------------------------------------------------------------------
    Total...............................              17  1.4 million ~ 3.5 million.  1.3 million ~ 2.6 million.
----------------------------------------------------------------------------------------------------------------
\a\ This cost figure is obtained by summing the ongoing implementation costs ($924,000) and non-PRA based
  compliance costs ($214,000 ~ $1.6 million) associated with Regulation SCI presented in supra Table VIII.8 for
  1 Current Government Securities ATS.
\b\ This cost figure is obtained by summing the ongoing implementation costs ($924,000) and non-PRA based
  compliance costs ($214,000 ~ $1.6 million) associated with Regulation SCI presented in supra Table VIII.8 for
  1 Current Government Securities ATS.
\c\ This cost figure is the ongoing implementation cost associated with Rule 301(b)(5) presented in supra Table
  VIII.8 for 3 Current Government Securities ATSs.
\d\ This cost figure is the initial implementation cost associated with Rule 304 ($43,000) presented in supra
  Table VIII.8 for 17 Current Government Securities ATSs.
\e\ This cost figure is obtained by summing the ongoing implementation costs associated with Rule 301(b)(9)
  ($500) and 304 ($3,300) presented in supra Table VIII.8 for 17 Current Government Securities ATSs.


[[Page 15626]]


                      Table VIII.12--Communication Protocol Systems That Are NMS Stock ATSs
----------------------------------------------------------------------------------------------------------------
                                             Number of
               Compliance                    entities       Aggregate initial costs     Aggregate ongoing costs
----------------------------------------------------------------------------------------------------------------
Regulation SCI.
Fair Access.
BD Registration.
Other...................................               4  209,000 \a\...............  59,000.\b\
                                         -----------------------------------------------------------------------
    Total...............................               4  209,000...................  59,000.
----------------------------------------------------------------------------------------------------------------
\a\ This cost figure is obtained by summing the initial implementation costs associated with Rule 301(b)(10) and
  304 ($49,000) presented in supra Table VIII.8 for 4 Communication Protocol Systems that trade NMS stocks.
\b\ This cost figure is obtained by summing the ongoing implementation costs associated with Rule 301(b)(9),
  301(b)(10), 302, 303, and 304 ($3,300) presented in supra Table VIII.8 for 4 Communication Protocol Systems
  that trade NMS stocks.


                                      Table VIII.13--Current NMS Stock ATSs
----------------------------------------------------------------------------------------------------------------
                                             Number of
               Compliance                    entities       Aggregate initial costs     Aggregate ongoing costs
----------------------------------------------------------------------------------------------------------------
Regulation SCI.
Fair Access.
Other...................................              34  77,000 \a\................  16,000.\b\
                                         -----------------------------------------------------------------------
    Total...............................              34  77,000....................  16,000.
----------------------------------------------------------------------------------------------------------------
\a\ This cost figure is the initial implementation cost associated with Rule 304 ($2,300) presented in supra
  Table VIII.8 for 34 Current NMS Stock ATSs.
\b\ This cost figure is the ongoing implementation cost associated with Rule 301(b)(9) ($500) presented in supra
  Table VIII.8 for 34 Current NMS Stock ATSs.


                               Table VIII.14--Other Communication Protocol Systems
----------------------------------------------------------------------------------------------------------------
                                             Number of
               Compliance                    entities       Aggregate initial costs     Aggregate ongoing costs
----------------------------------------------------------------------------------------------------------------
Rule 301(b)(6)..........................               2  ..........................  $10,000.\a\
Fair Access.............................               6  ..........................  99,000.\b\
BD Registration.........................               6  1.9 million \c\...........  360,000.\d\
Other...................................              14  133,000 \e\...............  191,000.\f\
                                         -----------------------------------------------------------------------
    Total...............................              14  2 million.................  660,000.
----------------------------------------------------------------------------------------------------------------
\a\ This cost figure is the ongoing implementation cost associated with Rule 301(b)(6) presented in supra Table
  VIII.8 for 2 Communication Protocol Systems that trade corporate debt securities.
\b\ This cost figure is the ongoing implementation cost associated with Rule 301(b)(5) presented in supra Table
  VIII.8 for 6 Communication Protocol Systems that trade corporate debt securities or municipal securities.
\c\ This cost figure is obtained by summing the initial implementation costs associated with Rule 301(b)(1)
  presented in supra Table VIII.8 for 6 Communication Protocol Systems that trade neither government securities
  nor NMS stocks.
\d\ This cost figure is obtained by summing the ongoing implementation costs associated with Rule 301(b)(1)
  presented in supra Table VIII.8 for 6 Communication Protocol Systems that trade neither government securities
  nor NMS stocks.
\e\ This cost figure is obtained by summing the initial implementation costs associated with Rule 301(b)(2) and
  301(b)(10) presented in supra Table VIII.8 for 14 Communication Protocol Systems that trade neither government
  securities nor NMS stocks.
\f\ This cost figure is obtained by summing the ongoing implementation costs associated with Rule 301(b)(2),
  301(b)(9) ($6,000), 301(b)(10), 302, and 303 presented in supra Table VIII.8 for 14 Communication Protocol
  Systems that trade neither government securities nor NMS stocks.


                                        Table VIII.15--Other Current ATSs
----------------------------------------------------------------------------------------------------------------
                                             Number of
               Compliance                    entities       Aggregate initial costs     Aggregate ongoing costs
----------------------------------------------------------------------------------------------------------------
Rule 301(b)(6).
Fair Access.
Other...................................              59  374,000 \a\...............  115,000.\b\
                                         -----------------------------------------------------------------------
    Total...............................              59  374,000...................  115,000.
----------------------------------------------------------------------------------------------------------------
\a\ This cost figure is the initial implementation cost associated with Rule 301(b)(2) presented in supra Table
  VIII.8 for 59 Current ATSs that trade neither government securities nor NMS stocks.
\b\ This cost figure is obtained by summing the ongoing implementation costs associated with Rule 301(b)(2) and
  301(b)(9) ($500) presented in supra Table VIII.8 for 59 Current ATSs that trade neither government securities
  nor NMS stocks.

    One commenter stated that the proposed amendments in the 2020 
Proposal would require a Legacy Government Securities ATS to separate 
trading activity in government securities and repos from non-NMS stock 
trading activity, which could impose administrative and operational 
burdens on both Government Securities ATSs

[[Page 15627]]

and subscribers.\1103\ The Commission believes that the proposed 
amendments do not require separating operations, and thus, Legacy 
Government Securities ATSs would not incur costs associated with 
separating operations.\1104\
---------------------------------------------------------------------------

    \1103\ See ICE Bonds Letter I at 3 and 4. The commenter on the 
2020 Proposal stated that this separation requirement would result 
in fewer venues and higher trading costs for subscribers to trade 
and hedge and concentrate trading among a few large Government 
Securities ATSs because smaller Legacy Government Securities ATSs 
may determine to exit due to the prohibitive costs associated with 
this separation requirement. This commenter also provided a list of 
costs associated with separating operation. See also supra Section 
III.B.1 and note 250.
    \1104\ See supra Section III.B.I.
---------------------------------------------------------------------------

i. Implementation Costs: \1105\
---------------------------------------------------------------------------

    \1105\ Implementation costs are the monetized costs of PRA 
burdens. See also supra note 1100.
---------------------------------------------------------------------------

    Currently Exempted Government Securities ATSs and Communication 
Protocol Systems that would be newly subject to the requirements of 
Regulation ATS would incur implementation costs associated with, among 
other things, written safeguards and procedures to protect subscribers' 
trading information,\1106\ recordkeeping,\1107\ record 
preservation,\1108\ and Form ATS-R.\1109\ Currently Exempted Government 
Securities ATSs and Communication Protocol Systems that trade NMS 
stocks or government securities would incur higher implementation costs 
due to the heightened requirements of filing Form ATS-N compared to 
other Communication Protocol Systems that would file Form ATS.\1110\
---------------------------------------------------------------------------

    \1106\ See the implementation costs associated with Rule 
301(b)(10) in supra Table VIII.8.
    \1107\ See the implementation costs associated with Rule 302 in 
supra Table VIII.8.
    \1108\ See the implementation costs associated with Rule 303 in 
supra Table VIII.8.
    \1109\ See the implementation costs associated with Rule 
301(b)(9) in supra Table VIII.8.
    \1110\ See the implementation costs associated with Rule 
301(b)(2) and Rule 304 in supra Table VIII.8.
---------------------------------------------------------------------------

    Current ATSs and Communication Protocol Systems that trade neither 
NMS stocks nor government securities would incur implementation costs 
associated with re-filing or filing the modernized Form ATS.\1111\ 
Current NMS Stock ATSs would incur implementation costs associated with 
amending revised Form ATS-N.\1112\ Furthermore, all current ATSs, 
Currently Exempted Government Securities ATSs, and Communication 
Protocol Systems would incur implementation costs to re-file or file 
the revised electronic Form ATS-R.\1113\
---------------------------------------------------------------------------

    \1111\ The initial and ongoing implementation costs per entity 
associated with Rule 301(b)(2) are approximately $6,400 and $1,500, 
respectively. See supra notes f and g in Table VIII.8. See also 
supra Section VII.D.1.a for a discussion about the implementation 
costs associated with Rule 301(b)(2).
    \1112\ The implementation cost associated with amending revised 
Form ATS-N is approximately $2,300 per entity. See supra note r in 
Table VII.8. See also supra Section VII.D.3 for a discussion about 
the implementation costs associated with Rule 304.
    \1113\ The implementation costs associated with filing or re-
filing electronic Form ATS-R is approximately $500 per entity. See 
supra note k in Table VII.8. See supra Section VII.D.1.d for a 
discussion about the implementation costs associated with Rule 
301(b)(9).
---------------------------------------------------------------------------

    Government Securities ATSs that meet certain volume thresholds 
would be subject to the Fair Access Rule of Regulation ATS. The 
Commission estimates 3 Currently Exempted Government Securities ATSs, 3 
Current Government Securities ATSs, and 2 Communication Protocol 
Systems that trade government securities would be subject to the Fair 
Access Rule. These entities would incur the implementation costs per 
entity presented in Table VIII.8.
    Significant NMS Stock ATSs and ATSs that trade corporate debt 
securities, municipal securities, or non-NMS stock equity securities 
are subject to the Fair Access Rule. The Commission estimates 2 
Communication Protocol Systems that trade corporate debt securities, 1 
Communication Protocol System that trades municipal securities, and 3 
Communication Protocol Systems that trade non-NMS stock equity 
securities would be subject to the Fair Access Rule. These entities 
would incur the same implementation costs per entity presented in Table 
VIII.8.
    Significant ATSs that trade corporate debt securities or municipal 
securities are subject to Rule 301(b)(6). The Commission estimates that 
2 Communication Protocol Systems that trade corporate debt securities 
would be subject to Rule 301(b)(6) and incur the implementation costs 
per entity presented in Table VIII.8.
    The Commission believes that the 2018 estimates of initial PRA 
burdens for new SCI entities and ongoing PRA burdens for all SCI 
entities under Regulation SCI are largely applicable to Government 
Securities ATSs.\1114\ For the purpose of implementation cost 
estimation, two groups of Government Securities ATSs are considered: 
\1115\ Government Securities ATSs that are existing SCI entities; and 
Government Securities ATSs that are entirely new SCI entities currently 
not subject to Regulation SCI. For the first group (Government 
Securities ATSs that are existing SCI entities), the Commission 
believes that such entities would incur approximately 50 percent of the 
Commission's initial PRA burden estimates for entirely new SCI 
entities. Furthermore, for the second group (Government Securities ATSs 
that are new SCI entities currently not subject to Regulation SCI), the 
Commission believes that such entities would incur the same estimated 
initial PRA burdens as those estimated for new SCI entities in the 2018 
SCI PRA Supporting Statement. The Commission also believes that the 
same ongoing PRA burdens for all SCI entities estimated in the 2018 SCI 
PRA Supporting Statement are applicable to Government Securities ATSs 
in both the first and the second group.
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    \1114\ See 2018 SCI PRA Supporting Statement, supra notes 793, 
794, and 795.
    \1115\ Government Securities ATSs are divided into two groups in 
discussing implementation costs because Government Securities ATSs 
operated by a broker-dealer operator of an NMS Stock ATS that is a 
SCI entity would have lower initial implementation costs. See also 
2018 SCI PRA Supporting Statement, supra note 793.
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    The Commission estimates that 4 Government Securities ATSs would be 
subject to the requirements of Regulation SCI and incur the 
implementation costs per entity presented in Table VIII.8. Among the 
four Government Securities ATSs that satisfy the volume thresholds, the 
Commission believes that one Government Securities ATS (referred as the 
first group above) would incur approximately 50 percent of initial PRA 
burden estimates for an entirely new SCI entity included in the 2018 
SCI PRA Supporting Statement, and three Government Securities ATSs 
(referred as the second group above) would incur the same estimated 
initial PRA burdens as those estimated for new SCI entities included in 
the 2018 SCI PRA Supporting Statement. In addition, the Commission 
believes that all four Government Securities ATSs would incur the same 
ongoing PRA burdens as all other SCI entities included in the 2018 SCI 
PRA Supporting Statement.
    Significant ATSs that trade either NMS stocks or non-NMS stock 
equity securities are subject to the requirements of Regulation SCI. 
The Commission estimates that no Communication Protocol System that 
trades NMS stocks or non-NMS stock equity securities would be subject 
to Regulation SCI. If a significant Communication Protocol System that 
trades NMS stocks or equity securities that are not NMS stocks exists, 
it would incur the same range of implementation costs per entity 
presented in Table VIII.8.
    The estimated implementation costs for Communication Protocol 
Systems and Currently Exempted Government Securities ATSs associated 
with Rule

[[Page 15628]]

301(b)(9) and (10), Rule 302, and Rule 303 would represent a larger 
fraction of revenue for a small (measured in trading volume) ATS 
relative to that for a large ATS. This is because these costs would be 
fixed costs that these ATSs would incur regardless of the amount of 
trading activity that takes place on them. Furthermore, regardless of 
their size and transaction volume, all Government Securities ATSs and 
Communication Protocol Systems that are NMS Stock ATSs would need to 
ensure that their disclosures meet the requirements of Form ATS-N and 
that they correctly file their Form ATS-N under Rule 304. Such 
Government Securities ATSs and Communication Protocol Systems might 
develop internal processes to ensure correct and complete reporting on 
Form ATS-N, which would result in a fixed implementation cost. These 
implementation costs would fall disproportionately on smaller (measured 
in trading volume) such Government Securities ATSs and Communication 
Protocol Systems in terms of implementation costs relative to trading 
volume (as opposed to larger such Government Securities ATSs and 
Communication Protocol Systems in terms of implementation costs 
relative to trading volume), because all Government Securities ATSs and 
Communication Protocol Systems that are NMS Stock ATSs would likely 
incur these fixed implementation costs. However, smaller such 
Government Securities ATSs and Communication Protocol Systems that are 
not operated by multi-service broker-dealer operators and that 
generally do not engage in other brokerage or dealing activities in 
addition to their ATSs would likely incur lower implementation costs 
because certain sections of revised Form ATS-N would not be applicable 
to Government Securities ATSs and Communication Protocol Systems that 
are NMS Stock ATSs.
    The implementation costs associated with Rule 304 would also vary 
across Government Securities ATSs and Communication Protocol Systems 
that are NMS Stock ATSs depending on the complexity of the ATS and the 
services that it offers. For example, some such ATSs might not segment 
subscriber order flow or offer counterparty selection protocols. These 
ATSs would not be required to complete Part III, Items 13 and 14 of 
revised Form ATS-N. As a result, such Government Securities ATSs and 
Communication Protocol Systems that are NMS Stock ATSs would incur 
lower implementation costs because these ATSs would apply lesser burden 
hours to complete their Form ATS-N.
ii. Costs Associated With Broker-Dealer Requirements
    Under the proposed Rule 301(b)(1), Currently Exempted Government 
Securities ATSs that are banks (i.e., bank-operated Currently Exempted 
Government Securities ATSs) and Communication Protocol Systems that are 
non-broker-dealers (i.e., non-broker-dealer-operated Communication 
Protocol Systems) would be subject to broker-dealer registration 
requirements.
    The Commission believes that non-broker-dealer-operated 
Communication Protocol Systems without a broker-dealer affiliate would 
incur additional compliance costs related to registering with the 
Commission as broker-dealers, becoming members of an SRO, such as 
FINRA, and maintaining broker-dealer registration and SRO membership, 
compared to those operated by broker-dealers and those with a broker-
dealer affiliate. The initial costs would include the costs associated 
with filing Form BD and Form ID, FINRA membership application fees, and 
any legal or consulting costs necessary for effectively completing the 
application to be a member of FINRA (e.g., ensuring compliance with 
FINRA rules \1116\ including drafting policies and procedures as may be 
required). The ongoing costs would include the costs associated with 
amending Form BD, and ongoing fees associated with FINRA membership and 
legal work relating to FINRA membership.
---------------------------------------------------------------------------

    \1116\ See supra Section II.D.2 for a discussion about FINRA 
rules.
---------------------------------------------------------------------------

    The Commission recognizes that the costs associated with obtaining 
and maintaining FINRA membership would vary significantly depending on 
entity characteristics, activities, and the degree of the firm's 
reliance on outside legal or consulting for effectively completing the 
application process and maintaining FINRA membership. The initial 
registration costs for FINRA membership \1117\ would depend on, among 
other things, the number of associated persons being registered. The 
ongoing costs to remain a FINRA member would vary based on the scope of 
brokerage activities, revenue,\1118\ size (i.e., the number of 
registered persons and the number of branch offices), and trading 
volume.\1119\ Thus, entities with a smaller number of registered 
persons, fewer brokerage activities, smaller trading volume, and lower 
revenue would face lower costs.
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    \1117\ See https://www.finra.org/registration-exams-ce/classic-crd/fee-schedule#examfees for the schedule of FINRA registration 
fees.
    \1118\ FINRA imposes a Gross Income Assessment as follows: 
$1,200 on a Member Firm's annual gross revenue up to $1 million; a 
charge of 0.1215% on a Member Firm's annual gross revenue between $1 
million and $25 million; a charge of 0.2599% on a Member Firm's 
annual gross revenue between $25 million and $50 million; a charge 
of 0.0518% on a Member Firm's annual gross revenue between $50 
million and $100 million; a charge of 0.0365% on a Member Firm's 
annual gross revenue between $100 million and $5 billion; a charge 
of 0.0397% on a Member Firm's annual gross revenue between $5 and 
$25 billion; and a charge of 0.0855% on a Member Firm's annual gross 
revenue greater than $25 billion. When a firm's annual gross revenue 
exceeds $25 million, the maximum of current year's revenue and 
average of the last three years' revenue is used as the basis for 
the income assessment. See also https://www.finra.org/rules-guidance/notices/09-68.
    \1119\ Fees for reporting trades to FINRA may depend on the 
types of security, the size of trade, and the types of message 
(e.g., cancellation message, correction message). For example, fees 
for reporting trades to FINRA TRACE as follows: $0.475/trade for 
trade size up to and including $200,000 par value; $0.000002375 
times the par value of the transaction (i.e., $0.002375/$1,000) for 
trade size over $200,000 and up to and including $999,999.99 par 
value; $2.375/trade for trade size of $1,000,000 par value or more; 
$1.50/trade for all transactions in securitized products that are 
Agency Pass-Through Mortgage-Backed Securities traded to be 
announced (``TBA'') or SBA-Backed ABS traded TBA (each ``TBA 
transaction''); $1.50/trade for cancellation or correction; and $3/
trade for late trades. See also https://www.finra.org/rules-guidance/rulebooks/finra-rules/7730.
---------------------------------------------------------------------------

    As outlined in Table VIII.8, the Commission estimates an initial 
cost of approximately $317,000 to register as a broker-dealer with the 
Commission and become a member of FINRA.\1120\ Additionally, the 
Commission estimates an ongoing annual cost of approximately $58,000 to 
maintain the broker-dealer registration and FINRA membership.\1121\ The 
Commission preliminarily believes that these costs related to broker-
dealer registration and FINRA membership are relevant to non-broker-
dealer-operated Communication Protocol Systems without a broker-dealer 
affiliate. However, these cost estimates are uncertain because the

[[Page 15629]]

