Notice2024-22027
Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Order Approving a Proposed Rule Change, as Modified by Partial Amendment No. 1, To Amend FINRA Rule 6730 (Transaction Reporting) To Reduce the 15-Minute TRACE Reporting Timeframe to One Minute
Primary source
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Published
September 26, 2024
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 89 Issue 187 (Thursday, September 26, 2024)</title>
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[Federal Register Volume 89, Number 187 (Thursday, September 26, 2024)]
[Notices]
[Pages 78930-78942]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-22027]
[[Page 78930]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-101121; File No. SR-FINRA-2024-004]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Order Approving a Proposed Rule Change, as Modified by
Partial Amendment No. 1, To Amend FINRA Rule 6730 (Transaction
Reporting) To Reduce the 15-Minute TRACE Reporting Timeframe to One
Minute
September 20, 2024.
I. Introduction
On January 11, 2024, the Financial Industry Regulatory Authority,
Inc. (``FINRA'') filed with the Securities and Exchange Commission
(``Commission'' or ``SEC''), 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 6730 to
reduce the 15-minute reporting timeframe for transactions reported to
FINRA's Trade Reporting and Compliance Engine (``TRACE'') system to one
minute, with exceptions for FINRA members with de minimis reporting
activity and for manual trades. The proposed rule change was published
for comment in the Federal Register on January 25, 2024.\3\ On February
29, 2024, the Commission extended until April 24, 2024, the time period
within which to approve the proposed rule change, disapprove the
proposed rule change, or institute proceedings to determine whether to
disapprove the proposed rule change.\4\ On April 22, 2024, the
Commission instituted proceedings to determine whether to approve or
disapprove the proposed rule change.\5\ On July 18, 2024, the
Commission, pursuant to Section 19(b)(2) of the Act,\6\ designated
September 20, 2024, as the date by which the Commission shall either
approve or disapprove the proposed rule change.\7\ Also on July 18,
2024, FINRA filed a partial amendment to the original proposal
(``Partial Amendment No. 1''). On July 25, 2024, the Commission
published notice of Partial Amendment No. 1.\8\ The Commission received
comment letters in response to publications of the Notice, OIP, and
Partial Amendment No. 1,\9\ as well as a letter from FINRA.\10\ This
order approves the proposed rule change, as modified by Partial
Amendment No. 1 (collectively, ``Proposal'').
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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. 99404 (January 19,
2024), 89 FR 5034 (January 25, 2024) (``Notice'').
\4\ See Securities Exchange Act Release No. 99640 (February 29,
2024), 89 FR 16042 (March 6, 2024).
\5\ See Securities Exchange Act Release No. 100006 (April 22,
2024), 89 FR 32475 (April 26, 2024) (``OIP'').
\6\ 15 U.S.C. 78s(b)(2).
\7\ See Securities Exchange Act Release No. 100555 (July 18,
2024), 89 FR 59948 (July 24, 2024).
\8\ See Securities Exchange Act Release No. 100594 (July 25,
2024), 89 FR 61514 (July 31, 2024) (``Partial Amendment No. 1'').
\9\ Comments received are available at: <a href="https://www.sec.gov/comments/sr-finra-2024-004/srfinra2024004.htm">https://www.sec.gov/comments/sr-finra-2024-004/srfinra2024004.htm</a>.
\10\ See Letter from Racquel L. Russell, Senior Vice President,
Director of Capital Markets Policy, Office of General Counsel,
FINRA, dated July 18, 2024, available at <a href="https://www.sec.gov/comments/sr-finra-2024-004/srfinra2024004-491763-1411786.pdf">https://www.sec.gov/comments/sr-finra-2024-004/srfinra2024004-491763-1411786.pdf</a>
(``FINRA Letter'').
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II. Description of the Proposed Rule Change
FINRA has collected and disseminated transaction information in
fixed income securities through TRACE since 2002.\11\ FINRA rules
currently specify the applicable outer-limit reporting timeframe for
different types of TRACE-Eligible Securities.\12\ Most transactions
\13\ in corporate bonds, agency debt securities,\14\ asset-backed
securities (``ABS''),\15\ and agency pass-through mortgage-backed
securities (``MBS'') traded to-be-announced (``TBA'') for good delivery
(``GD'') \16\ must be reported within 15 minutes. The 15-minute
reporting timeframe has been in place for corporate bonds since
2005,\17\ and was implemented later for agency debt (2010),\18\ ABS
(2015),\19\ and MBS TBA GD (2013).\20\ In 2015, the Commission approved
FINRA rule amendments requiring FINRA members to report transactions in
these TRACE-Eligible Securities as soon as practicable but no later
than 15 minutes from the time of execution,\21\ and FINRA publicly
disseminates information on these transactions immediately upon
receipt. According to FINRA, ``in 2022, 82.9 percent of the trades [in
TRACE-Eligible Securities] executed after 8:00 a.m. and before 6:15
p.m. [Eastern Time (``ET'')] were reported within one minute of
execution.'' \22\
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\11\ See Securities Exchange Act Release No. 43873 (January 23,
2001), 66 FR 8131 (January 29, 2001) (Order Approving File No. SR-
NASD-99-65).
\12\ See FINRA Rule 6710(a) (providing a definition for ``TRACE-
Eligible Security'').
