Notice2022-00879
Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Order Approving Proposed Rule Change To Amend FINRA Rule 6732 and Expand the Scope of Exemptions That FINRA May Grant ATSs From the TRACE Reporting Requirements
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
January 19, 2022
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 87 Issue 12 (Wednesday, January 19, 2022)</title>
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[Federal Register Volume 87, Number 12 (Wednesday, January 19, 2022)]
[Notices]
[Pages 2976-2977]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-00879]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-93966; File No. SR-FINRA-2021-029]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Order Approving Proposed Rule Change To Amend FINRA
Rule 6732 and Expand the Scope of Exemptions That FINRA May Grant ATSs
From the TRACE Reporting Requirements
January 12, 2022.
I. Introduction
On November 15, 2021, the Financial Industry Regulatory Authority,
Inc. (``FINRA'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to amend FINRA Rule 6732 (Exemption from Trade
Reporting Obligation for Certain Transactions on an Alternative Trading
System) to expand the scope of exemptions from the transaction
reporting obligations of FINRA Rule 6730 (Transaction Reporting) that
FINRA may grant to a member alternative trading system (``ATS''). The
proposed rule change was published for comment in the Federal Register
on November 30, 2021.\3\ The Commission received no comments on the
proposed rule change. This order approves the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 93651 (November 23,
2021), 86 FR 67996 (November 30, 2021) (``Notice'').
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II. Description of the Proposal
FINRA Rule 6730(a) requires each FINRA member that is a Party to a
Transaction in a TRACE-Eligible Security \4\ to report the transaction
to the Trade Reporting and Compliance Engine (``TRACE''). FINRA Rule
6710(e) defines ``Party to a Transaction'' as an introducing broker-
dealer (if any), an executing broker-dealer, or a customer. An
alternative trading system (``ATS'') is a Party to a Transaction
occurring through its system and has a TRACE transaction reporting
obligation, unless an exception or exemption applies.\5\
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\4\ See FINRA Rule 6710(a) (defining ``TRACE-Eligible
Security'').
\5\ See Regulatory Notice 14-53 (November 2014).
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FINRA Rule 6732 provides FINRA with the authority to exempt a
member ATS from TRACE reporting obligations under FINRA Rule 6730.
FINRA has stated that it adopted Rule 6732 in response to concerns
raised by members regarding operational difficulties arising from the
reporting of certain transactions on an ATS, particularly when the ATS
does not have a role in the clearance and settlement for trades on its
system.\6\ If FINRA grants an ATS an exemption under Rule 6732, a
member subscriber of the ATS, when engaging in a trade on the ATS
covered by the Rule 6732 exemption, must report against its
counterparty (rather than the ATS), which mitigates these operational
difficulties and facilitates clearance and settlement.\7\
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\6\ See Notice, 86 FR at 67997. FINRA explained that members'
back-end systems are often programmed to clear against the
counterparty identified on TRACE trade reports, and when the ATS is
not involved in clearance and settlement, member subscribers often
prefer to TRACE-report against the party with which they clear and
settle the trade (i.e., another subscriber, rather than the ATS).
See id.
\7\ See id.
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Currently, under Rule 6732, FINRA may grant an ATS an exemption if
the following criteria are satisfied: (1) A trade is between two FINRA
members; (2) the trade does not pass through any ATS account, and the
ATS seeking the exemption does not exchange TRACE-Eligible Securities
or funds on behalf of the subscribers or take either side of the trade
for clearing or settlement purposes, or in any other way insert itself
into the trade; (3) the ATS seeking the exemption agrees to provide
data relating to each exempted trade to FINRA on either a monthly basis
or as otherwise proscribed by FINRA, and acknowledges that failure to
meet this requirement would result in its exemption being revoked; (4)
the ATS seeking the exemption pays the applicable reporting fee to
FINRA; and (5) the ATS seeking the exemption has entered into a written
agreement with each member that is a Party to a Transaction to ensure
that each exempted trade is properly reported.\8\ Where these criteria
are satisfied, an exempted trade occurring on the ATS must be reported
by a member (other than the ATS) that meets the definition of ``Party
to a Transaction'' identifying a counterparty other than the ATS with
respect to each side of the trade.\9\
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\8\ See FINRA Rule 6732(a).
\9\ See FINRA Rule 6732(b).
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FINRA is now proposing to amend Rule 6732 to expand the scope of
transactions that may be exempted under Rule 6732 to include trades
that involve only one FINRA member (other than the ATS). Specifically,
FINRA proposes to delete the current language in subparagraph (a)(1) of
Rule 6732 that requires an exempted transaction to be between two FINRA
members, and
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replace it with the following: ``The trade involves at least one member
(other than the ATS) that meets the definition of `Party to a
Transaction.' ''
FINRA has stated that, in many cases, transactions on an ATS that
involve only one member are otherwise similar to the transactions
between two members that are currently eligible for exemptive relief
under existing Rule 6732.\10\ FINRA believes that expanding the scope
of the current exemption to permit its use for transactions between a
member (other than the ATS) and a non-member subscriber would extend
the benefits of the rule--including simplifying compliance with TRACE
trade reporting obligations--for additional ATS models and member
subscribers, while capturing substantially the same regulatory
information and enabling public dissemination of the transaction in a
more streamlined manner.\11\
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\10\ See Notice, 86 FR at 67997.