Commission does not have information on the estimated 6 non-broker-
dealer-operated Communication Protocol Systems without a broker-dealer 
affiliate, such as the number of associated persons of the broker 
entity and their licensing requirements, the scope of the proposed 
brokerage activities, and the degree of reliance on outside legal or 
consulting expertise necessary for effectively completing the 
application to be a member of FINRA. Furthermore, the Commission is 
unable to provide cost estimates related to trade reporting obligations 
\1122\ because these costs would depend on various factors, such as the 
number of trades and the costs of updating systems for trade reporting 
requirements, for which the Commission does not have information.
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    \1120\ See Exchange Act Release No. 33-9974 (October 30, 2015), 
80 FR 71388, 71509 (November 16, 2015) (``Regulation Crowdfunding 
Adopting Release''). These estimates are adjusted for an inflation 
rate of 15.33 percent based on the Bureau of Labor Statistics data 
on CPI-U between October 2015 and September 2021. In addition to the 
initial costs to become a member of FINRA, this cost includes the 
initial implementation costs of $950 for filing Form BD and Form ID 
tabulated in Table VIII.8. The Commission recognizes that the cost 
of registering and becoming a member of a national securities 
association varies significantly among brokers, depending on facts 
and circumstances. The Commission estimates the range of cost to be 
between $57,500 and $576,500, and thus, chose the average amount of 
$317,000 for purposes of this discussion.
    \1121\ See id. See also Regulation Crowdfunding Adopting Release 
at 71509. In addition to the ongoing annual costs to maintain a 
membership with FINRA, this cost includes the ongoing annual 
implementation costs of $300 to amend Form BD tabulated in Table 
VIII.8.
    \1122\ See supra note 1119 for fees for reporting trades to 
FINRA. The Commission estimates that 2 non-broker-dealer-operated 
Communication Protocol Systems without a broker-dealer affiliate 
trade restricted securities, which may be subject to FINRA 
transaction reporting requirements. Thus, with respect to those 
restricted securities, these Communication Protocol Systems may 
incur costs associated with reporting trades to FINRA.
---------------------------------------------------------------------------

    In addition to the costs associated with broker-dealer registration 
and FINRA membership, a non-broker-dealer-operated Communication 
Protocol System without a broker-dealer affiliate could incur costs 
related to restructuring its business and incorporating itself or a 
separate entity (i.e., an affiliate) to be registered as a broker-
dealer. Such restructuring costs would include any costs that may be 
associated with making necessary changes to its business practices, 
fees for consulting and legal services, fees for incorporation and the 
amendment of its certificate of incorporation and its bylaws, and tax 
consequences. Fees for incorporation and amending the certificate of 
incorporation and its bylaws may be minimal. For example, fees for 
incorporation and amending the certificate of incorporation and its 
bylaws in the state of Delaware would range approximately between $89 
and $200 depending on the entity type of incorporation.\1123\ However, 
certain restructuring costs, such as costs associated with making 
changes to business practices to comply with the broker-dealer 
registration requirements, could be significant. The Commission 
estimates that up to 6 non-broker-dealer-operated Communication 
Protocol Systems without a broker-dealer affiliate could be required to 
restructure their business in order to comply with the broker-dealer 
registration requirements. The Commission is unable to provide 
estimates on certain restructuring related costs for a non-broker-
dealer-operated Communication Protocol System because the Commission 
does not have information regarding the scope of its restructuring, 
such as the need and the extent of required changes in current business 
practices, the need and the extent of consulting services, and its 
choice of entity type for incorporation.
---------------------------------------------------------------------------

    \1123\ See fee schedules for incorporation and amending the 
certificate of incorporation and its bylaws in the state of Delaware 
at: https://corpfiles.delaware.gov/Aug09feesch.pdf.
---------------------------------------------------------------------------

    Upon becoming broker-dealers, operators of these Communication 
Protocol Systems would be subject to certain broker-dealer requirements 
with respect to maintaining net capital, reporting, and 
recordkeeping.\1124\ The compliance costs associated with maintaining 
net capital, reporting, and recordkeeping would depend on the business 
structure of a broker-dealer (i.e., the capital structure of a broker-
dealer and the scope of a broker-dealer's activities). For example, the 
costs would vary significantly depending on the types of securities a 
broker-dealer holds, the level of net capital a broker-dealer 
maintains, and whether a broker-dealer carries customer accounts, 
carries for other broker-dealers, is a registered investment adviser, 
is affiliated with an investment adviser, or transacts in principal 
capacity. However, to the extent that an operator of Communication 
Protocol System limits its activities to trading operations and does 
not expand into these other business activities, the operator would 
incur minimal costs with respect to net capital, reporting, and 
recordkeeping requirements upon registering as a broker-dealer. The 
Commission is unable to estimate the costs associated with these 
broker-dealer requirements because the Commission does not have 
information about whether or how the current business structures of the 
estimated 6 Communication Protocol Systems that are not operated by a 
registered broker-dealer nor how a broker-dealer affiliate might change 
upon registering as a broker-dealer.
---------------------------------------------------------------------------

    \1124\ Registered Broker-dealers would be subject to 
requirements under the rules, such as 17 CFR 240.15c3-1, 204.17a-1, 
204.17a-3, 240.17a-4, and 240.17a-5 (Rule 15c3-1, Rule 17a-1, Rule 
17a-3, Rule 17a-4, and Rule 17a-5).
---------------------------------------------------------------------------

    The Commission believes that a bank-operated Currently Exempted 
Government Securities ATS or a non-broker-dealer-operated Communication 
Protocol System would not incur compliance costs associated with 
registering as a broker-dealer and becoming a member of an SRO (e.g., 
FINRA) if it has a broker-dealer affiliate. It is the Commission's 
understanding that ATSs that are banks often are operated by bank 
affiliates that are themselves registered broker-dealers, rather than 
by the banks themselves.\1125\ A bank-operated Currently Exempted 
Government Securities ATS might adopt a similar registered affiliate 
structure for its government securities trading operations. For a non-
broker-dealer-operated Communication Protocol System that is affiliated 
with an existing broker-dealer, it would be more cost-effective for the 
Communication Protocol System to move its operations to an existing 
broker-dealer affiliate rather than restructure itself to become a 
broker-dealer or create a new broker-dealer entity to comply with the 
broker-dealer registration requirements. Thus, the Commission expects 
that such non-broker-dealer-operated Communication Protocol Systems 
would choose the more cost-effective way of moving its trading 
operations to its registered broker-dealer affiliate.
---------------------------------------------------------------------------

    \1125\ See supra Section III.B.2 for a discussion about ATSs 
that are banks.
---------------------------------------------------------------------------

    A broker-dealer affiliate that is adding ATS or Communication 
Protocol System operations would incur additional ongoing costs 
associated with maintaining FINRA membership if adding trading 
operations increases revenue, the number of registered persons or 
branch offices, trading volume, or expands the scope of brokerage 
activities.\1126\ Furthermore, a broker-dealer affiliate that is adding 
ATS or Communication Protocol System operations could incur additional 
costs associated with maintaining adequate net capital level, 
reporting, and recordkeeping depending on the changes in business 
structure of the broker-dealer. For the reasons discussed above, the 
Commission is unable to provide estimates on these additional costs for 
the estimated 1 bank-operated Currently Exempted Government Securities 
ATS and 2 non-broker-operated Communication Protocol Systems that are 
affiliated with an existing broker-dealer.
---------------------------------------------------------------------------

    \1126\ For an entity that may adopt a registered affiliate 
structure, it is possible that it may have to file a Continuing 
Membership Application with FINRA noticing material changes to 
business operations resulting from adding ATS operations. See (under 
material change) https://www.finra.org/registration-exams-ce/classic-crd/fee-schedule regarding the fees for the Continuing 
Membership Application with FINRA.
---------------------------------------------------------------------------

iii. Costs Associated With Ineffectiveness Declaration
    In addition to the implementation costs associated with filing and 
amending Form ATS-N, the Commission preliminarily believes that the 
proposed ability for the Commission to declare a Form ATS-N or Form 
ATS-

[[Page 15630]]

N amendment ineffective could result in direct costs for Government 
Securities ATSs and Communication Protocol Systems that are NMS Stock 
ATSs.\1127\ If the Commission declares a Government Securities ATS's or 
an NMS Stock ATS's Form ATS-N or Form ATS-N amendment ineffective, then 
the ATS might have to cease operations, roll back a change in 
operations, or delay the start of operations until it is able to 
address the deficiencies in the previously filed form.
---------------------------------------------------------------------------

    \1127\ See Rule 304(a)(1)(iv)(B).
---------------------------------------------------------------------------

    An ineffective Form ATS-N could also impose indirect costs on the 
overall market for government securities and NMS stock trading services 
resulting from a potential reduction in competition or the removal of a 
sole provider of a niche service within the market.\1128\
---------------------------------------------------------------------------

    \1128\ See infra Section VIII.C.3.a.i.d for a discussion about 
the impact of a declaration of ineffectiveness on competition in the 
market for government securities and repo trading services.
---------------------------------------------------------------------------

    However, the Commission believes that there would not be a 
substantial burden imposed in connection with resubmitting Form ATS-N 
or a Form ATS-N amendment or from an ineffective declaration in 
general.\1129\ Because Government Securities ATSs, Communication 
Protocol Systems that are NMS Stock ATSs, and market participants would 
not incur these costs unless the Commission declares a Form ATS-N or 
amendment ineffective, such Government Securities ATSs and 
Communication Protocol Systems would be incentivized to comply with the 
requirements of Form ATS-N, as well as Federal securities laws, 
including the other requirements of Regulation ATS, to avoid an 
ineffectiveness declaration. These incentives would encourage such 
Government Securities ATSs and Communication Protocol Systems to 
initially submit a more accurate and complete Form ATS-N and amendments 
thereto, which would reduce the likelihood that they are declared 
ineffective.
---------------------------------------------------------------------------

    \1129\ One commenter on the 2020 Proposal stated that the use of 
the same initial filing, amendment review, and effectiveness process 
for the previously proposed Form ATS-G as is currently in place for 
the Form ATS-N should reduce compliance burdens for market 
participants and reduce potential market confusion. See Tradeweb 
Letter at 10.
---------------------------------------------------------------------------

    Additionally, Current Government Securities ATSs and Communication 
Protocol Systems that are NMS Stock ATSs would not have to bear the 
costs of immediately ceasing operations under the proposal without 
having an effective Form ATS-N on file with the Commission because 
Current Government Securities ATSs would be able to continue operations 
pursuant to a previously filed initial operation report on Form ATS and 
Currently Exempted Government Securities ATSs and Communication 
Protocol Systems that trade NMS stocks would also be able to continue 
operations pending the Commission's review of their initial Form ATS-N. 
However, if after notice and opportunity for hearing, the Commission 
declares an initial Form ATS-N filed by a Current Government Securities 
ATS, Currently Exempted Government Securities ATS, or Communication 
Protocol System ineffective, the ATS would be required to cease 
operations until an initial Form ATS-N is effective.
    One commenter stated that the Commission's imposition of an 
``effectiveness'' regime to previously proposed Form ATS-G under the 
2020 proposal is an unnecessary administrative burden on Government 
Securities ATSs, and will be particularly burdensome on those 
Government Securities ATSs with limited volumes in government 
securities.\1130\ The implementation costs associated with the 
requirements of Form ATS-N, including the costs for developing internal 
processes to ensure correct and complete reporting on Form ATS-N to 
avoid an ineffectiveness declaration, would be fixed costs, and thus, 
would represent a larger fraction of revenue for a small (measured in 
trading volume) ATS relative to that for a large ATS. However, the 
Commission preliminarily believes that this adverse effect on small 
ATSs would be mitigated to some extent, because, as discussed in 
Section VIII.C.2.a.i, the Commission believes that certain smaller 
Government Securities ATSs and Communication Protocol Systems that 
trade NMS stocks would likely incur lower implementation costs.\1131\
---------------------------------------------------------------------------

    \1130\ See ICE Bonds Letter I at 5.
    \1131\ Smaller Government Securities ATSs and Communication 
Protocol Systems that trade NMS stocks that are not operated by 
multi-service broker-dealer operators and that generally do not 
engage in other brokerage or dealing activities in addition to their 
ATSs would likely incur lower implementation costs because certain 
sections of revised Form ATS-N would not be applicable to these 
ATSs. Furthermore, smaller such Government Securities ATSs and 
Communication Protocol Systems that operate simpler systems would 
likely incur lower implementation costs associated with the 
requirements of Form ATS-N because certain sections of revised Form 
ATS-N would not be applicable to these ATSs.
---------------------------------------------------------------------------

iv. Costs Associated With the Fair Access Rule
    The Commission preliminarily believes that applying the Fair Access 
Rule could impose compliance costs (non-PRA based) on Government 
Securities ATSs, Communication Protocol Systems that trade NMS stocks, 
non-NMS stock equity securities, corporate debt securities, or 
municipal securities, and passive systems that trade NMS stocks. Under 
the proposal, Government Securities ATSs, Communication Protocol 
Systems that trade NMS stocks, non-NMS stock equity securities, 
corporate debt securities, or municipal securities, and passive systems 
that trade NMS stocks that meet the specified aggregate volume 
thresholds could no longer treat subscribers differently with respect 
to access to the services of the ATS without a reasonable basis. For 
example, an ATS could not offer one class of subscriber a service 
(e.g., an order interaction procedure, order type, trading protocol, or 
connectivity method) without offering the service to all subscribers 
unless the ATS had a reasonable basis for the differential treatment. 
In addition, an ATS could not charge fees that unreasonably prohibit 
certain market participants from accessing the services of the 
ATS.\1132\ If ATSs must change fee structures, order interaction 
procedures, trading protocols, or access provisions and adapt their 
operating model due to the Fair Access Rule, those ATSs would incur 
costs related to changing business operations.
---------------------------------------------------------------------------

    \1132\ See supra Section V.A.3 for a discussion about 
reasonableness and fees under the proposed amendments to the Fair 
Access Rule.
---------------------------------------------------------------------------

    The Commission, however, is unable to quantify the potential 
compliance costs discussed above. In particular, the Commission lacks 
data on the extent to which Communication Protocol Systems that trade 
NMS stocks, non-NMS stock equity securities, corporate debt securities, 
or municipal securities, passive systems that trade NMS stocks, and 
Government Securities ATSs that meet the aggregate volume thresholds 
currently grant access to the ATS services to all subscribers on the 
same terms, and on the specific types of services and subscribers in 
question. In addition, the Commission lacks similar data for other 
trading venues in the government securities, corporate debt securities, 
and municipal securities market, which might offer differential access 
to services. Thus, the Commission is not able to estimate the costs 
associated with changing fee structures and adapting operating models.
    Significant ATSs that trade NMS stocks, non-NMS stock equity 
securities, corporate debt securities, or municipal securities are 
subject to the Fair Access

[[Page 15631]]

Rule. The proposed amendments to aggregate volume across affiliated 
ATSs in calculating certain volume thresholds could increase the number 
of smaller affiliate ATSs that would be subject to the Fair Access 
Rule. Smaller affiliate ATSs that would not have met the current volume 
thresholds individually would be subject to the Fair Access Rule if 
they meet the proposed aggregate volume thresholds. As discussed above, 
if ATSs must adapt their operating models as a result of being subject 
to the Fair Access Rule, those ATSs would incur costs related to 
changing business operations. The Commission estimates that no current 
smaller affiliate ATS that trades NMS stocks, non-NMS stock equity 
securities, corporate debt securities, or municipal securities and does 
not already currently meet the Fair Access volume thresholds would meet 
the volume thresholds \1133\ and be subject to the Fair Access Rule if 
volume is aggregated across affiliated ATSs.\1134\
---------------------------------------------------------------------------

    \1133\ See supra note 1079 for details on the Fair Access 
thresholds. See supra note 310 for the application of the Fair 
Access Rule on the trading of NMS stocks, non-NMS stock equity 
securities, municipal securities, and corporate debt securities. See 
also supra Section V.A.2 for a discussion about the aggregation of 
volume threshold.
    \1134\ See supra note 1085.
---------------------------------------------------------------------------

v. Costs Associated With Rule 301(b)(6)
    In addition to the implementation costs associated with reporting 
outages and recordkeeping under the proposed Rule 301(b)(6), the 
Commission preliminarily believes that significant Communication 
Protocol Systems that trade corporate debt securities or municipal 
securities could incur compliance costs (non-PRA based) to ensure 
adequate capacity, integrity, and security with respect to those 
systems that support order entry, order routing, order execution, 
transaction reporting, and trade comparison.\1135\ To the extent that 
these significant Communication Protocol Systems currently do not meet 
certain standards under the proposed Rule 301(b)(6), they would incur 
compliance costs associated with, among other things, capacity 
planning, and conducting periodic capacity stress tests of critical 
systems that process transactions.\1136\ For example, a Communication 
Protocol System would incur the costs associated with upgrading systems 
(e.g., investing in computer hardware and software) if its critical 
systems that process transactions do not have adequate capacity. In 
addition, significant Communication Protocol Systems would incur costs 
associated with the independent review of their systems on an annual 
basis.
---------------------------------------------------------------------------

    \1135\ The Commission estimates that 2 Communication Protocol 
Systems that trade corporate debt securities or municipal securities 
would exceed the thresholds under the proposed Rule 301(b)(6). See 
supra Section VIII.C.2.a.i.
    \1136\ See supra note 157.
---------------------------------------------------------------------------

    The Commission believes that the compliance costs for one of these 
significant Communication Protocol Systems would depend on the extent 
to which its existing policies with respect to maintaining adequate 
capacity, integrity, and security of systems that support order entry, 
order routing, order execution, transaction reporting, and trade 
comparison already comply with the standards under the proposed Rule 
301(b)(6). The Commission is unable to estimate these compliance costs 
because it lacks information on the existing policies for maintaining 
adequate capacity, integrity, and security of such systems for 
significant Communication Protocol Systems that trade corporate debt 
securities or municipal securities.\1137\ However, the Commission 
believes that compliance costs associated with Rule 301(b)(6) would be 
significantly less than those of Regulation SCI because the scope and 
requirements of Rule 301(b)(6) would be narrower than those of 
Regulation SCI.\1138\
---------------------------------------------------------------------------

    \1137\ See supra note 888 (discussing commenter statements on 
the extent to which fixed incomes systems already comply with the 
provisions of Rule 301(b)(6)).
    \1138\ For example, Rule 301(b)(6) would apply to a narrower set 
of systems, as compared to Regulation SCI: Rule 301(b)(6) of 
Regulation ATS applies only to systems that support order entry, 
order routing, order execution, transaction reporting, and trade 
comparison, which is narrower than the definition of SCI system. 
Furthermore, Rule 301(b)(6) would not require significant 
Communication Protocol Systems that trade corporate debt securities 
or municipal securities to maintain a geographically diverse backup 
facility.
---------------------------------------------------------------------------

vi. Costs Associated With Regulation SCI
    Government Securities ATSs that meet certain volume thresholds 
would incur compliance costs (non-PRA based costs) as SCI 
entities.\1139\ The Regulation SCI Adopting Release in 2014 estimated 
that an SCI entity would incur an initial cost of between approximately 
$320,000 and $2.4 million. Additionally, an SCI entity would incur an 
ongoing annual cost of between approximately $214,000 and $1.6 million. 
The Commission believes that these compliance costs are largely 
applicable to Government Securities ATSs.
---------------------------------------------------------------------------

    \1139\ While NMS Stock ATSs that meet certain volume thresholds 
are also subject to Regulation SCI, the Commission estimates that no 
Communication Protocol Systems that trade NMS stocks would be 
subject to Regulation SCI. The Commission preliminarily believes 
that a Communication Protocol System that trades NMS stocks would 
incur the same implementation costs and other compliance costs (non-
PRA based), including ATS's participant costs, in the same range as 
those presented in Table VIII.8.
---------------------------------------------------------------------------

    One commenter on the 2020 Proposal stated that Regulation SCI 
imposes a specific manner in which SCI Entities must organize their 
asset inventories, and that redesigning and implementing new asset 
inventories to comply with Regulation SCI would require significant 
investment and would impose material upfront compliance costs that may 
divert resources rather than encourage meaningful investment.\1140\ 
Although Regulation SCI would require SCI Entities to identify systems 
based on their functionality, as discussed above, the Commission 
believes that Regulation SCI is designed to provide flexibility in 
applying industry standards to establish policies and procedures.\1141\ 
This flexibility may not require SCI Entities to redesign their systems 
to comply with Regulation SCI. However, to the extent that an SCI 
Entity would be required to redesign its systems, the Commission 
believes that the costs would be included in the compliance costs 
associated with Regulation SCI discussed above.\1142\
---------------------------------------------------------------------------

    \1140\ See BrokerTec Letter at 7.
    \1141\ See supra note 374 and accompanying text.
    \1142\ See supra Table VIII.8 for the compliance costs 
associated with Regulation SCI.
---------------------------------------------------------------------------

    However, the Commission is uncertain about the actual level of 
costs Government Securities ATSs would incur because these costs might 
differ from the types of SCI entities considered in the Regulation SCI 
Adopting Release, which did not include fixed income ATSs.\1143\ The 
Commission is also uncertain about the actual level of costs Government 
Securities ATSs would incur because the actual costs might differ based 
on various factors, such as complexity of SCI entities' systems and the 
degree to which SCI entities employ third-party systems. The Commission 
believes that Government Securities ATSs with relatively simpler 
systems would incur lower compliance costs compared to those with more 
complex systems.\1144\ Also, any SCI systems operated by a third-party 
on behalf of an SCI entity would be subject to the requirements of 
Regulation SCI. The Commission believes that Government Securities ATSs 
with higher dependency on SCI systems operated by

[[Page 15632]]

third-party vendors might incur higher compliance costs compared to 
those with lower dependency on third-party systems.\1145\
---------------------------------------------------------------------------

    \1143\ See Regulation SCI Adopting Release, supra note 3. In the 
Regulation SCI Adopting Release, fixed income ATSs are excluded from 
the regulation.
    \1144\ See id. The Regulation SCI Adopting Release explains that 
compliance costs would depend on the complexity of SCI entities' 
systems and they would be higher for SCI entities with more complex 
systems.
    \1145\ See id. The Regulation SCI Adopting Release discusses 
that compliance costs could in part depend on the extent to which an 
SCI entity uses third-party systems because ensuring compliance of 
systems operated by a third-party with Regulation SCI may be more 
costly than ensuring compliance of internal systems with Regulation 
SCI.
---------------------------------------------------------------------------

    In addition, the Commission believes that some Government 
Securities ATSs' participants required to participate in the testing of 
business continuity and disaster recovery plans would incur Regulation 
SCI-related connectivity costs of approximately $10,000 apiece.\1146\ 
If larger members or participants of SCI Government Securities ATSs 
already maintain connections to backup facilities including for testing 
purposes, the compliance costs associated with the business continuity 
and disaster recovery plans testing requirements in Rule 1004 for those 
larger member or participants might be limited.
---------------------------------------------------------------------------

    \1146\ See id. The Regulation SCI Adopting Release estimated 
connectivity costs as part of business continuity and disaster 
recovery plans to be approximately $10,000 per SCI entity member or 
participant.
---------------------------------------------------------------------------

    The Commission believes that the costs to comply with Regulation 
SCI discussed above would also fall on third-party vendors employed by 
Government Securities ATSs to provide services used in their SCI 
systems. The costs for third-party vendors imposed by Regulation SCI 
would depend on the extent to which Government Securities ATSs use 
third-party systems that fall under the definition of SCI systems and 
the portion of third-party vendors operating SCI systems on behalf of 
large (i.e., over the volume threshold) Government Securities ATSs that 
already comply with the requirements of Regulation SCI. It is possible 
that some third-party vendors operating SCI systems on behalf of large 
Government Securities ATSs already comply with the requirements of 
Regulation SCI because they also operate the SCI systems for other SCI 
(e.g., SCI ATSs, SCI SROs). The additional compliance costs from the 
proposed amendments of Regulation SCI for these third-party vendors 
would be minimal. However, at this time, it is difficult to estimate 
the cost for third-party vendors because the Commission does not know 
the extent to which Government Securities ATSs use third-party systems 
that fall under the definition of SCI systems.
b. Indirect Costs
    The Commission believes that the proposed amendments could result 
in indirect costs for market participants and certain Government 
Securities ATSs and Communication Protocol Systems.
    The public disclosure requirements of Form ATS-N under the proposal 
could generate indirect costs for some subscribers by causing 
Government Securities ATSs and Communication Protocol Systems that are 
NMS Stock ATSs to stop sharing information that they might currently 
offer to only some subscribers. Form ATS-N would require Government 
Securities ATSs and NMS Stock ATSs to publicly disclose any platform-
wide order execution metrics that they share with any subscriber. To 
avoid publicly disclosing this information, an ATS might stop sharing 
the information with subscribers. The trading costs of subscribers that 
currently use this information to help make trading decisions would 
increase if the information is no longer available to them. The risk of 
ATSs disclosing less information than they currently do depends on 
several factors, such as the commercial purpose for releasing such 
information. If the subscribers who receive such information demand the 
information as a condition of subscribing, ATSs would have a commercial 
incentive to continue disclosing it. Thus, the Commission believes that 
this risk might be low.
    The Commission believes that the public disclosure of Form ATS-N 
would generate indirect costs, in the form of transfers, for some 
subscribers of Government Securities ATSs or Communication Protocol 
Systems that are NMS Stock ATSs who might currently have more 
information regarding some ATS features, such as order priority and 
matching procedures, than other subscribers. The public disclosure of 
these features would reduce informed subscribers' information advantage 
over other subscribers on such Government Securities ATSs or 
Communication Protocol Systems and increase their trading costs. In 
this regard, the Commission recognizes that this effect would be a 
transfer to those subscribers who would receive the proposed 
information, from those subscribers currently exclusively receive such 
information.
    Some Government Securities ATSs and Communication Protocol Systems 
that are NMS Stock ATSs would experience indirect costs from the public 
disclosure of Form ATS-N to the extent that this form would reveal 
information to competitors. If a Government Securities ATS or NMS Stock 
ATS in part relies on certain operational characteristics (e.g., order 
types, trading functionalities) to attract customer order flow and 
generate trading revenues, it is possible that the public disclosure of 
these characteristics in Form ATS-N would make it easier for other 
trading venues to adopt the operational characteristics, which would 
lower trading volume and reduce revenue of the disclosing ATS. Such 
costs to the disclosing ATS would constitute transfers to competing 
ATSs rather than a net cost to the market.
    That said, the Commission believes that the risk of these transfers 
is low because it is not likely the responsive information to the 
revised Form ATS-N would include detailed enough information regarding 
operational facets such that the public disclosure of the information 
would allow another ATS to replicate the functionality to the extent it 
would adversely affect the competitive position of the disclosing ATS 
in the market.\1147\
---------------------------------------------------------------------------

    \1147\ See supra note 467 and accompanying text.
---------------------------------------------------------------------------

    The Commission believes that Government Securities ATSs and 
Communication Protocol Systems that trade NMS stocks, non-NMS stock 
equity securities, corporate debt securities, or municipal securities, 
and passive systems that trade NMS stocks could indirectly experience 
costs in the form of lost revenue if they meet or exceed the Fair 
Access Rule thresholds and need to alter their business model to comply 
with the requirements of the Fair Access Rule. If they need to alter 
their terms of service or operations it may lead some subscribers that 
currently trade on the venue and benefit from the existing terms of 
service or operations to reduce the order flow they route to the venue 
or even leave the venue entirely, which could reduce the ATS's revenue. 
However, this revenue loss may be mitigated if the ATS is also able to 
attract new subscribers or additional order flow that was previously 
not able to access the venue.\1148\ The Commission is not able to 
estimate the loss of revenues that Government Securities ATSs, 
Communication Protocol Systems that trade NMS stocks, and passive 
systems that meet the aggregate volume thresholds could incur as a 
result of applying the Fair Access Rule, because the venues may alter 
their business operations in response to being subject

[[Page 15633]]

to the requirements of the Fair Access Rule and how the venue's 
existing subscribers may consequently alter their order flow or 
subscription to the ATS.
---------------------------------------------------------------------------

    \1148\ The Commission believes that, even if, an ATS has to 
change its business operations as a result of exceeding the Fair 
Access Rule threshold and is able to attract additional order flow 
or subscribers, the ATS's profits will likely be lower. If an ATS 
could have increased its profits by altering its business model 
before it was subject to the Fair Access Requirements, it would 
presumably have done so.
---------------------------------------------------------------------------

    The Commission believes that market participants could incur 
indirect costs related to Government Securities ATSs, Communication 
Protocol Systems that trade NMS stocks, non-NMS stock equity 
securities, corporate debt securities, or municipal securities, and 
passive systems that trade NMS stocks being subject to the Fair Access 
Rule. As discussed in Section VIII.C.1.b, applying the Fair Access Rule 
could lower trading costs for market participants who are able to gain 
access to a trading venue from which they were previously excluded. 
This could impose costs on existing subscribers who may currently 
benefit from limiting access to the trading venue, though the 
Commission recognizes these costs would amount to transfers. To the 
extent this occurs, it is possible that some existing subscribers may 
redirect some or all of their trading interest to another trading venue 
that is not subject to the Fair Access Rule in order to preserve some 
of the benefits they may receive from a trading venue limiting access. 
These existing subscribers may incur search costs to find other venues 
to trade on as well as costs associated with administrative and 
operational procedures (e.g., means of access, connectivity, order 
entry) to trade on a new trading venue. To the extent that existing 
subscribers shift their trading from the trading venue that is subject 
to the Fair Access Rule to a trading venue that is not subject to the 
rule, the benefits marker participants receive from gaining access to 
trading venues subject to the Fair Access Rule could be reduced.
    Furthermore, compared to larger and more established ATSs, it is 
possible that younger ATSs rely more on providing catered services, 
including more advantageous access, to specific clients or a clientele, 
in order to grow their businesses. If being subject to the Fair Access 
Rule prohibits these ATSs from doing this, these ATSs could restrict 
trading on their systems when they are close to meeting the volume 
thresholds under the Fair Access Rule. This may not result in a 
significant increase in trading costs for market participants, because 
the order flow that was being sent to those ATSs would likely be 
absorbed and redistributed amongst other ATSs or non-ATS venues. 
However, if an ATS that is the sole provider of a niche service limits 
the trading in certain securities to avoid being subject to the Fair 
Access Rule, it could be more difficult for some market participants to 
find an alternative trading venue for that niche service, which would 
result in a larger increase in trading costs.
    Similarly, the proposed amendments to apply certain aggregate 
volume thresholds to the Fair Access Rule in the markets for government 
securities, corporate debt and municipal securities, and equity 
securities could also cause market participants to incur similar 
indirect costs. If the aggregate volume of ATSs operated by a common 
broker-dealer or operated by affiliated broker-dealers approaches the 
Fair Access volume thresholds, then the operators could restrict 
trading in one or more securities on their systems in order to avoid 
being subject to the requirements of the Fair Access Rule. However, 
ATSs in the markets for government securities, corporate debt 
securities, and municipal securities may be unlikely to restrict 
trading in individual securities on their systems because the 
aggregated volume threshold is applied categorically rather than to 
individual securities.
    Market participants could also incur indirect costs from the 
proposed amendments to apply certain aggregate volume thresholds to the 
Fair Access Rule if it causes a broker-dealer or affiliated broker-
dealers that operate multiple ATSs to shut down one or more their 
smaller ATSs in order to avoid triggering the Fair Access threshold. 
This could cause market participants that subscribed to one of the 
shutdown platforms to incur search costs to find another venue to trade 
on.
    The Commission believes that market participants could incur 
indirect costs related to applying Regulation SCI to Government 
Securities ATSs and Communication Protocol Systems in equity securities 
and with applying Rule 301(b)(6) to Communication Protocol Systems in 
the market for corporate debt securities or municipal securities. If a 
Government Securities ATS or Communication Protocol System that trades 
NMS stocks is close to satisfying the volume thresholds of Regulation 
SCI or Rule 301(b)(6), it could limit the trading in certain securities 
on its systems to stay below the volume thresholds in order to avoid 
being subject to Regulation SCI or Rule 301(b)(6). If this occurs for a 
Government Securities ATS or Communication Protocol System that is the 
sole provider of a niche service, as discussed above, some market 
participants would incur higher trading costs.
    Additionally, in order to stay below the volume thresholds under 
Regulation SCI or Rule 301(b)(6), an ATS could break itself up into 
smaller ATSs. If this results in its subscribers changing their 
administrative and operational procedures (e.g., means of access, 
connectivity, order entry), the subscribers would incur costs 
associated with making those administrative and operational changes to 
utilize the ATS, or otherwise incur search costs to find another venue 
to trade.
3. Efficiency, Competition, and Capital Formation
    The Commission has considered the effects of the proposed 
amendments on efficiency, competition, and capital formation, and 
discussed these effects below.
a. Competition
    The Commission preliminarily believes that the proposed amendments 
to Regulation ATS and Regulation SCI would affect competition in the 
market for trading services.\1149\
---------------------------------------------------------------------------

    \1149\ See supra Section VIII.C.1 for a discussion about 
benefits from the requirements of Regulation ATS and Regulation SCI 
and Section VIII.C.2 for a discussion about costs of the 
requirements of Regulation ATS and Regulation SCI.
---------------------------------------------------------------------------

i. Regulation ATS
    The Commission believes that the proposed amendments to Rule 3b-16 
and Regulation ATS would promote competition by requiring current ATSs 
and Communication Protocol Systems to operate on a more equal basis. 
Additionally, the Commission believes that the regulatory requirements 
and compliance costs associated with the proposed amendments to Rule 
3b-16 and Regulation ATS could act as a deterrent or a barrier to entry 
for potential ATSs or cause some smaller existing trading venues to 
exit the market for trading services.\1150\ However, based on the 
estimated costs in Section VIII.C.2.a.i above, the burdens imposed by 
these regulatory requirements or compliance costs may not be large 
enough for these effects to be significant. Even if a smaller trading 
venue ceased operating, the Commission believes it may not have a 
significant adverse effect on overall competition among trading venues, 
because the market for trading services is competitive and the trading 
volume from the venue would likely be

[[Page 15634]]

absorbed and redistributed amongst other ATSs or non-ATS venues.\1151\
---------------------------------------------------------------------------

    \1150\ The expected compliance costs of Regulation SCI could act 
as a barrier to entry for new entrants who expect to eventually 
become SCI ATSs. If the expected compliance costs reduce the number 
of potential new entrants, this would reduce the potential 
competition from new entrants. However, these effects may not be 
significant because the entry decision at the margin, when the venue 
is small, may not be significantly influenced by what would happen 
if the venue later became large enough and met the requirements of 
Regulation SCI.
    \1151\ The competitive effects would vary based on the types of 
securities and the role that ATSs and Communication Protocol Systems 
play in each securities market. See supra Sections VIII.B.2.d, 
VIII.B.3.d, VIII.B.4.d, and VIII.B.5.f for a discussion about 
competition in the market for trading services in different 
securities markets. Furthermore, the Commission acknowledges that 
the effects on competition could be greater if a smaller trading 
venue that is the sole provider of a niche service were shut down. 
To the extent this occurs, it could adversely impact competition 
because it would require some market participants to find other 
venues to trade on that may not minimize their trading costs to the 
same extent. However, even in this case, the overall effects on 
competition may still be limited because a competitor could create 
similar business models if demand were adequate, and if it did not 
do so, it seems likely new entrants would do so if demand were 
sufficient.
---------------------------------------------------------------------------

    Although the proposed amendments to Exchange Act Rule 3b-16 and 
Regulation ATS may not significantly increase the barriers to entry for 
new trading venues or cause some existing smaller trading venues to 
exit the market, the Commission lacks certain information necessary to 
quantify the extent to which entities that otherwise would seek to 
operate as a trading venue in the markets for government securities, 
repos, corporate, municipal, or equity securities would be dissuaded 
from doing so. Specifically the decision for a trading venue to 
continue operating or to cease operating depends on numerous factors 
and the Commission lacks information about many of those factors. For 
example, the Commission does not have information on the extent to 
which an existing Communication Protocol Systems would potentially need 
to alter its operations or business model as a result of the proposed 
amendments to Rule 3b-16 and Regulation ATS.
(a) Regulatory Framework
    To the extent that current ATSs and Communication Protocol Systems 
compete,\1152\ the proposed changes to Exchange Act Rule 3b-16, which 
would subject Communication Protocol Systems to the exchange regulatory 
framework, which can include complying with Regulation ATS,\1153\ would 
promote competition by requiring current ATSs and Communication 
Protocol Systems to operate on a more equal basis in securities 
markets. One commenter on the Concept Release stated that non-ATS 
trading platforms that are neither registered as exchanges nor as ATSs 
perform core market place functions in fixed income securities (e.g., 
corporate and municipal bonds) trading.\1154\ This commenter also noted 
that these non-ATS trading platforms are operated by either broker-
dealers or unregulated entities. Furthermore, this commenter stated 
that the significant regulatory burdens on ATSs put ATSs at a 
competitive disadvantage to non-ATS trading platforms that are not 
subject to the same regulatory obligations. Extending the requirements 
of Regulation ATS to Communication Protocol Systems would help 
eliminate a competitive disadvantage for ATSs arising from uneven 
regulatory requirements in the market for trading services.\1155\ As 
discussed in Section II.B.3, the proposed amendment would subject both 
broker-dealer-operated and non-broker-dealer-operated Communication 
Protocol Systems to the requirements of Regulation ATS. To comply with 
the broker-dealer registration requirements of Regulation ATS, a non-
broker-dealer-operated Communication Protocol System would be required 
to become a member of an SRO (e.g., FINRA) and comply with the 
requirements of the SRO, to which ATSs are currently required.
---------------------------------------------------------------------------

    \1152\ See supra Sections VIII.B.2.d, VIII.B.2.d, VIII.B.2.d, 
and VIII.B.7 (discussing how current ATSs in some markets tend to be 
interdealer markets and Communication Protocol Systems tend to be 
dealer-to-customer markets).
    \1153\ Under the proposal, Communication Protocol Systems that 
choose not to register as exchanges can instead register as broker-
dealers and comply with Regulation ATS. Furthermore, under the 
proposal, Communication Protocol Systems operated by non-broker-
dealers would be subject to the same regulatory requirements as 
ATSs, including the broker-dealer registration requirement of 
Regulation ATS. The Commission estimates that 6 non-broker-dealer-
operated Communication Protocol Systems without a broker-dealer 
affiliate exist. The Commission assumes that, under the proposed 
amendments, Communication Protocol Systems would choose to register 
as broker-dealers and comply with Regulation ATS, rather than 
register as exchanges. See supra note 1056 and accompanying text.
    \1154\ See ICE Bonds Letter II at 2 and 3.
    \1155\ See supra Sections VIII.B.2, VIII.B.3, VIII.B.4, 
VIII.B.5, and VIII.B.6 for discussions regarding regulatory 
requirements for ATSs in the government securities, corporate debt 
securities, municipal securities, equities, and options market, 
respectively. One commenter on the Concept Release stated that 
applying a consistent regulatory framework to trading platforms that 
provide equivalent services to market participants, while also 
distinguishing between platforms that offer distinct trading 
protocols, would level the competitive landscape and allow market 
participants to choose trading platforms and protocols based on the 
merits of the services provided. Furthermore, this commenter also 
stated that it would not be appropriate to regulate all types of 
electronic trading protocols in the same manner regardless of their 
systemic risk profiles or to regulate electronic trading protocols 
more strictly than equivalent non-electronic trading protocols. See 
Tradeweb Letter at 4.
---------------------------------------------------------------------------

    Similarly, extending Regulation ATS to Currently Exempted 
Government Securities ATSs \1156\ and Communication Protocol Systems 
that trade government securities would help promote competition by 
eliminating a Current Government Securities ATS's competitive 
disadvantage that might arise due to uneven regulatory requirements in 
the market for government securities and repo trading services.\1157\
---------------------------------------------------------------------------

    \1156\ Under the proposal, bank-operated Currently Exempted 
Government Securities ATSs would be subject to the same regulatory 
requirements as non-bank-operated Currently Exempted Government 
Securities ATSs and Current Government Securities ATSs. The 
Commission estimates that 1 bank-operated Currently Exempted 
Government Securities ATS exists.
    \1157\ Current Government Securities ATSs might be at a 
competitive disadvantage to Currently Exempted Government Securities 
ATSs and Communication Protocol Systems, which do not currently 
incur compliance costs associated with the requirements of 
Regulation ATS. As discussed above, Currently Exempted Government 
Securities ATSs, bank-operated Currently Exempted Government 
Securities ATSs, Communication Protocol Systems, and Current 
Government Securities ATSs compete in the market for government 
securities and repo trading services with different regulatory 
requirements. For example, due to reporting requirements of 
Regulation ATS, it would be more difficult or costly for a Current 
Government Securities ATS to implement significant operational 
changes to compete with Currently Exempted Government Securities 
ATSs and Communication Protocol Systems if the Current Government 
Securities ATS's competitive advantage is driven by operational 
facets that would be reported on Form ATS. See also supra Sections 
II, III, VIII.B.2.a, and VIII.B.2.b for a discussion about the 
differences in regulatory requirements between Current Government 
Securities ATSs, Currently Exempted Government Securities ATSs, and 
Communication Protocol Systems under the current regulatory 
framework.
---------------------------------------------------------------------------

    The Commission acknowledges that some Government Securities ATSs 
and Communication Protocol Systems could restructure their operations 
to be non-ATSs to avoid being subject to Regulation ATS and Regulation 
SCI if the requirements are too burdensome or impair the ability of the 
trading venue to compete. However, the risk of this occurring may be 
mitigated because the proposed amendments to Rule 3b-16 may make it 
difficult for Government Securities ATSs and Communication Protocol 
Systems to restructure their operations to be non-ATSs.\1158\ To the 
extent this does occur, the benefits and enhancements to competition 
discussed above would be reduced.\1159\
---------------------------------------------------------------------------

    \1158\ Additionally, although non-ATS venues would compete with 
ATSs in the market for government securities and repo trading 
services, non-ATS venues cannot offer the same services as ATSs 
without becoming ATSs.
    \1159\ See supra Section VIII.C.1 for a discussion about 
benefits from the requirements of Regulation ATS and Regulation SCI.
---------------------------------------------------------------------------

    One commenter on the Concept Release stated that the flexibility of 
the current regulatory framework allows financial technology firms 
\1160\ to