\11\ See id.
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FINRA also has proposed to add new paragraph (c) to Rule 6732,
which provides that, with respect to a transaction between a member and
a non-member on an ATS that is a ``covered ATS,'' \12\ the ATS must
provide to the member subscriber, and the member subscriber must report
to TRACE using, the FINRA-assigned identifier for each non-FINRA member
subscriber. FINRA also has stated that an ATS that has received an
exemption under Rule 6732 and that is a ``covered ATS'' must use the
FINRA-assigned identifier to identify each non-FINRA member subscriber
in the monthly transaction files that are required to be submitted to
FINRA.\13\
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\12\ See FINRA Rule 6730.07 (defining ``covered ATS'' as an ATS
``that executed transactions in U.S. Treasury Securities against
non-FINRA member subscribers of $10 billion or more in monthly par
value, computed by aggregating buy and sell transactions, for any
two months in the preceding calendar quarter'').
\13\ See Notice, 86 FR at 67998, n. 12.
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FINRA has represented that it will announce the effective date of
the rule change in a Regulatory Notice, and the effective date will be
no later than 365 days following Commission approval of the proposed
rule change.\14\
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\14\ See Notice, 86 FR at 67998.
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III. Discussion and Commission Findings
After careful consideration, the Commission finds that the proposed
rule change is consistent with the requirements of the Act and the
rules and regulations thereunder applicable to a national securities
association.\15\ In particular, the Commission finds that the proposed
rule change is consistent with Section 15A(b)(6) of the Act,\16\ which
requires, among other things, that the rules of a national securities
association be designed to prevent fraudulent and manipulative acts and
practices, to promote just and equitable principles of trade, and, in
general, to protect investors and the public interest.
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\15\ In approving this proposal, the Commission has considered
the proposed rule's impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
\16\ 15 U.S.C. 78o-3(b)(6).
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The proposed rule change appears reasonably designed to reduce
reporting burdens on member ATSs and to mitigate operational burdens of
ATS member subscribers with respect to clearance and settlement,
without negatively impacting the regulatory audit trail or post-trade
transparency for ATS transactions in TRACE-Eligible Securities. The
proposed rule change will expand the scope of existing Rule 6732 by
allowing FINRA to grant exemptions from the TRACE reporting
requirements to ATSs regarding member-to-non-member trades in addition
to, as currently, member-to-member trades. The proposal does not change
any of the other criteria for granting an exemption under Rule 6732.
Thus, although an ATS receiving an exemption pursuant to FINRA's
expanded authority under Rule 6732 would no longer be submitting TRACE
reports regarding exempted trades, the proposal appears reasonably
designed to prevent any relevant information regarding such trades from
being lost from the regulatory audit trail. An ATS granted an exemption
under FINRA's expanded authority would have to enter into a written
agreement with each member subscriber that is a Party to a Transaction
that is exempted, specifying that the member must report that
transaction to TRACE and identify the transaction as having occurred on
the ATS using the ATS's MPID.\17\ The sole member subscriber involved
in the transaction would have to identify a counterparty other than the
ATS with respect to each side of the transaction.\18\ In addition, an
ATS granted an exemption would have to agree to provide FINRA on a
monthly basis (or such other basis as prescribed by FINRA) data
relating to exempted trades occurring on the ATS's system, and to
acknowledge that failure to report such data to FINRA, in addition to
constituting a violation of FINRA rules, would result in revocation of
any exemption granted pursuant to Rule 6732.\19\ Furthermore, under new
Rule 6732(c), for an exempted trade between a member and a non-member
on an ATS that is a ``covered ATS'' under FINRA Rule 6730.07, the ATS
would have to provide to the member subscriber (and the member
subscriber would have to report to TRACE using) the FINRA-assigned
identifier for each non-FINRA member subscriber.
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\17\ See FINRA Rule 6732(a)(5).
\18\ See FINRA Rule 6732(b).
\19\ See FINRA Rule 6732(a)(3).
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The proposal also appears reasonably designed to prevent any
negative impact on post-trade transparency. Although trade reports for
exempt trades will no longer be submitted by the ATS and publicly
disseminated, market observers will still have relevant information
about the ATS trade between the member subscriber and the non-member
because FINRA will continue to publicly disseminate the trade report
submitted by the member subscriber that is the Party to the
Transaction. This approach aligns public dissemination more closely
with the legal and economic effects of the transaction, because an
exemption under Rule 6732 can apply to a trade on the ATS only if the
broker-dealer operator of the ATS is not a legal counterparty to the
trade.\20\
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\20\ See FINRA Rule 6732(a)(2).
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For the reasons noted above, the Commission finds that the proposed
rule change is consistent with the Act.
IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\21\ that the proposed rule change (SR-FINRA-2021-029) is approved.
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\21\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\22\
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\22\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-00879 Filed 1-18-22; 8:45 am]
BILLING CODE 8011-01-P
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</html>Indexed from Federal Register on January 19, 2022.
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