[[Page 15635]]

innovate and compete fiercely.\1161\ This commenter also stated that 
this structure creates relatively low costs for entry (and exit) in the 
development of new technologies.\1162\ Subjecting Communication 
Protocol Systems to the requirements of Regulation ATS could reduce 
operational flexibility. For example, it would be more costly for a 
Communication Protocol System to implement significant changes to 
operational facets that would be required to be reported on Form ATS or 
Form ATS-N. The Commission acknowledges that this reduction in 
operational flexibility could, under certain circumstances, make it 
more difficult to innovate.\1163\ That said, in addition to the other 
benefits discussed above,\1164\ the Commission believes that the 
proposed amendments would foster competition by requiring current ATSs 
and Communication Protocol Systems to operate on a more equal basis in 
the market for trading services. This, in turn, would help promote 
innovation.
---------------------------------------------------------------------------

    \1160\ For the purpose of this discussion, financial technology 
firm is interpreted to be a type of Communication Protocol System 
(e.g., RFQ system).
    \1161\ See Bloomberg Letter at 10 and 17.
    \1162\ See Bloomberg Letter at 23.
    \1163\ For example, it would take longer for a Communication 
Protocol System that trades government securities to implement an 
innovative operational facet that required a significant change to 
its systems, e.g. an innovative trading protocol, because they it 
need to file a Form ATS-N material amendment 30 days before 
implementing the system change. See supra IV.A.
    \1164\ See supra Section VIII.C.1.
---------------------------------------------------------------------------

(b) Compliance Costs of Regulation ATS
    The Commission preliminarily believes that the compliance costs 
associated with the requirements of Regulation ATS would have different 
effects on the competitive position of ATSs depending on their size. 
However, the Commission believes that these initial and ongoing 
compliance costs may not have a significant adverse impact on overall 
competition in the market for trading services.
    As a result of the proposed extension of Regulation ATS to 
Communication Protocol Systems and Currently Exempted Government 
Securities ATSs, these ATSs would be subject to Rule 301(b)(9) and 
(10), Rule 302, and Rule 303. Most of the estimated compliance costs 
\1165\ associated with these rules would be fixed costs to those ATSs 
regardless of the amount of trading activity that takes place on them, 
and thus, these compliance costs would represent a larger fraction of 
revenue for a small (measured in trading volume) ATS relative to that 
for a large ATS.\1166\ Furthermore, most of the estimated compliance 
costs associated with the requirements of Form ATS-N under Rule 304, 
which all Government Securities ATSs and Communication Protocol Systems 
that trade NMS stocks would incur, would be fixed costs. This could 
have an adverse impact on small ATSs in competing against larger ATSs, 
which could act as a deterrent or a barrier to entry for potential ATSs 
or result in small ATSs exiting the market for trading services.\1167\ 
However, if small Government Securities ATSs and Communication Protocol 
Systems that trade NMS stocks engage in providing simpler services, 
these small ATSs are likely to incur lower compliance costs.\1168\
---------------------------------------------------------------------------

    \1165\ The compliance costs associated with the requirements of 
Regulation ATS are generally represented by implementation costs 
(the monetized costs of PRA burdens). See also supra note 1100. See 
supra Section VIII.C.2.a.i for a discussion on the implementation 
costs associated with Rule 301(b)(9) and (10), Rule 302, and Rule 
303. Communication Protocol Systems that are not broker-dealers and 
Currently Exempted Government Securities ATSs that are banks would 
incur additional compliance costs associated with the broker-dealer 
registration requirements under Rule 301(b)(1). See infra Section 
VIII.C.3.1.i.c) for a discussion of the competitive effects of 
broker-dealer registration requirements.
    \1166\ See supra Section VIII.2.a.i for a discussion about the 
impact of implementation costs for small ATSs.
    \1167\ Based on the estimated costs in Section VIII.C.2.a.i 
above, the Commission preliminarily believes that the compliance 
costs may not be large enough for these effects to be significant. 
See supra note 1151 and accompanying text.
    \1168\ See supra Section VIII.C.2.
---------------------------------------------------------------------------

    One commenter on the Concept Release stated that the regulatory 
burdens associated with subjecting all electronic platforms to the 
requirements of Regulation ATS could ultimately reduce the number of 
different platforms available.\1169\ Another commenter on the Concept 
Release stated that the changes contemplated to Rule 3b-16 could end up 
raising costs for new financial technology (i.e., fintech) \1170\ 
entrants (liquidity solutions) to enter, stifle innovation and damage 
the current ability of market participants to locate liquidity in all 
illiquid security markets.\1171\ This commenter also stated that a 
change in the definition of exchange would insert unnecessary 
intermediation between dealers and their customers and damage liquidity 
formation.\1172\
---------------------------------------------------------------------------

    \1169\ See SIFMA Letter at 9 and 11. Another commenter on the 
Concept Release stated that the revision of the definition of 
``exchange'' in Exchange Act Rule 3b-16 (``Rule 3b-16'') to expand 
the applicability of Regulation ATS to firms currently regulated as 
non-ATS broker-dealers may cause disruption if not undertaken 
carefully. See Tradeweb Letter at 2. An additional commenter stated 
that the Commission must be careful in implementing any reforms to 
the oversight of corporate bond and municipal securities trading 
venues to ensure that there are no unintended consequences for 
investors, such as the reduction in the availability of the types of 
platforms that investors utilize to effect transactions in these 
securities. See MFA Letter at 8.
    \1170\ For the purpose of this discussion, fintech is 
interpreted to be a type of Communication Protocol System (e.g., RFQ 
system).
    \1171\ See Bloomberg Letter at 3. This commenter on the Concept 
Release stated that adding fintechs, such as RFQ systems, to the 
definition of exchange would erect high regulatory hurdles for 
innovation and new fintech entrants. See also Bloomberg Letter at 
28. Another commenter on the Concept Release similarly expressed 
concern that any revisions to the regulatory framework for fixed 
income electronic trading should not stifle the investment and 
innovation that has led to the variety of existing trading 
protocols, and that it would be a mistake to interrupt this 
evolution through the increased imposition of an equity-based 
regulatory framework. See MarketAxess Letter at 3.
    \1172\ See Bloomberg Letter at 20. This commenter also stated 
that a change in the definition of exchange would threaten to 
distort the market structure by creating a one-size-fits-all 
approach that is biased against the trading of less-liquid 
instruments, damaging liquidity formation. See id.
---------------------------------------------------------------------------

    As discussed above, the compliance costs from the proposed 
amendments to Regulation ATS may not significantly increase the 
barriers to entry for new trading venues or cause some existing 
Communication Protocol Systems and Currently Exempted Government 
Securities ATSs to exit the market. Therefore, the Commission believes 
that the compliance costs associated with Regulation ATS may not have a 
significant adverse impact on competition in the markets for trading 
services. As discussed above, while the Commission acknowledges the 
proposed amendments could reduce operational flexibility, which could, 
under certain circumstances, make it more difficult to innovate, the 
Commission believes increased competition from the proposed amendments 
providing a more equal regulatory basis would help promote 
innovation.\1173\ To the extent the proposed amendments force an 
innovative fintech to exit the market, it may be able to restructure 
itself (rather than operate as an ATS) as a third-party vendor and 
continue to provide certain innovative services, or otherwise sell its 
technology to another ATS, which would mitigate to some extent any 
adverse impact the proposed amendments may have on innovation.
---------------------------------------------------------------------------

    \1173\ See supra Section VIII.C.3.a.i.a).
---------------------------------------------------------------------------

    To the extent the proposed amendments result in a Communication 
Protocol System that trades less liquid securities exiting the market 
for trading services, it could increase the trading costs of its 
subscribers if they need to find a new trading venue or are forced to 
go through multiple intermediaries (i.e., broker-dealers) to find 
counterparties. However, as discussed above, the Commission 
preliminarily believes this may not result in a significant increase in 
trading costs for market participants because the trading

[[Page 15636]]

interest that was being sent to the Communication Protocol System would 
likely be absorbed and redistributed amongst other ATSs or non-ATS 
venues.\1174\
---------------------------------------------------------------------------

    \1174\ See supra Section VIII.C.2.b.
---------------------------------------------------------------------------

(c) Broker-Dealer Registration Requirements
    In addition to the compliance costs associated with the 
requirements of Regulation ATS, non-broker-dealer-operated 
Communication Protocol Systems without a broker-dealer affiliate would 
incur additional compliance costs related to registering with the 
Commission as broker-dealers, becoming members of an SRO, such as 
FINRA, and maintaining broker-dealer registration and SRO 
membership.\1175\ Although these additional compliance costs could harm 
the competitive position of these Communication Protocol Systems and 
raise barriers to entry for entrants who are not broker-dealers nor 
affiliated with another broker-dealer, the Commission preliminarily 
believes that the compliance costs associated with the proposed broker-
dealer registration requirements may not have a significant adverse 
effect on overall competition in the market for trading services.
---------------------------------------------------------------------------

    \1175\ The Commission estimates there are 6 non-broker-dealer-
operated Communication Protocol Systems without a broker-dealer 
affiliate. See supra Section VIII.C.2.a.ii.
---------------------------------------------------------------------------

    Although the Commission acknowledges uncertainty about the 
compliance costs associated with the proposed broker-dealer 
registration requirements,\1176\ there are two reasons why these costs 
may not be significant enough to make a non-broker-dealer-operated 
Communication Protocol Systems exiting the market likely. First, the 
Commission believes that the estimated average costs may not be 
significant enough to make exiting the market likely.\1177\ Second, the 
Commission believes that the adverse effect on competition may be 
limited to existing small Communication Protocol Systems and this 
adverse effect may be mitigated to some extent because small 
Communication Protocol Systems would incur lower compliance costs 
associated with the broker-dealer registration requirements.\1178\ To 
the extent that one of these Communication Protocol Systems ceased 
operating, the Commission believes it may not have a significant 
adverse effect on overall competition among trading venues, because the 
market for trading services is competitive and the trading volume from 
the venue would likely be absorbed and redistributed amongst other ATSs 
or non-ATS venues.\1179\
---------------------------------------------------------------------------

    \1176\ As discussed above, the costs would vary significantly 
across firms and the Commission's estimate is uncertain because it 
does not have information on the non-broker-dealer-operated 
Communication Protocol Systems without a broker-dealer affiliate. 
See id.
    \1177\ The Commission estimates an initial cost of approximately 
$317,000 to register as a broker-dealer with the Commission and 
become a member of FINRA and an ongoing annual cost of approximately 
$58,000 to maintain the broker-dealer registration and FINRA 
membership. See id.
    \1178\ See id for a discussion about the costs associated with 
the broker-dealer registration requirements under Rule 301(b)(1).
    \1179\ See supra note 1151 and accompanying text.
---------------------------------------------------------------------------

(d) Ineffectiveness Declaration
    The proposed ability for the Commission to be able to declare a 
Form ATS-N or Form ATS-N amendment ineffective could result in 
compliance costs for Government Securities ATSs and Communication 
Protocol Systems that are NMS Stock ATSs and may affect competition in 
the market for government securities, repos, and NMS stock trading 
services. However, based on Commission staff's experience with NMS 
Stock ATSs that filed an initial Form ATS-N, the Commission 
preliminarily believes this would be an unlikely result.\1180\ To the 
extent the Commission declares an initial Form ATS-N or amendment 
ineffective, the ATS would either have to cease operations \1181\ or, 
in the case of an amendment, roll back any changes it made and operate 
pursuant to its previous Form ATS-N that is effective until it is able 
to address the deficiencies and file a new Form ATS-N that becomes 
effective.\1182\ To the extent the Commission declares an initial Form 
ATS-N or amendment ineffective, some broker-dealer operators of 
Government Securities ATSs and Communication Protocol Systems in NMS 
Stocks might find that the costs of addressing deficiencies in Form 
ATS-N outweigh the benefits of continuing to operate the trading venue, 
particularly if the trading venue does not constitute a significant 
source of profit for a broker-dealer operator.
---------------------------------------------------------------------------

    \1180\ Unlike the current rules applicable to NMS Stock ATSs 
under Rule 304 of Regulation ATS with respect to ineffectiveness, 
the Commission does not have a process to declare a Form ATS 
ineffective because of the quality of the disclosures and cause the 
ATS cease operating pursuant the exemption. See Rule 
304(a)(1)(iv)(B).
    \1181\ See Rule 304(a)(1)(iv)(B).
    \1182\ See id.
---------------------------------------------------------------------------

    The ability of the Commission to declare Form ATS-N ineffective 
could also raise barriers to entry for new ATSs, as it might create 
uncertainty as to whether the Commission would declare its initial Form 
ATS-N effective or ineffective and as to the cost of avoiding an 
ineffective declaration. If a new ATS's initial Form ATS-N is declared 
ineffective, it would require time and additional expenditures to 
address the deficiencies delaying the commencing of operations, which 
would deter some potential ATSs from entry into the market for trading 
services. However, because an ineffectiveness declaration would be an 
unlikely result,\1183\ the Commission believes it would not 
significantly raise the barriers to entry for new ATSs.
---------------------------------------------------------------------------

    \1183\ See supra Section VIII.C.2.a.iii (discussing the 
Commission's belief that the potential costs of an ineffectiveness 
declaration would incentivize Government Securities ATSs and 
Communication Protocol Systems to initially submit a more accurate 
and complete Form ATS-N and amendments, which would reduce the 
likelihood that they are declared ineffective).
---------------------------------------------------------------------------

(e) Fair Access
    The Commission believes that applying the Fair Access Rule to 
Government Securities ATSs, Communication Protocol Systems, and passive 
systems could increase competition between market participants in the 
markets for government securities, repos, corporate and municipal 
securities, and equity securities. As discussed above, to the extent 
that there are market participants currently excluded from trading on 
significant Government Securities ATSs, Communication Protocol Systems, 
or passive systems, applying the Fair Access Rule to Government 
Securities ATSs, Communication Protocol Systems, and passive systems 
could increase trading venue options available to these market 
participants, which could lower their trading costs.\1184\ This, in 
turn, could increase competition among market participants trading on 
these platforms, which could be significant sources of liquidity and 
represent a significant portion of trading volume in their respective 
markets.\1185\ However, these competitive effects may be reduced to the 
extent that some existing subscribers of trading venues that are 
subject to the Fair Access Rule redirect their trading interest to 
other trading venues not subject to the Fair Access Rule in order to 
preserve some of the benefits they may receive from a trading venue 
limiting access.\1186\ If the

[[Page 15637]]

proposed amendments to apply certain aggregate volume thresholds 
increase the number of smaller affiliate ATSs that would be subject to 
the Fair Access Rule, it could also increase competition among market 
participants, to the extent certain market participants are currently 
excluded from accessing these platforms.
---------------------------------------------------------------------------

    \1184\ See supra Section VIII.C.1.b.
    \1185\ One commenter on the 2020 Proposal stated that, since the 
bilateral fixed-income market is a heavily relationship-driven 
business, the Fair Access rule would better ensure that broker-
dealers and their affiliates cannot engage in retaliatory behavior, 
and thus improve access and competition for the largest, most 
systemically important markets. See AFREF Letter at 3.
    \1186\ See supra Section VIII.C.2.b (discussing the indirect 
costs to market participants related to the requirements of the Fair 
Access Rule).
---------------------------------------------------------------------------

    The Commission believes that the proposed amendments to apply 
certain aggregate volume thresholds to the Fair Access Rule could harm 
competition among trading venues in the markets for government 
securities, corporate debt and municipal securities, and equity 
securities. As discussed above, if the aggregate volume of ATSs 
operated by a common broker-dealer or operated by affiliated broker-
dealers approaches the Fair Access volume thresholds, then the 
operators could restrict trading on their systems in one or more 
securities in order to avoid being subject to the requirements of the 
Fair Access Rule.\1187\ However, ATSs in the markets for government 
securities and corporate debt and municipal securities may be unlikely 
to restrict trading in individual securities on their systems because 
the aggregated volume threshold is applied categorically rather than to 
individual securities. If these venues restrict trading in some 
securities, it would reduce competition among trading venues to attract 
order flow in these securities.
---------------------------------------------------------------------------

    \1187\ See supra Section VIII.C.2.b.
---------------------------------------------------------------------------

    Additionally, the proposed amendments to apply certain aggregate 
volume thresholds to the Fair Access Rule could also harm competition 
among trading venues if they cause a broker-dealer or affiliated 
broker-dealers that operate multiple ATSs to shut down one or more 
their smaller ATSs in order to avoid triggering the Fair Access 
threshold.\1188\ However, because the trading volume on these smaller 
ATSs would likely be absorbed and redistributed amongst other ATSs or 
non-ATS venues, the Commission believes that the overall effects on 
competition among trading venues may not be significant.
---------------------------------------------------------------------------

    \1188\ See id.
---------------------------------------------------------------------------

(f) Public Disclosure
    The increase in transparency due to the public disclosure of Form 
ATS-N would promote competition in the markets for government 
securities, repos, and NMS stock trading services. The increase in 
competition could result in lower venue fees, improve the efficiency in 
customer trading interest or order handling procedures, and promote 
innovation. For instance, because the public disclosure of Form ATS-N 
would make it easier for market participants to compare fees across 
ATSs,\1189\ market participants could choose to send their orders to 
ATSs that offer lower fees, which in turn, could induce ATSs to lower 
their fees to attract new subscribers. If non-ATS venues compete with 
ATSs for trading services, the increased operational transparency of 
ATSs might also incentivize non-ATS trading venues to reduce their fees 
to compete with ATSs.
---------------------------------------------------------------------------

    \1189\ Under the proposed amendments, Government Securities ATSs 
(inclusive of Communication Protocol Systems, as proposed) and 
Communication Protocol Systems that trade NMS stocks would need to 
begin disclosing their Form ATS-N. Current NMS Stock ATSs already 
publically disclose their Form ATS-N.
---------------------------------------------------------------------------

    Because the public disclosure of Form ATS-N would make it easier 
for market participants to compare the quality of trading services, 
such as innovative trading functionalities, order handling procedures, 
and execution statistics--if they are made available, across 
venues,\1190\ market participants would be more likely to send their 
trading interests or orders to ATSs that offer better trading services. 
This would promote greater competition in the market for trading 
services and incentivize ATSs to innovate, including, in particular, 
technology related to trading services to improve the quality of such 
services to attract more subscribers.
---------------------------------------------------------------------------

    \1190\ See supra Section VIII.C.1.b for a discussion about 
benefits from public disclosure of Form ATS-N.
---------------------------------------------------------------------------

    Similarly, the public disclosure of Form ATS-N would also result in 
market participants redirecting their trading interest away from ATSs 
that offer lower quality trading services compared to other ATSs, which 
could result in these ATSs earning less revenue. If the loss in revenue 
causes these ATSs to become unprofitable, they might choose to exit the 
market.\1191\
---------------------------------------------------------------------------

    \1191\ See supra note 1151 and accompanying text for a 
discussion on the effects of ATSs exiting the market for trading 
services.
---------------------------------------------------------------------------

    The proposed amendment to require timely fee change disclosure on 
Form ATS-N would promote competition between current NMS Stock ATSs and 
other trading venues in the market for NMS stocks, including 
exchanges.\1192\ In the Commission staff's experience, NMS Stock ATSs 
have taken varied approaches to the reporting of fees. Current NMS 
Stock ATSs that treat fee changes as material changes in filing Form 
ATS-N are required to wait 30 calendar days from the filing date to 
implement a fee change.\1193\ In other cases, NMS Stock ATSs have filed 
updating amendments no later than 30 days following the end of the 
calendar quarter in which a fee change was made. The Commission 
believes that requiring NMS Stock ATSs to file a fee amendment no later 
than the date it makes the change to a fee or fee disclosure would 
require those NMS Stock ATSs to provide the public with sufficient 
notice about a fee change while enabling those NMS Stock ATSs to nimbly 
change fees in competing against other trading venues. Furthermore, 
under Section 19(b) of the Exchange Act, national securities exchanges 
can implement fee changes upon filing with the Commission.\1194\ To the 
extent that NMS Stock ATSs compete with exchanges in fees to attract 
order flow, the proposed amendment would promote competition by helping 
to level the playing field between NMS Stock ATSs and exchanges in 
terms of the timeframes in which they can initiate and disclose fee 
changes.\1195\
---------------------------------------------------------------------------

    \1192\ Under the proposed amendments, Government Securities ATSs 
would also be required to file fee amendments on Form ATS-N. This 
could promote competition among Government Securities ATSs because 
timely fee disclosure of fee changes by Government ATSs would make 
it easier for market participants to compare fees between trading 
venues. This could incentivize trading venues in the market for 
Government Securities to reduce their fees to compete to attract 
order flow.
    \1193\ See supra Section IV.A for a discussion about fee 
amendments on Form ATS-N.
    \1194\ Under Section 19(b)(3), SRO rule changes that: Constitute 
a stated policy, practice, or interpretation with respect to the 
meaning, administration, or enforcement of an existing rule of the 
SRO; establish or changing a due, fee, or other charge imposed by 
the SRO; or are concerned solely with the administration of the SRO, 
are immediately effective upon filing. However, the Commission may 
suspend one of these SRO rule changes within 60 days of the date the 
SRO rule change is filed with the Commission, if it appears to the 
Commission that such action is necessary or appropriate in the 
public interest, for the protection of investors, or the maintenance 
of fair and orderly markets, to remove impediments to, and perfect 
the mechanisms of, a national market system, or otherwise in 
furtherance of the purposes of the Exchange Act. If the Commission 
does suspend a SRO rule change, then it shall institute proceedings 
under Section 19(b)(2)(B) to determine whether the proposed SRO rule 
change should be approved or disapproved. See 15 U.S.C. 78s(b)(2) 
and 15 U.S.C. 78s(b)(3).
    \1195\ Currently, an amendment to a fee could result in an ATS 
filing an updating amendment or a material amendment, depending on 
the nature of the change and the ATS's assessment of whether such 
change was material. If an NMS Stock ATS would file an updating 
amendment to disclose a fee change, then the proposed amendment 
would help level the playing field by reducing the amount of time 
that the NMS Stock ATS would have before it had to disclose a fee 
change, bringing it more in line with the disclosure timeframes of 
exchanges. If an NMS Stock ATS would file a material amendment to 
disclose a fee change, then the proposed amendment would help level 
the playing field because the NMS Stock ATS would no longer have to 
give 30 days' notice before initiating the fee change, bringing it 
more in line with the notice timeline in which exchanges can 
initiate fee changes.

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

[[Page 15638]]

    The public disclosure of a Government Securities ATS's or 
Communication Protocol System that trades NMS stock's previously non-
public information regarding innovative operational facets could 
adversely impact competition in the market for trading services and 
also reduce the incentives for these trading venues to innovate. If the 
competitive advantage of an ATS in the market is driven by certain 
operational innovations, the disclosure of this information could 
result in other competing ATSs with similar operational platforms 
implementing similar methodologies, which could cause market 
participants to send their trading interest or orders to those other 
ATSs. To the extent some ATSs may rely on these innovations to attract 
trading interest, this could cause some existing ATSs to exit the 
market or raise the barriers to entry for new ATSs, which could 
adversely impact competition.\1196\ Additionally, it could reduce the 
incentives for ATSs to innovate if publicly disclosing new innovations 
results in the disclosing ATS earning less revenue from new innovations 
it develops. However, the Commission believes that the risk of these 
adverse effects occurring would be low, because the information 
disclosed on Form ATS-N is not likely to include detailed enough 
information regarding operational facets or innovations such that the 
public disclosure would adversely affect the competitive position of 
the disclosing ATS.\1197\
---------------------------------------------------------------------------

    \1196\ See supra note 1151 and accompanying text for a 
discussion on the effects of ATSs exiting the market for trading 
services.
    \1197\ See supra note 467 and accompanying text.
---------------------------------------------------------------------------

    One commenter on the 2020 Proposal stated that the Commission 
should not require making commercially sensitive information filed on 
the previously proposed Form ATS-G publicly available, which the 
commenter classified as information on certain fees or charges for use 
of the ATS's services and on aggregate, platform-wide order flow and 
execution statistics that the ATS already otherwise collects and 
publishes to one or more subscribers.\1198\ The commenter stated that 
the public disclosure of such information would have a negative impact 
on innovation and competition among ATSs. As discussed above, the 
Commission believes that the responsive information to the Form ATS-N 
is not likely to include commercially sensitive or other information 
the public disclosure of which would result in the disclosing ATSs 
exiting the market for trading services and ultimately reduce 
transparency.
---------------------------------------------------------------------------

    \1198\ See Tradeweb Letter at 3, 10, and 11. Similarly, another 
commenter stated that publication of compliance procedures/processes 
is not commonplace and risks requiring disclosure of proprietary 
information. See ICE Bonds Letter I at 6.
---------------------------------------------------------------------------

    One commenter on the 2020 Proposal stated that if the disclosure 
requirements of previously proposed Form ATS-G are too burdensome or 
impair the ability of Government Securities ATSs to compete, it will 
discourage the expansion of ATSs and potentially encourage operators of 
Government Securities ATS to restructure their operations to avoid 
being characterized as an ATS, which would ultimately result in less 
transparency rather than more.\1199\ As discussed above, although the 
Commission acknowledges that some Government Securities ATSs could 
restructure their operations to be non-ATSs to avoid being subject to 
the public disclosure of Form ATS-N, the risk of this occurring may be 
mitigated because the proposed amendments to Rule 3b-16 may make it 
difficult for them to restructure their operations to be non-
ATSs.\1200\
---------------------------------------------------------------------------

    \1199\ See ICE Bonds Letter I at 5 and ICE Bonds Letter II at 4.
    \1200\ See supra Section VIII.C.3.a.i.a).
---------------------------------------------------------------------------

ii. Regulation SCI
    The Commission believes that the requirements imposed by Regulation 
SCI may not have a significant adverse effect on competition in the 
market for trading services or on market participants' trading costs.
    The Commission believes that the compliance costs imposed by 
Regulation SCI may not have a significant adverse effect on competition 
among SCI ATSs, non-SCI ATSs, and non-ATS venues in the government 
securities market due to mitigating factors.\1201\ The compliance costs 
imposed by Regulation SCI would have some impact on competition in the 
market for government securities trading services. Specifically, 
because non-SCI ATSs do not have to incur the compliance costs 
associated with Regulation SCI, non-SCI ATSs and non-ATS venues would 
gain a competitive advantage in the market for trading services over 
SCI ATSs, with which they compete.\1202\ If SCI ATSs pass on the 
compliance costs to their subscribers in the form of higher fees, SCI 
ATSs would lose order flow or their subscribers to other non-SCI ATSs 
and non-ATS venues with lower fees. Adverse competitive effects, 
however, would be mitigated because an SCI ATS would likely have more 
robust systems, fewer disruptive systems issues, and better up-time 
compared to non-SCI ATSs. Furthermore, any adverse competitive effect 
may be minor if an SCI ATS is large and has a more stable and 
established subscriber base than other ATSs and non-ATS venues.
---------------------------------------------------------------------------

    \1201\ NMS Stock ATSs that meet certain volume thresholds are 
subject to Regulation SCI. The Commission estimates that no 
Communication Protocol System that is an NMS Stock ATS would be 
subject to Regulation SCI. The Commission preliminarily believes 
that subjecting significant Communication Protocol Systems that are 
NMS Stock ATSs to Regulation SCI would affect competition as 
discussed in the Regulation SCI Adopting Release.
    \1202\ The expected compliance costs could act as a barrier to 
entry for new entrants who expect to eventually become SCI ATSs, but 
the Commission preliminarily believes this would not be a likely 
possibility. See supra note 1150.
---------------------------------------------------------------------------

    The compliance costs associated with participating in business 
continuity and disaster recovery plan testing would affect competition 
among subscribers of SCI ATSs and also would raise barriers to entry 
for new subscribers. Because some subscribers would incur compliance 
costs associated with Rule 1004 and others would not, it would 
adversely impact the ability for those subscribers of SCI ATSs to 
compete. However, it is difficult to gauge the extent of impact on 
competition because the Commission does not have sufficient 
information, for example, on whether certain subscribers of SCI ATSs 
currently maintain connections to backup facilities, including for 
testing purposes. If larger subscribers of SCI ATSs already maintain 
connections to backup facilities including for testing purposes, the 
adverse impact on competition would be mitigated because the 
incremental compliance costs associated with the business continuity 
and disaster recovery plan testing requirements under Rule 1004 would 
be limited for those larger subscribers. The Commission believes that 
new subscribers are less likely to be designated immediately to 
participate in business continuity and disaster recovery plan testing 
than are existing larger subscribers because new subscribers might not 
initially satisfy the ATS's designation standards as they establish 
their businesses.
    It is difficult to estimate the costs of Regulation SCI for third-
party vendors that operate SCI systems or indirect SCI systems \1203\ 
on behalf of SCI ATSs.\1204\ If Regulation SCI imposes compliance costs 
on such vendors, the compliance costs would affect the competition

[[Page 15639]]

among third-party vendors in the market for SCI systems or indirect SCI 
systems. If the costs associated with Regulation SCI for third-party 
vendors outweigh the benefits of continuing to operate SCI systems or 
indirect SCI systems on behalf of SCI ATSs, these third-party vendors 
would exit the market for SCI systems or indirect systems. In this 
respect, Regulation SCI would adversely impact such vendors and reduce 
the ability for some third-party vendors to compete in the market for 
SCI systems and indirect SCI systems, with attendant costs to SCI ATSs. 
If this happens, SCI ATSs would incur costs from having to find a new 
vendor, form a new business relationship, and adapt their systems to 
those of the new vendor. SCI ATSs might also elect to perform the 
relevant functions internally. If the current third-party vendors are 
the most efficient means of performing certain functions for SCI ATSs, 
and to the extent that any third-party vendor exits the market, finding 
new vendors or performing the functions internally would represent a 
reduction in efficiency for SCI ATSs.
---------------------------------------------------------------------------

    \1203\ See supra note 348 for the definition of indirect SCI 
systems.
    \1204\ See supra Section VIII.C.2.a.vi.
---------------------------------------------------------------------------

b. Efficiency and Capital Formation
    The Commission believes the proposed amendments to Rule 3b-16, 
Regulation ATS, and Regulation SCI could promote price efficiency and 
capital formation by reducing trading costs and the potential for 
systems disruptions on ATSs that capture a significant portion of 
trading volume.\1205\ However, if ATSs restrict trading volume in 
certain securities to stay below the Fair Access Rule, Regulation SCI, 
and Rule 301(b)(6) thresholds, it could adversely affect price 
efficiency and capital formation.
---------------------------------------------------------------------------

    \1205\ See supra Sections VIII.B.2.a and VIII.B.2.b for 
discussions about the importance of real-time price information on 
Government Securities ATS and indicative quotes on Communication 
Protocol Systems that trade U.S. Treasury Securities in price 
discovery of various securities. See supra Section VIII.C.1.c, 
discussing the benefits of reducing system disruptions through 
Regulation SCI and Rule 301(b)(6).
---------------------------------------------------------------------------

    As discussed above, the proposed requirement for certain 
Communication Protocol Systems and Government Securities ATSs to 
publically disclose Form ATS-N could help reduce trading costs for 
market participants.\1206\ Additionally, subjecting significant 
Communication Protocol Systems and Government Securities ATS to the 
Fair Access Rule could also help reduce market participants' trading 
costs.\1207\ A reduction in trading costs could, in turn, reduce limits 
to arbitrage and help facilitate informed traders impounding 
information into security prices, which could enhance price 
efficiency.\1208\ Furthermore, extending Regulation SCI and Rule 
301(b)(6) would help improve systems up-time \1209\ for ATSs and would 
also promote more robust systems that directly support execution 
facilities, order matching, and the dissemination of market data, which 
could also enhance price efficiency.\1210\ In particular, enhanced 
price efficiency in the secondary market for on-the-run U.S. Treasury 
Securities might also enhance the price efficiency of risky securities 
because the transaction prices of on-the-run U.S. Treasury Securities 
are used as risk-free rate benchmarks to price risky securities 
transactions.\1211\
---------------------------------------------------------------------------

    \1206\ See supra Section VIII.C.1.b
    \1207\ See id.
    \1208\ See, e.g., Shleifer, A. and Vishny, R. (1997). The Limits 
of Arbitrage. The Journal of Finance, 52(1), 35-55 (discussing 
limits to arbitrage); Grossman, S. and Stiglitz, J. (1980). On the 
impossibility of informationally efficient markets. American 
Economic Review, 70, 393-408 (discussing informed traders and price 
efficiency).
    \1209\ Systems up-time is a measure of the time that a computer 
system is running and available.
    \1210\ See supra Section VIII.C.1.c.
    \1211\ Based on the Commission's understanding, Government 
Securities ATSs disseminate their Treasury trades via private feeds 
and third-party vendors. These prices also serve as benchmarks for 
pricing other financial products. See October 15 Staff Report, supra 
note 188.
---------------------------------------------------------------------------

    Enhanced price efficiency could also promote capital formation. 
Price efficiency of securities is important because prices that 
accurately convey information about fundamental value improve the 
efficiency in allocating capital across projects and entities, which 
helps promote capital formation.
    On the other hand, the Commission believes that the proposed 
amendments of the Fair Access Rule, Regulation SCI, and Rule 301(b)(6) 
could also adversely affect price efficiency and capital formation if 
ATSs that are close to satisfying the volume threshold limit trading 
over some period restrict trading or cease operating to stay below the 
volume thresholds and avoid being subject to these rules.\1212\ To the 
extent that this keeps ATSs from getting larger, it would increase 
fragmentation, and thus, adversely affect price efficiency in those 
markets, harming capital formation.
---------------------------------------------------------------------------

    \1212\ See supra Section VIII.C.2.b.
---------------------------------------------------------------------------

D. Reasonable Alternatives

    The Commission considered several alternatives to the proposal: (1) 
Require Currently Exempted Government Securities ATSs and certain 
Communication Protocol Systems to file Form ATS, but not publicly 
disclose Form ATS; (2) require differing levels of public disclosure by 
Government Securities ATSs depending on their trading volume; (3) 
extend the transparency requirements (i.e., Form ATS-N) of Regulation 
ATS to all ATSs and Communication Protocol Systems; (4) apply Rule 
301(b)(6) of Regulation ATS to Government Securities ATSs; (5) alter 
the volume thresholds for the Fair Access Rule; (6) alter the 
Government Securities ATS volume thresholds for Regulation SCI; (7) 
exclude Communication Protocol Systems from the definition of 
``exchange'' but require them to register as broker-dealers; (8) 
require Forms ATS-N, ATS, and ATS-R to be submitted in Inline XBRL; and 
(9) require the content of Form ATS-N to be posted on individual ATS 
websites.
1. Require Government Securities ATSS To File a Non-Public Form ATS
    One alternative could require Government Securities ATSs (inclusive 
of Communication Protocol Systems, as proposed) to file Form ATS and 
subsequent amendments with the Commission, instead of filing Form ATS-
N. This alternative would allow Current Government Securities ATSs to 
continue to file current Form ATS. However, Form ATS would be deemed 
confidential for all Government Securities ATSs and would not have to 
be publicly disclosed. Under this alternative, compliance costs would 
be lower because the costs to prepare a Form ATS for Government 
Securities ATSs is less than preparing a Form ATS-N. Furthermore, 
Government Securities ATSs would not incur additional costs associated 
with amending Form ATS-N to address any deficiencies to avoid an 
ineffectiveness determination, because Rule 304 of Regulation ATS does 
not apply to Form ATS filings. However, this alternative would reduce 
regulators' insight into Government Securities ATSs compared to the 
proposal because Form ATS would require the disclosure of less 
information about the operations of Government Securities ATSs and the 
activities of their broker-dealer operators and their affiliates, as 
compared to Form ATS-N.
    The lack of public disclosure of Form ATS under the alternative 
could result in market participants making less informed decisions 
regarding where to send their orders, and thus, could result in lower 
execution quality than they would obtain under the proposal. 
Additionally, this alternative could result in higher search costs for 
subscribers to identify potential trading venues for their orders. 
Because Government Securities ATSs would not have to publicly disclose 
their fees or details about their operations, there would be less 
competition among Government Securities ATSs and

[[Page 15640]]

between Government Securities ATSs and non-ATS trading venues compared 
to the proposal. If there is less competition for order flow in the 
market for government securities and repo trading services, there could 
also be less incentive for Government Securities ATSs to innovate.
2. Initiate Differing Levels of Public Disclosure Depending on 
Government Securities ATS Dollar Volume
    The Commission could require different levels of disclosure (i.e., 
under Rule 304) among Government Securities ATSs based on the dollar 
volume in government securities traded on the platform. In particular, 
this alternative would subject Government Securities ATSs with lower 
dollar volumes to lower levels of disclosure on the revised Form ATS-N. 
This alternative could provide smaller Government Securities ATSs with 
a competitive advantage over larger ones because smaller Government 
Securities ATSs would incur lower compliance costs relative to the 
proposal, which could translate into lower entry barriers relative to 
such barriers under the proposal. Because these small Government 
Securities ATSs would not have to disclose as much information 
pertaining to their operational facets to their competitors, they would 
have a competitive advantage over more established Government 
Securities ATSs and other trading venues. This approach therefore would 
promote competition in the market. To the extent the public disclosure 
of Form ATS-N would have discouraged innovation,\1213\ this alternative 
also would promote innovation because these small Government Securities 
ATSs would not be deterred from innovating by the possibility of having 
to disclose certain operational facets, which could also benefit market 
participants who trade on these ATSs by improving the execution quality 
of their trades. However, because some Government Securities ATS would 
not have to publicly disclose as much information on their Form ATS-N, 
market participants may not be as able to compare Government Securities 
ATSs to select the most appropriate venue for the their trading 
objectives, which could increase market participant search costs and 
trading costs relative to the proposal.\1214\ Additionally, this 
alternative could incentivize small Government Securities ATSs to limit 
the trading in government securities on their ATSs to stay small and 
not trigger additional disclosure requirements. If this were to happen, 
it could limit market participants' options for trading venues, which 
could result in higher trading costs relative to the proposal.
---------------------------------------------------------------------------

    \1213\ As discussed above, the risk that the public disclosure 
of Form ATS-N would reduce the incentives for ATSs to is likely to 
be low. See supra Section VIII.C.3.a.i.f).
    \1214\ See supra Section VIII.C.1.b.
---------------------------------------------------------------------------

3. Extend the Transparency Requirements of Regulation ATS to All ATSs 
and Communication Protocol Systems
    As another alternative, the Commission could extend the 
transparency requirements (i.e., the public disclosure on Form ATS-N 
under Rule 304) of Regulation ATS to all ATSs and Communication 
Protocol Systems. Under this alternative, investors would receive 
information about the ATS operations and the activities of the broker-
dealer operators and affiliates of all ATSs and Communication Protocol 
Systems. While the disclosure requirements of individual systems would 
be similar to what is required under the proposal, investors would be 
able to access detailed information on ATSs and Communication Protocol 
Systems that currently do not file Form ATS-N. This could help market 
participants make better-informed decisions about where to send their 
orders to achieve their trading objectives as compared to under the 
proposal. Compared to the proposal, the public disclosure of Form ATS-N 
by all ATSs and Communication Protocol Systems would further promote 
competition, which could result in lower venue fees, improve the 
efficiency in handling of customer trading interest procedures, and 
promote innovation.
    Under this alternative, ATSs and Communication Protocol Systems 
that currently do not file Form ATS-N would incur the compliance costs 
discussed in Section VIII.C.2.a to comply with Regulation ATS. 
Additionally, the public disclosure of details regarding the 
operational facets of these ATSs and Communication Protocol Systems 
could adversely impact competition and raise barriers to entry in the 
market for trading services, and could also lower the incentives for 
these ATSs and Communication Protocol Systems to innovate. However, the 
Commission believes that the risk of this is likely to be low.\1215\
---------------------------------------------------------------------------

    \1215\ See supra Section VIII.C.3.a.i.f) for a discussion about 
the risk that the responsive information to the revised Form ATS-N 
would include information regarding operational facets such that the 
public disclosure of the information would adversely affect the 
competitive position of the disclosing ATS or Communication Protocol 
Systems and why the Commission believes that this risk is likely to 
be low. See also supra note 467 and accompanying text.
---------------------------------------------------------------------------

4. Apply Rule 301(b)(6) of Regulation ATS to Government Securities ATSs
    Another alternative for the Commission is to apply the Capacity, 
Integrity, and Security Rule in Rule 301(b)(6) \1216\ of Regulation ATS 
to Government Securities ATSs instead of extending Regulation SCI. The 
scope and requirements of the Capacity, Integrity, and Security Rule 
would be narrower than those of Regulation SCI. For example, Rule 
301(b)(6) of Regulation ATS would apply to a narrower set of systems, 
as compared to Regulation SCI. Rule 301(b)(6) of Regulation ATS applies 
only to systems that support order entry, order routing, order 
execution, transaction reporting, and trade comparison, which is 
narrower than the definition of SCI system. This could result in the 
establishment of less robust systems in Government Securities ATSs 
compared to the proposal. This may increase the duration and severity 
of any system distributions, and result in more system issues occurring 
on Government Securities ATSs, which may, in turn, cause more 
interruptions in the price discovery process and liquidity flows and 
increase the occurrence of periods with pricing inefficiencies compared 
to the proposal.\1217\ Furthermore, the Commission believes that 
compliance costs associated with the Capacity, Integrity, and Security 
Rule would be significantly less than those under the proposal because 
the scope and requirements of the Capacity, Integrity, and Security 
Rule would be narrower than those of Regulation SCI. For example, the 
Capacity, Integrity, and Security Rule would not require Government 
Securities ATSs to maintain a backup facility to comply with the 
requirements of Regulation SCI related to business continuity and 
disaster recovery plans. To the extent that Government Securities ATSs 
pass on these compliance costs to their subscribers, the significantly 
lower compliance costs of this alternative could result in lower 
trading costs for market participants compared to the proposal. 
Furthermore, the lower compliance costs of this alternative could lower 
barriers to entry in the market for government securities trading 
services and increase competition compared to the proposal, which would

[[Page 15641]]

also result in lower trading costs for market participants.
---------------------------------------------------------------------------

    \1216\ As also explained above, Rule 301(b)(6) addresses the 
capacity, integrity, and security requirements of automated systems 
for ATSs that meet certain volume thresholds. See supra note 157.
    \1217\ See supra Section VIII.C.1.c.
---------------------------------------------------------------------------

    As another alternative, the Commission could apply the Capacity, 
Integrity, and Security Rule in Rule 301(b)(6) to smaller Government 
Securities ATSs and extend Regulation SCI to larger Government 
Securities ATSs as proposed. For example, the Commission could require 
a Government Securities ATS that falls within a volume range for U.S. 
Treasury Securities of 5 percent and 10 percent to comply with Rule 
301(b)(6) of Regulation ATS and a Government Securities ATS that 
exceeds a 10 percent volume threshold for U.S. Treasury Securities to 
comply with Regulation SCI. Under this alternative, the Commission 
believes that the smaller Government Securities ATSs subject to Rule 
301(b)(6) would incur significantly lower compliance costs, as compared 
to the proposal, where these smaller Government Securities ATSs would 
be subject to Regulation SCI.\1218\ To the extent that Government 
Securities ATSs pass on the additional compliance costs associated with 
Rule 301(b)(6) or Regulation ATS to their subscribers, the Commission 
believes that the trading costs for subscribers to these smaller 
Government Securities ATSs would be smaller, as compared to the 
proposal. Furthermore, the lower compliance costs of this alternative 
incurred by smaller Government Securities ATSs could lower barriers to 
entry in the market for government securities trading services and 
increase competition compared to the proposal, which could also result 
in lower trading costs for market participants.
---------------------------------------------------------------------------

    \1218\ See supra Section VIII.C.2.a.
---------------------------------------------------------------------------

5. Alter the Volume Thresholds for the Fair Access Rule
    Another alternative for the Commission is to alter the volume 
thresholds for the Fair Access Rule.\1219\ A higher aggregate volume 
threshold for the Fair Access Rule would result in a smaller number of 
ATSs and Communication Protocol Systems that are subject to the Fair 
Access Rule than under the proposal. With fewer ATSs and Communication 
Protocol Systems subject to the Fair Access Rule, some market 
participants may not be able to trade on as many ATSs and Communication 
Protocol Systems as they could have under the proposal, which could 
result in these market participants experiencing higher trading costs 
or worse execution quality than they would under the proposal. With a 
higher aggregate volume threshold for the Fair Access Rule, fewer ATSs 
and Communication Protocol Systems would incur compliance costs 
discussed in Section VIII.C.2.a to comply with the Fair Access Rule 
than under the proposal. This could lower the barriers to entry for new 
ATSs compared to the proposal.\1220\ Additionally, a higher aggregate 
volume threshold could result in fewer broker-dealers shutting down 
some of their ATSs to avoid being subject to the Fair Access Rule 
compared to the proposal.\1221\ Both lower barriers to entry and fewer 
ATSs exiting the market could increase competition compared to the 
proposal, resulting in lower trading costs for market participants. 
Since the aggregate volume threshold would be higher, broker-dealers 
operators would be less likely to restrict trading in certain 
securities in one or more of their systems in order to avoid the 
requirements of the Fair Access Rule. This would cause less order flow 
to be absorbed and redistributed amongst other trading venues, which 
could result in lower trading costs compared to the proposal, 
especially if the sole provider of a niche service is less likely to 
limit the trading in certain securities.
---------------------------------------------------------------------------

    \1219\ See supra Sections VII.D.1.b and VIII.C.2.a for estimates 
of the number of additional trading venues that would be subject to 
the Fair Access Rule under the proposal.
    \1220\ The Commission believes that this would lower the 
barriers to entry compared to the proposal for both new ATSs that 
are the sole ATS operated by a broker-dealer, as well as new ATSs 
that are operated by a broker-dealer or affiliated broker-dealers 
that already operate one or more ATSs.
    \1221\ See supra Sections VIII.C.2.a.iv and VIII.C.3.a.i.e.
---------------------------------------------------------------------------

    A lower aggregate volume threshold for the Fair Access Rule would 
cause a greater number of small ATSs and Communication Protocol Systems 
to be subject to the Fair Access Rule compared to the proposal. This 
would allow market participants that currently may be restricted in 
their access to access a greater number of ATSs and Communication 
Protocol Systems and provide them with more options in the selection of 
trading venues than under the proposal. Thus, compared to the proposal, 
these market participants could better access the trading venue that 
best meets their trading objectives, which result in the experiencing 
lower trading costs. With a lower aggregate volume threshold for the 
Fair Access Rule, ATSs and Communication Protocol Systems would incur 
greater compliance costs discussed in Section VIII.C.2.a to comply with 
the Fair Access Rule than under the proposal, which could increase the 
barriers to entry for new ATSs. Additionally, a lower aggregate volume 
threshold for the Fair Access Rule could cause a greater number of 
small ATSs and Communication Protocol Systems to exit the market for 
trading services compared to the proposal. Both higher barriers to 
entry and more ATSs shutting down could result in less competition 
compared to the proposal, which could result in market participants 
facing higher trading costs. Broker-dealers operators that are near the 
lower volume threshold would be more likely to restrict trading in one 
or more of their systems in order to avoid the requirements of the Fair 
Access Rule. This would result in more order flow being absorbed and 
redistributed amongst other trading venues compared to the proposal, 
which could result in higher trading costs, especially if the sole 
provider of a niche service is more likely to limit the trading in 
certain securities.
6. Alter the Government Securities ATS Volume Thresholds for Regulation 
SCI
    Another alternative for the Commission is to alter the Government 
Securities ATS volume thresholds for Regulation SCI.\1222\ A higher 
volume threshold for Regulation SCI would result in a smaller number of 
Government Securities ATSs being subject to Regulation SCI than under 
the proposal. Compared to the proposal, this could result in the 
establishment of less robust systems in Government Securities ATSs that 
would be subject to Regulation SCI under the proposal but fall below 
the higher volume threshold. This may increase the duration and 
severity of any system distributions, and result in more system issues 
occurring on these Government Securities ATSs, which may, in turn, 
cause more interruptions in the price discovery process and liquidity 
flows and increase the occurrence of periods with pricing 
inefficiencies compared to the proposal.\1223\ With a higher volume 
threshold for Regulation SCI, the Commission believes that a smaller 
number of Government Securities ATSs would incur compliance costs 
discussed in Section VIII.C.2.a to comply with Regulation SCI 
requirements than under the proposal. This could lower barriers to 
entry in the market for government securities execution services 
compared to the proposal, which could increase competition, resulting 
in lower trading costs or better execution quality for investors. 
Compared to the proposal, a higher volume threshold for Regulation

[[Page 15642]]

SCI could also lead to less Government Securities ATSs restricting 
trading in certain government securities on their platform in order to 
stay below the volume threshold. This would cause less order flow to be 
absorbed and redistributed amongst other trading venues, which could 
result in lower trading costs compared to the proposal, especially if 
the sole provider of a niche service is less likely to limit the 
trading in certain securities.
---------------------------------------------------------------------------

    \1222\ See supra Sections VII.D.6 and VIII.C.2.a for estimates 
of the number of additional trading venues that would be subject to 
Regulation SCI under the proposal.
    \1223\ See supra Section VIII.C.1.c.
---------------------------------------------------------------------------

    A lower volume threshold for Regulation SCI would result in a 
larger number of Government Securities ATSs being subject to Regulation 
SCI than under the proposal. Compared to the proposal, a lower volume 
threshold for Regulation SCI likely would promote the establishment of 
more robust systems, help reduce the duration and severity of any 
system distributions, and help prevent system issues from occurring on 
smaller Government Securities ATSs that met the lower volume 
thresholds. This, in turn, could help prevent interruptions in the 
price discovery process and liquidity flows and thus may reduce the 
chance of periods with pricing inefficiencies occurring compared to the 
proposal. With a lower volume threshold for Regulation SCI, more 
Government Securities ATSs would incur compliance costs discussed in 
Section VIII.C.2.a to comply with Regulation SCI requirements than 
under the proposal, which could increase the barriers to entry for new 
Government Securities ATSs. This could decrease competition, resulting 
in higher trading costs or worse execution quality for investors 
compared to the proposal. Compared to the proposal, a lower volume 
threshold for Regulation SCI could also lead to more Government 
Securities ATSs restricting trading in certain government securities on 
their platform in order to stay below the volume threshold. This would 
cause more order flow to be absorbed and redistributed amongst other 
trading venues, which could result in higher trading costs compared to 
the proposal, especially if the sole provider of a niche service is 
more likely to limit the trading in certain securities.
7. Exclude Communication Protocol Systems From the Definition of 
``Exchange'' but Require Them To Register as Broker-Dealers
    The proposed amendments to Exchange Act Rule 3b-16 would require 
Communication Protocol Systems to either register as an exchange or 
register as a broker-dealer and comply with Regulation ATS.\1224\ As an 
alternative, the Commission could require Communication Protocol 
Systems to register as broker-dealers, but continue to exclude them 
from the definition of ``exchange'' under Rule 3b-16, and thus, the 
requirements of Regulation ATS and Regulation SCI.\1225\ Under this 
alternative, operators of Communication Protocol Systems would still 
need to register as broker-dealers with the Commission and FINRA, so 
they would still be subject to Commission and FINRA inspections and 
examinations. However, the benefits of enhanced regulatory oversight 
and investor protection would be less than in the proposal because 
Communication Protocol Systems would not be subject to the additional 
reports and requirements of Regulation ATS, which include having to 
report additional information to the Commission on Form ATS and Form 
ATR, or, if applicable, Form ATS-N.\1226\
---------------------------------------------------------------------------

    \1224\ As discussed above, Communication Protocol Systems 
function similarly to exchanges as market places and that including 
them within the definition of ``exchange'', rather than only 
subjecting them to the requirements of broker-dealers, would 
appropriately regulate a market place that brings together buyers 
and sellers of securities. See supra Section II.
    \1225\ The Commission assumes that, under the proposed 
amendments, Communication Protocol Systems would choose to register 
as broker-dealers and comply with Regulation ATS, rather than 
register as national securities exchanges. See supra note 1056 and 
accompanying text.
    \1226\ See supra Section VIII.C.1.a.
---------------------------------------------------------------------------

    Additionally, compared to the proposal, the reduction in market 
participant trading costs and improvements in their execution quality 
would not be as large because Communication Protocol Systems that trade 
government securities or NMS stocks would not be required to file and 
publicly disclose Form ATS-N and because significant Communication 
Protocol Systems would not be subject to the Fair Access Rule.\1227\ 
Furthermore, because significant Communication Protocol Systems would 
not be subject to Regulation SCI or Rule 301(b)(6) of Regulation ATS, 
the enhancements to the price discovery process and liquidity in 
securities markets would be reduced relative to the proposal.\1228\
---------------------------------------------------------------------------

    \1227\ See supra Section VIII.C.1.b. Under this alternative, 
significant Communication Protocol Systems in the NMS stock market 
would also not be required to display their best quotes in the SIP, 
because they would not be subject to the order display and execution 
access requirements of Rule 301(b)(3) of Regulation ATS.
    \1228\ See supra Section VIII.C.1.c.
---------------------------------------------------------------------------

    Under this alternative, Communications Protocol Systems would still 
incur the costs of registering as a broker-dealer, but would not incur 
the additional costs associated with Regulation ATS, including the 
costs associated with the Fair Access Rule and Regulation SCI and Rule 
301(b)(6).\1229\ This could result in less Communication Protocol 
Systems exiting the market and create lower barriers to entry for new 
Communication Protocol Systems compared to the proposal, which, 
relative to the proposal, could increase competition. Increased 
competition, in turn, could lower market participant trading costs and 
increase innovation among Communication Protocol Systems relative to 
the proposal. Since significant Communication Protocol Systems would 
not be subject to the Fair Access Rule or Regulation SCI and Capacity, 
Integrity, and Security Rule, Communication Protocol Systems would not 
have an incentive to restrict trading volume in certain securities to 
avoid reaching the volume threshold associated with these rules. This 
could cause less order flow to be absorbed and redistributed amongst 
other trading venues, which could result in lower trading costs 
compared to the proposal, especially if a Communication Protocol System 
that is the sole provider of a niche service is less likely to limit 
the trading in certain securities.\1230\
---------------------------------------------------------------------------

    \1229\ See supra Section VIII.C.2.
    \1230\ See supra Section VIII.C.2.b.
---------------------------------------------------------------------------

8. Require Forms ATS-N, ATS, and ATS-R To Be Submitted in Inline XBRL
    The proposal would require Government Securities ATSs to file Form 
ATS-N, which is submitted in ATS-N-specific XML. In addition, the 
proposal would require confidential Forms ATS and ATS-R, which are 
currently submitted as paper documents, to be submitted to the 
Commission electronically via EDGAR in unstructured HTML or 
ASCII.\1231\ As an alternative, the Commission might require Form ATS-
N, as well as Forms ATS and ATS-R, to be submitted in the Inline 
eXtensible Business Reporting Language (``Inline XBRL'') data language. 
Inline XBRL is a derivation of XML that is designed for business 
reporting information and is both machine-readable and human-
readable.\1232\ This alternative might

[[Page 15643]]

include numerical detail tagging of quantitative disclosures (e.g., 
platform-wide statistics) and text block tagging for narrative 
disclosures (e.g., trade reporting arrangements).\1233\ Compared to the 
proposal, the Inline XBRL alternative for Forms ATS-N, ATS, and ATS-R 
would provide more sophisticated validation, presentation, and 
reference features for filers and data users. However, the Inline XBRL 
alternative would also impose initial implementation costs (e.g., 
training staff to prepare filings in Inline XBRL, licensing Inline XBRL 
filing preparation software) upon filers that do not have prior 
experience structuring data in the Inline XBRL data language. By 
contrast, because Form ATS-N may be filed using a fillable web form, 
filers that lack experience structuring data in EDGAR Form-specific XML 
would not incur technical implementation costs related to filing Form 
ATS-N under the proposal.
---------------------------------------------------------------------------

    \1231\ See supra Section V.B. The EDGAR system generally 
requires filers to use ASCII or HTML for their document submissions, 
subject to certain exceptions. See Regulation S-T, 17 CFR 
232.101(a)(1)(iv); 17 CFR 232.301; EDGAR Filer Manual (Volume II) 
version 60 (December 2021), at 5-1.
    \1232\ Such a requirement would be implemented by revising 
Regulation S-T (17 CFR part 232) and including an Instruction to 
Forms ATS-N, ATS, and ATS-R which cites to Regulation S-T. In 
conjunction with the EDGAR Filer Manual, Regulation S-T governs the 
electronic submission of documents filed with the Commission. 
Modifying a structured data language requirement for a Commission 
filing or series of filings can generally be accomplished through 
changes to Regulation S-T, and would not require dispersed changes 
to the various rules and forms that would be impacted by the data 
language modification.
    \1233\ See supra Sections IV.D.4.y and IV.D.4.t.
---------------------------------------------------------------------------

9. Require the Content of Form ATS-N To Be Posted on Individual ATS 
Websites
    Under the proposal, Form ATS-N would be filed on the EDGAR system. 
Alternatively, the Commission might require the content of Form ATS-N 
to be posted on the individual ATSs' websites. Requiring the content of 
Form ATS-N to be posted on the individual ATSs' websites rather than 
EDGAR would impose additional direct costs on data users, who would 
need to navigate to and manually retrieve data from different ATSs' 
websites to aggregate, compare, and analyze the data. In addition, 
individual websites would not provide the validation capabilities that 
an EDGAR requirement would enable, and would thus, impose on data users 
the indirect costs associated with lower reliability of the data. An 
individual website requirement would provide a small benefit to bank-
operated Government Securities ATSs relative to the proposal's EDGAR 
requirement, as those entities would not be required to incur the $50 
compliance cost of submitting a Form ID to begin making EDGAR 
filings.\1234\
---------------------------------------------------------------------------

    \1234\ See supra Section VIII.C.2.a.i. The Commission estimates 
that one Currently Exempted Government Securities ATS is operated by 
a bank. See supra Section VII.C.1.
---------------------------------------------------------------------------

E. Request for Comments

    The Commission is sensitive to the potential economic effects, 
including costs and benefits, of the proposed Rule. The Commission has 
identified certain costs and benefits associated with the proposal and 
requests comment on all aspects of its preliminary economic analysis, 
including with respect to the specific questions below. The Commission 
encourages commenters to identify, discuss, analyze, and supply 
relevant data, information, or statistics regarding any such costs or 
benefits.
    177. Do you agree with the Commission's characterization of the 
relevant baseline against which it considered the effects of the 
proposed amendments?
    178. Do you agree with the Commission's characterization of 
Communication Protocol Systems? Please provide any relevant details 
that you believe are missing from the Commission's description.
    179. Do you agree with the Commission's characterization of the 
current state of the government securities market?
    180. Do you agree that PTFs provide liquidity to Government 
Securities ATSs?
    181. Do you agree that trading in the Treasury securities market is 
concentrated in a few large ATSs? Please provide data to support your 
position.
    182. The Commission invites comment on the role of PTFs in trading 
Agency Securities. The Commission also requests comment on the 
providers of liquidity in the market for Agency Securities.
    183. Do you agree with the Commission's characterization of the 
regulatory environment for Government Securities ATSs? Please provide 
any details you feel are relevant to understanding the impact of the 
variation in regulation across different ATSs in this market. Also, do 
you agree that the differences in regulation across different entities 
providing trading services in this market has placed some of them at a 
competitive disadvantage?
    184. Please provide any additional details you feel are relevant to 
the role of Communication Protocol Systems in the government securities 
market.
    185. Do you agree with the Commission's characterization of the 
role played by the RFQ indicative quote streams? Please provide any 
details you feel are important to understanding their role in the 
market.
    186. Do you agree with the Commission's characterization of the 
competition baseline for government securities trading services?
    187. Do you agree with the Commission's characterization of the 
state of the corporate debt market? Please provide any additional 
details you believe are relevant to understanding this market.
    188. Do you agree with the Commission's description of the 
implications of the difference in regulation for Communication Protocol 
Systems compared to ATSs in the corporate debt market?
    189. Do you agree with the Commission's description of the 
competition baseline for providing trading services in the corporate 
debt market? Do you agree with the Commission's characterization of the 
role of the existing regulatory regime in creating the current 
competitive environment?
    190. Do you agree with the Commission's description of the 
municipal debt market?
    191. Do you agree with the Commission's description of broker's 
brokers and their role in the municipal bond market? Please provide any 
details you feel are necessary to fully understanding this point.
    192. The Commission requests any information pertaining to the role 
of Communication Protocol Systems in the market for municipal debt 
generally.
    193. Do you agree with the Commission's description of the equity 
market? In particular, please provide any additional details you feel 
are relevant to understanding the role of Communication Protocol 
Systems in this market.
    194. The Commission requests comment on the extent to which 
Communication Protocol Systems are used in the non-ATS OTC market for 
NMS stocks.
    195. The Commission lacks the data to estimate the number or 
trading volume of IDQS or other OTC equity trading systems that operate 
Communication Protocol Systems and are not registered as ATSs or with 
FINRA, and requests comment on this topic.
    196. Do you agree with the Commission's description of the options 
market?
    197. The Commission requests comment on the full role of 
Communication Protocol Systems in the market for listed options.
    198. Do you agree with the Commission's description of the market 
for repurchase and reverse repurchase agreements?
    199. The Commission requests comment on the full role of 
Communication Protocol Systems in the

[[Page 15644]]

market for repurchase and reverse repurchase agreements.
    200. Do you agree with the Commission's description of the market 
for asset-backed securities?
    201. The Commission requests comment on the full role of 
Communication Protocol Systems in the asset-backed securities market.
    202. The Commission requests comment on whether Communication 
Protocol Systems play a role in the trading of to-be-announced 
mortgage-backed securities.
    203. The Commission requests comment on whether Communication 
Protocol Systems play a role in asset classes besides those discussed 
in Section VIII.B, and on what role they play in those asset classes.
    204. Do you agree that the proposed amendments would enhance 
regulatory oversight and investor protection? Do you agree that 
requiring Communication Protocol Systems to register as broker-dealers 
would help lead to these benefits? Do you believe that the proposed 
amendments would lead to improvements in the safeguarding of 
confidential information?
    205. Do you agree that the proposed amendments would reduce trading 
costs and improve execution quality for market participants? Do you 
agree that Regulation SCI would improve the resiliency of the systems 
that provide trading services in the government securities markets? Do 
you agree that Rule 301(b)(6) would improve the resiliency of systems 
in the applicable securities markets?
    206. Do you agree with the Commission's assessment of the costs of 
the proposed amendments? If not, please provide as many quantitative 
estimates to support your position on costs as possible.
    207. The Commission requests that commenters provide any insights 
or data they may have on the costs associated with the proposed broker-
dealer requirements for Communication Protocol Systems that are 
operated by non-broker-dealers?
    208. Are the initial implementation cost estimates for new and 
existing SCI entities and the ongoing implementation cost estimates for 
all SCI entities under Regulation SCI largely applicable to Government 
Securities ATSs? How would these costs vary between Current Government 
Securities ATSs and Communication Protocol Systems that trade 
government securities? Please explain.
    209. Would Government Securities ATSs also incur direct compliance 
costs (non-PRA based) as SCI entities? The Regulation SCI Adopting 
Release in 2014 estimated that an SCI entity would incur an initial 
cost of between approximately $320,000 and $2.4 million. Additionally, 
an SCI entity would incur an ongoing annual cost of between 
approximately $213,600 and $1.6 million. Are these estimated costs 
applicable to Government Securities ATSs? How might the actual level of 
costs Government Securities ATSs would incur differ from the estimates 
in the Regulation SCI Adopting Release because they differ from 
existing SCI entities? How might other factors, such as the complexity 
of SCI entities' systems and the degree to which SCI entities employ 
third-party systems, affect the estimated costs? How would these costs 
vary between Current Government Securities ATSs and Communication 
Protocol Systems that trade government securities? Please explain and 
provide cost estimates or a range for cost estimates, if possible.
    210. Do you agree with the Commission's assessment of the indirect 
costs of applying the Fair Access rule?
    211. Do you agree that ATSs could break themselves up to stay below 
the volume threshold for Regulation SCI? Please explain.
    212. Do you agree with the Commission's assessment of the impact of 
the proposed amendments on efficiency, competition and capital 
formation? Do you agree that the proposed amendments would allow for 
competition among trading systems on a more equal basis? Do you agree 
with the Commission's assessment as to the risks of increasing barriers 
to entry and causing current trading systems to exit the market?
    213. To what extent would the proposed amendments to Exchange Act 
Rule 3b-16 and Regulation ATS increase the barriers to entry for new 
trading venues or cause some existing trading venues to exit the 
market? How would these effects vary based on the size and/or type of 
trading venue and the securities market in which it operates? Please 
explain in detail.
    214. How would the proposed amendments affect innovation? Please 
explain. If so, which provisions of the proposed amendments would 
affect innovation the most and how? Please explain.
    215. Do you agree with the Commission's assessment of the effects 
of an alternative to require Currently Exempted Government Securities 
ATSs and certain Communication Protocol Systems to file a non-public 
Form ATS?
    216. Do you agree with the Commission's assessment of the effects 
of an alternative to initiate differing levels of public disclosure 
depending on Government Securities ATS (inclusive of a Communication 
Protocol System, as proposed) or other Communication Protocol System 
dollar volume?
    217. Do you agree with the Commission's assessment of the effects 
of an alternative to extend the transparency requirements of Regulation 
ATS to all ATSs and Communication Protocol Systems?
    218. Do you agree with the Commission's assessment of the effects 
of an alternative to apply Rule 301(b)(6) of Regulation ATS to 
Government Securities ATSs?
    219. Do you agree with the Commission's assessment of the effects 
of an alternative to alter the volume thresholds for the Fair Access 
Rule?
    220. Do you agree with the Commission's assessment of the effects 
of an alternative to alter the Government Securities ATS volume 
thresholds for Regulation SCI?
    221. Do you agree with the Commission's assessment of the effects 
of an alternative to require Communication Protocol Systems to register 
as broker-dealers but exempt them from the requirements of Rule 3b-16, 
Regulation ATS, and Regulation SCI?
    222. Do you agree with the Commission's assessment of the effects 
of an alternative to require Forms ATS-N, ATS, and ATS-R to be 
submitted in Inline XBRL?
    223. Do you agree with the Commission's assessment of the effects 
of an alternative to require the content of Form ATS-N to be posted on 
individual ATS websites?
    224. How would the economic effects of the proposal differ if Forms 
ATS-N, ATS, and ATS-R were proposed to be submitted using the 
Commission's Electronic Form Filing System/SRO Rule Tracking System 
(``EFFS/SRTS'')?

IX. Consideration of Impact on the Economy

    For purposes of the Small Business Regulatory Enforcement Fairness 
Act of 1996,\1235\ the Commission requests comment on the potential 
effect of the proposed amendments on the United States economy on an 
annual basis. The Commission also requests comment on any potential 
increases in costs or prices for consumers or individual industries, 
and any potential effect on competition, investment, or innovation. 
Commenters are requested to provide empirical data and other factual 
support for their views to the extent possible.
---------------------------------------------------------------------------

    \1235\ 5 U.S.C. 603.

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[[Page 15645]]

X. Regulatory Flexibility Act Certification

    Section 3(a) of the Regulatory Flexibility Act of 1980 \1236\ 
(``RFA'') requires the Commission to undertake an initial regulatory 
flexibility analysis of the impact of the proposed rule amendments on 
small entities unless the Commission certifies that the rule, if 
adopted, would not have a significant economic impact on a substantial 
number of small entities.\1237\ For purposes of Commission rulemaking 
in connection with the RFA,\1238\ a small entity includes a broker or 
dealer that: (1) Had total capital (net worth plus subordinated 
liabilities) of less than $500,000 on the date in the prior fiscal year 
as of which its audited financial statements were prepared pursuant to 
Rule 17a-5(d) under the Exchange Act,\1239\ or, if not required to file 
such statements, a broker-dealer with total capital (net worth plus 
subordinated liabilities) of less than $500,000 on the last day of the 
preceding fiscal year (or in the time that it has been in business, if 
shorter); and (2) is not affiliated with any person (other than a 
natural person) that is not a small business or small 
organization.\1240\
---------------------------------------------------------------------------

    \1236\ 5 U.S.C. 603(a).
    \1237\ 5 U.S.C. 605(b).
    \1238\ Although Section 601(b) of the RFA defines the term 
``small entity,'' the statute permits agencies to formulate their 
own definitions. The Commission has adopted definitions for the term 
``small entity'' for the purposes of Commission rulemaking in 
accordance with the RFA. Those definitions, as relevant to this 
proposed rulemaking, are set forth in Rule 0-10 under the Exchange 
Act, 17 CFR 240.0-10. See Securities Exchange Act Release No. 18451 
(January 28, 1982), 47 FR 5215 (February 4, 1982) (File No. AS-305).
    \1239\ 17 CFR 240.17a-5(d).
    \1240\ See 17 CFR 240.0-10(c). See also 17 CFR 240.0-10(i) 
(providing that a broker or dealer is affiliated with another person 
if: Such broker or dealer controls, is controlled by, or is under 
common control with such other person; a person shall be deemed to 
control another person if that person has the right to vote 25 
percent or more of the voting securities of such other person or is 
entitled to receive 25 percent or more of the net profits of such 
other person or is otherwise able to direct or cause the direction 
of the management or policies of such other person; or such broker 
or dealer introduces transactions in securities, other than 
registered investment company securities or interests or 
participations in insurance company separate accounts, to such other 
person, or introduces accounts of customers or other brokers or 
dealers, other than accounts that hold only registered investment 
company securities or interests or participations in insurance 
company separate accounts, to such other person that carries such 
accounts on a fully disclosed basis).
---------------------------------------------------------------------------

    All Government Securities ATSs would be required to register as 
broker-dealers, including those that are currently exempt from such 
requirement.\1241\ In addition, all Communications Protocol Systems 
that choose to comply with Regulation ATS in lieu of exchange 
registration will be required to register as broker-dealers.\1242\ The 
Commission examined recent FOCUS data for the 17 broker-dealers that 
currently operate Legacy Government Securities ATSs and concluded that 
1 of the broker-dealer operators of these ATSs had total capital of 
less than $500,000 on the last day of the preceding fiscal year (or in 
the time that it has been in business, if shorter). The Commission 
notes that this broker-dealer operator has never reported any 
transaction volume in any government security or repo to the Commission 
on Form ATS-R. Given that this ATS has never reported any transaction 
volume in government securities to the Commission, the Commission 
believes that this ATSs is unlikely to submit a Form ATS-N if the 
proposed amendments to Regulation ATS are adopted.\1243\ The Commission 
has recently examined recent FOCUS data for 4 broker-dealers that the 
Commission estimates are Currently Exempted Government Securities ATSs 
and concluded that none of the broker-dealer operators of ATSs that 
currently trade government securities had total capital of less than 
$500,000 on the last day of the preceding fiscal year (or in the time 
that it has been in business, if shorter). The Commission has also 
recently examined recent FOCUS data for 7 systems that the Commission 
estimates are Communication Protocol Systems operated by broker-dealers 
or affiliates of broker-dealers and trade various securities asset 
classes including, among others, government securities. The Commission 
concluded that none of these broker-dealer operators of ATSs had total 
capital of less than $500,000 on the last day of the preceding fiscal 
year (or in the time that it has been in business, if shorter). 
Consequently, the Commission certifies that the proposed amendments to 
Regulation ATS would not, if adopted, have a significant economic 
impact on a substantial number of small entities.
---------------------------------------------------------------------------

    \1241\ See supra Section III.B.2. See also 17 CFR 242.301(b)(1).
    \1242\ See supra Section II.D.2.
    \1243\ In order to be as inclusive as is reasonable, the 
Commission is nevertheless counting this ATS for purposes of 
projecting expected costs under the PRA.
---------------------------------------------------------------------------

    The Commission encourages written comments regarding this 
certification. The Commission solicits comment as to whether the 
proposed amendments could have impacts on small entities that have not 
been considered. The Commission requests that commenters describe the 
nature of any impacts on small entities and provide empirical data to 
support the extent of such effect. Such comments will be placed in the 
same public file as comments on the proposed amendments to Regulation 
ATS. Persons wishing to submit written comments should refer to the 
instructions for submitting comments in the front of this release.

XI. Statutory Authority and Text of Proposed Amendments

    Pursuant to Exchange Act, 15 U.S.C. 78a et seq., and particularly 
Sections 3(b), 5, 6, 11A, 15, 15C, 17(a), 17(b), 19, 23(a), and 36 
thereof (15 U.S.C. 78c(b), 78e, 78f, 78o, 78o-5, 78q(a), 78q(b), 78s, 
78w(a), and 78mm), the Commission proposes amendments to Form ATS-N 
under the Exchange Act, Regulation ATS under the Exchange Act, and 17 
CFR parts 232, 240, 242, and 249.

List of Subjects in 17 CFR Parts 232, 240, 242, and 249

    Administrative practices and procedure, Brokers, Confidential 
business information, Fraud, Reporting and recordkeeping requirements, 
Securities.

    For the reasons stated in the preamble, title 17, chapter II of the 
Code of Federal Regulations is proposed to be amended as follows:

PART 232--REGULATION S-T--GENERAL RULES AND REGULATIONS FOR 
ELECTRONIC FILINGS

0
1. The general authority citation for part 232 continues to read as 
follows:

    Authority: 15 U.S.C. 77c, 77f, 77g, 77h, 77j, 77s(a), 77z-3, 
77sss(a), 78c(b), 78l, 78m, 78n, 78o(d), 78w(a), 78ll, 80a-6(c), 
80a-8, 80a-29, 80a-30, 80a-37, 7201 et seq.; and 18 U.S.C. 1350, 
unless otherwise noted.
* * * * *
0
2. Amend Sec.  232.101 by:
0
a. Removing the periods at the end of paragraphs (a)(1)(xiii) and (xiv) 
and adding semicolons in their places;
0
b. Removing the word ``and'' at the end of paragraphs (a)(1)(xviii) and 
(xix);
0
c. Removing the periods at the end of paragraphs (a)(1)(xx) and (xxi) 
and adding semicolons in their places; and
0
d. Adding paragraphs (a)(1)(xxii) and (xxiii).
    The additions read as follows:


Sec.  232.101  Mandated electronic submissions and exceptions.

    (a) * * *
    (1) * * *
    (xxii) Form ATS (Sec.  249.637 of this chapter); and
    (xxiii) Form ATS-R (Sec.  249.638 of this chapter).
* * * * *

[[Page 15646]]

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1934

0
3. The general authority citation for part 240 continues to read as 
follows:

    Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3, 
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78c-3, 78c-5, 78d, 78e, 78f, 
78g, 78i, 78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78n-1, 78o, 78o-4, 
78o-10, 78p, 78q, 78q-1, 78s, 78u-5, 78w, 78x, 78dd, 78ll, 78mm, 
80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4, 80b-11, and 7201 et 
seq., and 8302; 7 U.S.C. 2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18 U.S.C. 
1350; Pub. L. 111-203, 939A, 124 Stat. 1376 (2010); and Pub. L. 112-
106, sec. 503 and 602, 126 Stat. 326 (2012), unless otherwise noted.
* * * * *
0
4. Amend Sec.  240.3b-16 by:
0
a. Revising paragraphs (a)(1) and (2) and (b)(1) and (2);
0
b. Adding paragraph (b)(3);
0
c. Redesignating paragraph (e) as paragraph (f); and
0
d. Adding new paragraph (e).
    The revisions and additions read as follows:


Sec.  240.3b-16  Definitions of terms used in Section 3(a)(1) of the 
Act.

    (a) * * *
    (1) Brings together buyers and sellers of securities using trading 
interest; and
    (2) Makes available established, non-discretionary methods (whether 
by providing a trading facility or communication protocols, or by 
setting rules) under which buyers and sellers can interact and agree to 
the terms of a trade.
    (b) * * *
    (1) Routes trading interest to a national securities exchange, a 
market operated by a national securities association, or a broker-
dealer for execution;
    (2) Allows persons to enter trading interest for execution against 
the bids and offers of a single dealer; and
    (i) As an incidental part of these activities, matches trading 
interest that is not displayed to any person other than the dealer and 
its employees; or
    (ii) In the course of acting as a market maker registered with a 
self-regulatory organization, displays the limit orders of such market 
maker's, or other broker-dealer's, customers; and
    (A) Matches customer orders with such displayed limit orders; and
    (B) As an incidental part of its market making activities, crosses 
or matches orders that are not displayed to any person other than the 
market maker and its employees; or
    (3) Allows an issuer to sell its securities to investors.
* * * * *
    (e) For purposes of this section, the term trading interest means 
an order as the term is defined under paragraph (c) of this section or 
any non-firm indication of a willingness to buy or sell a security that 
identifies at least the security and either quantity, direction (buy or 
sell), or price.
* * * * *

PART 242--REGULATIONS M, SHO, ATS, AC, NMS, AND SBSR AND CUSTOMER 
MARGIN REQUIREMENTS FOR SECURITY FUTURES

0
5. The authority citation for part 242 continues to read as follows:

    Authority: 15 U.S.C. 77g, 77q(a), 77s(a), 78b, 78c, 78g(c)(2), 
78i(a), 78j, 78k-1(c), 78l, 78m, 78n, 78o(b), 78o(c), 78o(g), 
78q(a), 78q(b), 78q(h), 78w(a), 78dd-1, 78mm, 80a-23, 80a-29, and 
80a-37.

0
6. Amend Sec.  242.300 by:
0
a. In paragraph (b), removing ``orders'' and adding in its place 
``trading interest'';
0
b. Revising paragraph (c);
0
c. Adding a sentence at the end of paragraph (k); and
0
d. Adding paragraphs (l) through (s).
    The revision and additions read as follows:


Sec.  242.300  Definitions.

* * * * *
    (c) Affiliate means, with respect to a specified person, any person 
that, directly or indirectly, controls, is under common control with, 
or is controlled by, the specified person.
* * * * *
    (k) * * * An NMS Stock ATS shall not trade securities other than 
NMS stocks.
    (l) Government Securities ATS means an alternative trading system, 
as defined in paragraph (a) of this section, that trades government 
securities, as defined in section 3(a)(42) of the Act (15 U.S.C. 
78c(a)(42)) or repurchase and reverse repurchase agreements on 
government securities. A Government Securities ATS shall not trade 
securities other than government securities or repurchase and reverse 
repurchase agreements on government securities.
    (m) Covered ATS means an NMS Stock ATS or Government Securities 
ATS, as applicable.
    (n) Legacy Government Securities ATS means a Government Securities 
ATS operating as of [effective date of the final rule] that was either:
    (1) Formerly not required to comply with this section and 
Sec. Sec.  242.301 through 242.304 (Regulation ATS) pursuant to the 
exemption under Sec.  240.3a1-1(a)(3) of this chapter prior to 
[effective date of the final rule]; or
    (2) Operating pursuant to an initial operation report on Form ATS 
on file with the Commission as of [effective date of the final rule].
    (o) U.S. Treasury Security means a security issued by the U.S. 
Department of the Treasury.
    (p) Agency Security means a debt security issued or guaranteed by a 
U.S. executive agency, as defined in 5 U.S.C. 105, or government-
sponsored enterprise, as defined in 2 U.S.C. 622(8).
    (q) Trading Interest means an order, as defined in paragraph (e) of 
this section, or any non-firm indication of a willingness to buy or 
sell a security that identifies at least the security and either 
quantity, direction (buy or sell), or price.
    (r) Newly Designated ATS means an alternative trading system 
operating as of [effective date of the final rule] that meets the 
criteria under Sec.  240.3b-16(a) of this chapter as of [effective date 
of the final rule] but did not meet the criteria under Sec.  240.3b-
16(a) of this chapter in effect prior to [effective date of the final 
rule].
    (s) Covered Newly Designated ATS means a Newly Designated ATS that 
is a Government Securities ATS or NMS Stock ATS.
0
7. Amend Sec.  242.301 by:
0
a. Removing and reserving paragraphs (a)(4)(ii)(A) through (C);
0
b. Revising paragraphs (b)(1) and (b)(2)(i);
0
c. In paragraph (b)(2)(vi), adding the words ``and information filed 
pursuant to paragraph (b)(9) of this section'' after the words 
``pursuant to this paragraph (b)(2)'';
0
d. Revising paragraphs (b)(2)(vii) and (viii) and (b)(5)(i) 
introducotry text;
0
e. In paragraph (b)(5)(i)(A), adding the word ``share'' after the 
phrase ``average daily'';
0
f. In paragraph (b)(5)(i)(B), adding the word ``share'' after the 
phrase ``average daily trading'';
0
g. In paragraphs (b)(5)(i)(C):
0
i. Adding the word ``dollar'' after the phrase ``average daily'';
0
ii. Adding the phrase ``as provided by the self-regulatory organization 
to which such transactions are reported'' after the phrase ``in the 
United States''; and
0
iii. Removing the word ``or'' at the end of the paragraph;
0
h. In paragraph (b)(5)(i)(D):
0
i. Adding the word ``dollar'' after the phrase ``average daily'';
0
ii. Adding the phrase ``as provided by self-regulatory organizations to 
which such transactions are reported'' after the phrase ``in the United 
States''; and
0
iii. Removing the period and adding a semicolon in its place;
0
i. Adding paragraphs (b)(5)(i)(E), (F), and (G);

[[Page 15647]]

0
j. Removing paragraph (b)(5)(iii);
0
k. Redesignating paragraph (b)(5)(ii) as paragraph (b)(5)(iii) and 
revising the newly redesiganted paragraph;
0
l. Adding new paragraph (b)(5)(ii);
0
m. In paragraphs (b)(6)(i)(A) and (B), adding the word ``dollar'' after 
the phrase ``average daily'';
0
n. Removing paragraph (b)(6)(iii);
0
o. In paragraph (b)(9)(i):
0
i. Removing the words ``Separately file'' and adding ``File'' in their 
place; and
0
ii. Removing the phrase ``for transactions in NMS stocks, as defined in 
paragraph (g) of this section, and transactions in securities other 
than NMS stocks''; and
0
p. In paragraph (b)(9)(ii):
0
i. Removing the words ``Separately file'' and adding ``File'' in their 
palce; and
0
ii. Removing the phrase ``for transactions in NMS stocks and 
transactions in securities other than NMS stocks''.
    The revisions and additions read as follows:


Sec.  242.301  Requirements for alternative trading systems.

* * * * *
    (b) * * *
    (1) Broker-dealer registration. The alternative trading system 
shall register as a broker-dealer under section 15 of the Act (15 
U.S.C. 78o) or section 15C(a)(1)(A) of the Act (15 U.S.C. 78o-
5(a)(1)(A)). Notwithstanding the preceding sentence, provided that it 
complies with the applicable conditions in Sec.  240.3a1-1(a)(2) of ths 
chapater, an alternative trading system that is not registered as a 
broker-dealer and is either:
    (i) A Legacy Government Securities ATS that was formerly not 
required to comply with Sec. Sec.  242.300 through 242.304 (Regulation 
ATS) pursuant to the exemption under Sec.  240.3a1-1(a)(3) of this 
chapter prior to [effective date of the final rule]; or
    (ii) A Newly Designated ATS, may provisionally operate pursuant to 
the exemption under Sec.  240.3a1-1(a)(2) of this chapter, until the 
earlier of:
    (A) The date the alternative trading system registers as a broker-
dealer under section 15 of the Act or section 15C(a)(1)(A) of the Act 
and becomes a member of a national securities association; or
    (B) [date 210 calendar days after the effective date of the final 
rule].
    (2) * * *
    (i) The alternative trading system (other than a Covered ATS) shall 
file an initial operation report on Form ATS, Sec.  249.637 of this 
chapter, in accordance with the instructions therein, at least 20 days 
prior to commencing operation as an alternative trading system. 
Notwithstanding the preceding sentence, a Newly Designated ATS (other 
than a Covered Newly Designated ATS) shall file an initial operation 
report on Form ATS, in accordance with the instructions therein, no 
later than [date 30 calendar days after the effective date of the final 
rule].
* * * * *
    (vii) An ATS must file a Form ATS or Form ATS-R in accordance with 
the instructions therein. The reports provided for in paragraphs (b)(2) 
and (9) of this section shall be filed on Form ATS or Form ATS-R, as 
applicable, and include all information as prescribed in Form ATS or 
Form ATS-R, as applicable, and the instructions thereto. Any such 
document shall be executed at, or prior to, the time Form ATS or Form 
ATS-R is filed and shall be retained by the ATS in accordance with 
Sec.  242.303 and Sec.  232.302 of this chapter, and the instructions 
in Form ATS or Form ATS-R, as applicable. Duplicates of the reports 
provided for in paragraphs (b)(2)(i) through (v) of this section must 
be filed with surveillance personnel designated as such by any self-
regulatory organization that is the designated examining authority for 
the alternative trading system pursuant to Sec.  240.17d-1 of this 
chapter simultaneously with filing with the Commission. Duplicates of 
the reports required by paragraph (b)(9) of this section shall be 
provided to surveillance personnel of such self-regulatory authority 
upon request. All reports filed pursuant to this paragraph (b)(2) and 
paragraph (b)(9) of this section (except for types of securities traded 
provided on Form ATS and Form ATS-R) will be accorded confidential 
treatment subject to applicable law.
    (viii) A Legacy Government Securities ATS operating pursuant to an 
initial operation report on Form ATS on file with the Commission as of 
[effective date of the final rule] shall be subject to the requirements 
of paragraphs (b)(2)(i) through (vii) of this section until that ATS 
files an initial Form ATS-N with the Commission pursuant to Sec.  
242.304(a)(1)(iv)(A). Thereafter, the Legacy Government Securities ATS 
shall file reports pursuant to Sec.  242.304 and shall not be subject 
to the requirements of paragraphs (b)(2)(i) through (vii) of this 
section. A Legacy Government Securities ATS that was formerly not 
required to comply with Regulation ATS pursuant to the exemption under 
Sec.  240.3a1-1(a)(3) of this chapter prior to [effective date of the 
final rule], or a Covered Newly Designated ATS, shall file reports 
pursuant to Sec.  242.304 and shall not be subject to the requirements 
of paragraphs (b)(2)(i) through (vii) of this section. As of [effective 
date of the final rule], an entity seeking to operate as a Government 
Securities ATS shall not be subject to the requirements of paragraphs 
(b)(2)(i) through (vii) of this section and shall file reports pursuant 
to Sec.  242.304. An NMS Stock ATS or entity seeking to operate as an 
NMS Stock ATS shall not be subject to the requirements of paragraphs 
(b)(2)(i) through (vii) of this section and shall file reports pursuant 
to Sec.  242.304. An ATS that is not a Covered ATS shall be subject to 
paragraph (b)(2) of this section. Each Covered ATS that is operated by 
a broker-dealer that is the registered broker-dealer for more than one 
ATS must comply with Regulation ATS, including the filing requirements 
of Sec.  242.304.
* * * * *
    (5) Fair access. (i) An alternative trading system shall comply 
with the requirements in paragraph (b)(5)(iii) of this section, if 
during at least 4 of the preceding 6 calendar months, such alternative 
trading system had:
* * * * *
    (E) With respect to U.S. Treasury Securities, 3 percent or more of 
the average weekly dollar volume traded in the United States as 
provided by the self-regulatory organization to which such transactions 
are reported; or
    (F) With respect to Agency Securities, 5 percent or more of the 
average daily dollar volume traded in the United States as provided by 
the self-regulatory organization to which such transactions are 
reported.
    (G) Provided, however, that a Newly Designated ATS or Legacy 
Government Securities ATS shall not be required to comply with the 
requirements in paragraph (b)(5)(iii) of this section until one month 
after initially satisfying any of the paragraphs (b)(5)(i)(A) through 
(F) of this section.
    (ii) For purposes of calculating the volume thresholds of paragraph 
(b)(5)(i) of this section, the average transaction volume for a 
security or security category of alternative trading systems that are 
operated by a common broker-dealer, or alternative trading systems 
operated by affiliated broker-dealers, will be aggregated.
    (iii) An alternative trading system shall:
    (A) Establish and apply reasonable written standards for granting, 
limiting, and denying access to the services of the

[[Page 15648]]

alternative trading system that, at a minimum:
    (1) Provide the date that each standard is adopted, effective, and 
modified;
    (2) Set forth any objective and quantitative criteria upon which 
each standard is based;
    (3) Identify any differences in access to the services of the 
alternative trading system by an applicant and current participants;
    (4) Justify why each standard, including any differences in access 
to the services of the alternative trading system, is fair and not 
unreasonably discriminatory; and
    (5) Provide the information required by paragraphs 
(b)(5)(iii)(A)(1) through (4) of this section about any standards for 
granting, limiting, or denying access to the alternative trading system 
services that are performed by a person other than the broker-dealer 
operator.
    (B) Make and keep records of:
    (1) All grants of access including, for all participants, the 
reasons for granting such access under the standards provided in 
paragraph (b)(5)(iii)(A) of this section; and
    (2) All denials or limitations of access and reasons, for each 
applicant and participant, for denying or limiting access to the 
services of the alternative trading system under the standards provided 
in paragraph (b)(5)(iii)(A) of this section; and
    (C) Report the information required on Form ATS-R (Sec.  249.638 of 
this chapter) regarding grants, denials, and limitations of access.
* * * * *


Sec.  242.302  Recordkeeping requirements for alternative trading 
systems.

0
8. Amend Sec.  242.302 by:
0
a. In the introductory text to paragraph (c), removing ``order'' and 
adding in its place ``trading interest'';
0
b. In paragraphs (c)(1), (3), (5), and (8) through (15), removing 
``order'' wherever it appears and adding in its place ``trading 
interest''; and
0
c. In paragraph (c)(5), removing ``a'' before the phrase ``buy or 
sell''.


Sec.  242.303  Record preservation requirements for alternative trading 
systems.

0
9. Amend Sec.  242.303 by:
0
a. In paragraph (a)(1)(iii), adding ``, including each version,'' after 
the phrase ``at least one copy'' and adding ``written'' before the word 
``standards'';
0
b. In paragraph (a)(1)(iv), adding ``, including each version,'' after 
the phrase ``At least one copy''; and
0
c. In paragraph (a)(1)(v), adding ``, including each version,'' after 
the phrase ``At least one copy''.
0
10. Amend Sec.  242.304 by:
0
a. Revising the section heading;
0
b. In the introductory text to paragraph (a), removing ``an NMS Stock 
ATS'' and adding in its place ``a Covered ATS'';
0
c. In paragraphs (a)(1)(i) through (iii):
0
i. Removing ``an NMS Stock ATS'' wherever it appears and adding in its 
place ``a Covered ATS''; and
0
ii. Removing ``NMS Stock ATS'' wherever it appears and adding in its 
place ``Covered ATS'';
0
d. In paragraph (a)(1)(i), adding a sentence at the end of the 
paragraph;
0
e. In paragraph (a)(1)(ii)(A)(1), removing the phrase ``the Form ATS-N 
is unusually lengthy or raises novel or complex issues that require 
additional time for review'' and adding in its place ``the Commission 
determines that a longer period is appropriate'';
0
f. In paragraph (a)(1)(ii)(B), removing the phrase ``paragraphs 
(a)(2)(i)(B) and (C)'' and adding in its place ``paragraphs 
(a)(2)(i)(B), (C), and (E)'';
0
g. In paragraph (a)(1)(iv):
0
i. Revising the paragraph heading; and
0
ii. Removing ``Legacy NMS Stock ATS'' wherever it appears and adding in 
its place ``Legacy Government Securities ATS or Covered Newly 
Designated ATS'';
0
h. Revising paragraph (a)(1)(iv)(A) introductory text;
0
i. In the introductory text to paragraph (a)(1)(iv)(B), removing 
``120'' and adding in its place ``180'';
0
j. In paragraph (a)(1)(iv)(B)(1), removing ``the initial Form ATS-N is 
unusually lengthy or raises novel or complex issues that require 
additional time for review'' and ``initial 120-calendar day'' and 
adding in their places ``the Commission determines that a longer period 
is appropriate'' and ``initial 180-calendar day'', respectively;
0
k. In the introductory text to paragraph (a)(2)(i), removing ``An NMS 
Stock ATS'' and adding ``A Covered ATS'' in its place;
0
l. In paragraph (a)(2)(i)(A), removing ``except as provided by 
paragraph (a)(2)(i)(D) of this section,'' and ``NMS Stock ATS'' and 
adding in their places ``or the length of any extended review period 
pursuant to paragraph (a)(2)(ii)(A) of this section,'' and ``Covered 
ATS'', respectively;
0
m. In paragraph (a)(2)(i)(B), removing ``or (D)'' and adding ``(D), or 
(E)'' in its place;
0
n. In paragraph (a)(2)(i)(C), removing ``or'' at the end of the 
paragraph;
0
o. In paragraph (a)(2)(i)(D):
0
i. Removing ``Items 24 and 25'' and ``Order Display and Fair Access 
Amendment'' and adding in their places ``Items 23 and 24'' and 
``Contingent Amendment'', respectively; and
0
ii. Removing the period at the end of the paragraph and adding ``; or'' 
in its place;
0
p. Adding paragraph (a)(2)(i)(E);
0
q. Revising paragraph (a)(2)(ii);
0
r. In paragraphs (a)(3) and (4), (b), and (c):
0
i. Removing ``An NMS Stock ATS'' and ``an NMS Stock ATS'' and adding in 
their places ``A Covered ATS'' and ``a Covered ATS'', respectively; and
0
ii. Removing ``NMS Stock ATS'' wherever it appears and adding in its 
place ``Covered ATS'';
0
s. In paragraph (b)(2)(iii)(A):
0
i. Removing the colon at the end of the paragrpah heading and adding a 
period in its place; and
0
ii. Adding ``, or any extended review period,'' after ``the expiration 
of the review period''; and
0
t. In paragraph (b)(2)(iii)(B):
0
i. Revising the heading; and
0
ii. In the first sentence, removing ``Updating, Correcting, and Order 
Display and Fair Access Amendments'' and adding ``Updating, Correcting, 
Fee, and Contingent Amendments'' in it place.
    The revisions and addition read as follows:


Sec.  242.304  Covered ATSs.

    (a) * * *
    (1) * * *
    (i) * * * Notwithstanding the preceding sentence, a Legacy 
Government Securities ATS that was formerly not required to comply with 
Sec. Sec.  242.300 through 242.304 (Regulation ATS) pursuant to the 
exemption under Sec.  240.3a1-1(a)(3) of this chapter prior to 
[effective date of the final rule] or Covered Newly Designated ATS, may 
continue to operate pursuant to the exemption under Sec.  240.3a1-
1(a)(2) of this chapter until its initial Form ATS-N becomes effective.
* * * * *
    (iv) Transition for Legacy Government Securities ATSs and Covered 
Newly Designated ATSs--(A) Initial Form ATS-N filing requirements. A 
Legacy Government Securities ATS or a Covered Newly Designated ATS 
shall file with the Commission an initial Form ATS-N, in accordance 
with the conditions of this section, no later than [date 90 calendar 
days after the effective date of the final rule]. An initial Form ATS-N 
filed by a Legacy Government Securities ATS operating pursuant to an 
initial operation report on Form ATS on file with the Commission as of 
[effective date of the final rule] shall supersede and replace for 
purposes of the exemption the previously filed Form ATS of the Legacy 
Government Securities ATS. A Legacy Government

[[Page 15649]]

Securities ATS or Covered Newly Designated ATS may operate, on a 
provisional basis, pursuant to the filed initial Form ATS-N, and any 
amendments thereto, during the review of the initial Form ATS-N by the 
Commission. An initial Form ATS-N filed by a Legacy Government 
Securities ATS or Covered Newly Designated ATS, as amended, will become 
effective, unless declared ineffective, upon the earlier of:
* * * * *
    (2) * * *
    (i) * * *
    (E) No later than the date that the information required to be 
disclosed in Part III, Item 18 on Form ATS-N has become inaccurate or 
incomplete (``Fee Amendment'').
    (ii) Commission review period; ineffectiveness determination. (A) 
The Commission will, by order, declare ineffective any Form ATS-N 
amendment filed pursuant to paragraphs (a)(2)(i)(A) through (E) of this 
section, no later than 30 calendar days from filing with the 
Commission, or, if applicable, the end of the extended review period, 
if the Commission finds that such action is necessary or appropriate in 
the public interest, and is consistent with the protection of 
investors. The Commission may extend the amendment review period for:
    (1) An additional 30 calendar days, if the Commission determines 
that a longer period is appropriate; or
    (2) Any extended review period to which a duly authorized 
representative of the Covered ATS agrees in writing.
    (B) A Form ATS-N amendment declared ineffective shall prohibit the 
Covered ATS from operating pursuant to the ineffective Form ATS-N 
amendment. A Form ATS-N amendment declared ineffective does not prevent 
the Covered ATS from subsequently filing a new Form ATS-N amendment.
    (C) During review by the Commission of a Material Amendment, the 
Covered ATS shall amend the Material Amendment pursuant to the 
requirements of paragraphs (a)(2)(i)(B) through (C) of this section. To 
make material changes to a filed Material Amendment during the 
Commission review period, an ATS shall withdraw its filed Material 
Amendment and must file the new Material Amendment pursuant to 
(a)(2)(i)(A) of this section.
* * * * *
    (b) * * *
    (2) * * *
    (iii) * * *
    (B) Updating, Correcting, Fee, and Contingent Amendments. * * *
* * * * *
0
11. Amend Sec.  242.1000 by:
0
a. Adding, in alphabetical order, a definition for ``Agency 
Securities'';
0
b. In the definition of ``SCI alternative trading system or SCI ATS'':
0
i. Removing the word ``or'' at the end of paragraph (1)(ii);
0
ii. Redesignating paragraph (3) as paragraph (5);
0
iii. Adding a new paragraph (3) and paragraph (4); and
0
iv. In newly redesignated paragraph (5), removing ``paragraphs (1) or 
(2)'' and adding in its place ``paragraph (1), (2), (3), or (4)''; and
0
c. Adding, in alphabetical order, a definition for ``U.S. Treasury 
Securities''.
    The additions read as follows:


Sec.  242.1000  Definitions.

* * * * *
    Agency Security has the meaning set forth in Sec.  242.300(p).
* * * * *
    SCI alternative trading system or SCI ATS * * *
    (3) Had with respect to U.S. Treasury Securities, five percent (5%) 
or more of the average weekly dollar volume traded in the United States 
as provided by the self-regulatory organization to which such 
transactions are reported; or
    (4) Had with respect to Agency Securities, five percent (5%) or 
more of the average daily dollar volume traded in the United States as 
provided by the self-regulatory organization to which such transactions 
are reported.
* * * * *
    U.S. Treasury Security has the meaning set forth in Sec.  
242.300(o).

PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934

0
12. The general authority citation for part 249 continues to read as 
follows:

    Authority: 15 U.S.C. 78a et seq. and 7201 et seq.; 12 U.S.C. 
5461 et seq.; 18 U.S.C. 1350; Sec. 953(b) Pub. L. 111-203, 124 Stat. 
1904; Sec. 102(a)(3) Pub. L. 112-106, 126 Stat. 309 (2012), Sec. 107 
Pub. L. 112-106, 126 Stat. 313 (2012), Sec. 72001 Pub. L. 114-94, 
129 Stat. 1312 (2015), and secs. 2 and 3 Pub. L. 116-222, 134 Stat. 
1063 (2020), unless otherwise noted.
* * * * *
0
13. Amend Form ATS (referenced in Sec.  249.637) by:
0
a. In the General Instructions, Item A.2, after ``commencing 
operation'' adding ``and a Newly Designated ATS (other than a Covered 
Newly Designated ATS, as defined in Rule 300(s) of the Exchange Act (17 
CFR 242.300(s))) must file an initial operation report on Form ATS no 
later than [date 30 calendar days after the date of effective date of 
the final rule].''.
0
b. In the General Instructions, revising Items A.3 through A.6.
0
c. In the General Instructions, revising the fifth and seventh 
paragraphs of Item A.7.
0
d. In the General Instructions, adding new paragraph A.8.
0
e. In the Explanation of Terms, in the definition of ``Subscriber'', 
removing the word ``order'' and adding ``trading interest'' in its 
place.
0
f. In the Explanation of Terms, adding the definition of ``Trading 
Interest'' and ``Newly Designated ATS'' in alphabetical order.
0
g. At the top of page 1 of the form, removing ``INITIAL OPERATION 
REPORT'', ``AMENDMENT TO INITIAL OPERATION REPORT'', ``CESSATION OF 
OPERATIONS REPORT'' and accompanying check boxes and adding text under 
a new heading ``Type of Filing (select one)''.
0
h. At the top and side of page 1 to the Form removing:
0
i. ``Form ATS Page 1 Execution Page'';
0
ii. ``Date filed (MM/DD/YY)''; and
0
ii. ``[OFFICIAL USE ONLY]''.
0
i. Revising Items 2 through 5.
0
j. Removing Items 6 through 11.
0
k. Removing the text on page 1 of the form beginning ``EXECUTION'', the 
signature block below, the instruction that states ``This page must 
always be completed in full with original, manual signature and 
notarization. Affix notary stamp or seal where applicable.'' and ``DO 
NOT WRITE BELOW THIS LINE--FOR OFFICIAL USE ONLY''.
0
l. On page 2 of the form, removing the following text:

Alternative trading system name:---------------------------------------
Filing date:-----------------------------------------------------------
CRD Number:------------------------------------------------------------
SEC File Number: 8-----------------------------------------------------

0
m. At the top and side of page 2 to the Form removing:
0
i. ``Form ATS Page 2 Execution Page'';
0
ii. ``Date filed (MM/DD/YY)''; and
0
iii. ``[OFFICIAL USE ONLY]''.
    The revisions and additions read as follows:

    Note: The text of Form ATS does not and this amendment will not 
appear in the Code of Federal Regulations.

BILLING CODE 8011-01-P

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* * * * *
0
14. Amend Form ATS-R (referenced in Sec.  249.638) by:
0
a. In the General Instructions, revising Items A.3 through A.6.
0
b. In the General Instructions, revising the fifth and seventh 
paragraphs of Item A.7.
0
c. In the Explanation of Terms, removing the definitions of ``Nasdaq 
National Market Securities'' and ``Nasdaq SmallCap Market Securities''.
0
d. In the Explanation of Terms, adding the definitions of ``Agency 
Securities,'' ``Foreign Sovereign Debt Securities,'' ``U.S. Treasury 
Securities,'' and ``Trading Interest''.
0
e. In the Explanation of Terms, in the definition of ``Subscriber,'' 
removing the word ``order'' and adding in its place the word ``trading 
interest''.
0
f. On page 1 of the form, immediately before Section 1, adding text 
under a new heading ``Type of Filing''.
0
g. At the top and side of page 1 to the Form removing:
0
i. ``Form ATS Page 1 Execution Page'';
0
ii. ``Date filed (MM/DD/YY)''; and
0
iii. ``[OFFICIAL USE ONLY]''.
0
h. Revising Item 1.
0
i. Removing the text on page 1 of the form beginning ``EXECUTION'', the 
signature block below, the instruction that states ``This page must 
always be completed in full with original, manual signature and 
notarization. Affix notary stamp or seal where applicable.'' and ``DO 
NOT WRITE BELOW THIS LINE--FOR OFFICIAL USE ONLY''.
0
j. On pages 2 and 3 of the form, removing the following text:

DO NOT WRITE BELOW THIS LINE--FOR OFFICIAL USE ONLY

Alternative trading system name:---------------------------------------
Filing date:-----------------------------------------------------------
CRD Number:------------------------------------------------------------
SEC File Number: 8-----------------------------------------------------

0
k. At the top and side of page 2 to the Form removing:
0
i. ``Form ATS Page 2 Execution Page'';
0
ii. ``Date filed (MM/DD/YY)''; and
0
iii. ``[OFFICIAL USE ONLY]''.
0
l. At the top and side of page 3 to the Form removing:
0
i. ``Form ATS Page 3 Execution Page'';
0
ii. ``Date filed (MM/DD/YY)''; and
0
iii. ``[OFFICIAL USE ONLY]''.
0
m. Revising Item 4.
0
n. Adding Item 5.C.
0
o. Revising Item 6.
0
p. Adding Item 8.
0
q. Adding a signature block at the end of the form.
    The additions and revisions read as follows:

    Note: The text of Form ATS-R does not and this amendment will 
not appear in the Code of Federal Regulations.

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0
15. Revise Form ATS-N (referenced in Sec.  249.640).

    Note: Form ATS-N is attached as Appendix A to this document. 
Form ATS-N will not appear in the Code of Federal Regulations.


    Dated: January 26, 2022.
Vanessa A. Countryman,
Secretary.

    Note: The following appendix will not appear in the Code of 
Federal Regulations.

APPENDIX A--MARKED FORM ATS-N

    Deleted text is [bracketed]. New text is italicized.

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[FR Doc. 2022-01975 Filed 3-17-22; 8:45 am]
 BILLING CODE 8011-01-C