\13\ A ``List or Fixed Offering Price Transaction,'' as defined
in Rule 6710(q), and a ``Takedown Transaction,'' as defined in Rule
6710(r) are required to be reported to TRACE by the next business
day (T+1). See Rule 6730(a)(2).
\14\ See FINRA Rule 6710(l) (providing a definition for ``Agency
Debt Security'').
\15\ See FINRA Rule 6710(cc) (providing a definition for
``Asset-Backed Security'').
\16\ See FINRA Rule 6710(v) (providing a definition for ``Agency
Pass-Through Mortgage-Backed Security'') and FINRA Rule 6710(u)
(providing a definition for ``To Be Announced'').
\17\ See Securities Exchange Act Release No. 49845 (June 14,
2004), 69 FR 35088 (June 23, 2004) (Order Approving File No. SR-
NASD-2004-057); see also Notice to Members 04-51 (July 2004).
\18\ See Securities Exchange Act Release No. 60726 (September
28, 2009), 74 FR 50991 (October 2, 2009) (Order Approving File No.
SR-FINRA-2009-010); see also Regulatory Notice 09-57 (September
2009).
\19\ See Securities Exchange Act Release No. 71607 (February 24,
2014), 79 FR 11481 (February 28, 2014) (Order Approving File No. SR-
FINRA-2013-046); see also Regulatory Notice 14-34 (August 2014).
\20\ See Securities Exchange Act Release No. 66829 (April 18,
2012), 77 FR 24748 (April 25, 2012) (Order Approving File No. SR-
FINRA-2012-020); see also Regulatory Notice 12-26 (May 2012).
\21\ See Securities Exchange Act Release No. 75782 (August 28,
2015), 80 FR 53375 (September 3, 2015) (Order Approving File No. SR-
FINRA 2015-025).
\22\ See Notice, 89 FR at Table 1.
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According to FINRA, ``[s]ince the implementation of TRACE, the
fixed income markets have changed dramatically, including a significant
increase in the use of electronic trading platforms or other electronic
communication protocols to facilitate the execution of transactions.''
\23\ In light of these advances and consistent with FINRA's goals of
increasing transparency and improving access to timely transaction
data, FINRA proposed updates to modernize the reporting timeframes and
provide timelier transparency.\24\
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\23\ See id. at 5034.
\24\ See id. at 5035.
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A. One-Minute Reporting
FINRA proposed amendments to Rule 6730 to reduce the reporting
timeframe for securities currently subject to the 15-minute reporting
outer limit to one minute, with exceptions for FINRA member firms with
de minimis reporting activity and for manual trades. FINRA would
continue to make information on the transactions publicly available
immediately upon receipt of the trade reports.\25\
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\25\ See id.
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Under existing Rule 6730(a)(1), transactions in corporate bonds,
agency debt, ABS, and MBS TBA GD generally must be reported as soon as
practicable, but no later than within 15 minutes of execution.\26\
Specifically, transactions executed on a business day at or after
12:00:00 a.m. ET through 7:59:59 a.m. ET must be reported the same day
no later than 15 minutes after the TRACE system opens. Transactions
executed on a business day at or after 8:00:00 a.m. ET through 6:29:59
p.m. ET must be reported no later than within 15 minutes of the Time of
Execution,\27\
[[Page 78931]]
except for transactions executed on a business day less than 15 minutes
before 6:30 p.m. ET, which must be reported no later than 15 minutes
after the TRACE system opens the next day (and, if reported on T+1,
designated ``as/of'' with the date of execution). Finally, transactions
executed on a business day at or after 6:30:00 p.m. ET through 11:59:59
p.m. ET, or trades executed on a Saturday, a Sunday, a federal or
religious holiday, or other day on which the TRACE system is not open
at any time during that day, must be reported on the next business day
no later than 15 minutes after the TRACE system opens (and must be
designated ``as/of'' and include the date of execution).
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\26\ See supra notes 17-21.
\27\ Under Rule 6710(d), the ``Time of Execution'' generally
means the time when the parties to a transaction agree to all of the
terms of the transaction that are sufficient to calculate the dollar
price of the trade. For transactions involving TRACE-Eligible
Securities that are trading ``when issued'' on a yield basis, the
``Time of Execution'' is when the yield for the transaction has been
agreed to by the parties to the transaction.
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Amended Rule 6730(a)(1) would provide that transactions must be
reported as soon as practicable, but no later than within one minute of
the Time of Execution. Amended Rule 6730(a)(1)(A) would provide that
transactions executed on a business day at or after 12:00:00 a.m. ET
through 7:59:59 a.m. ET must be reported the same day as soon as
practicable after the TRACE system opens, but no later than within 15
minutes after the TRACE system opens. Amended Rule 6730(a)(1)(B) would
require that a transaction executed on a business day at or after
8:00:00 a.m. ET through 6:29:59 p.m. ET must be reported as soon as
practicable, but no later than one minute from the Time of Execution,
except that, a transaction executed on a business day less than one
minute before 6:30:00 p.m. ET, must be reported no later than 15
minutes after the TRACE system opens the next business day (T+1) (and,
if reported on T+1, designated ``as/of'' with the date of execution).
Any trades executed on a business day prior to the open of the TRACE
system, on a business day at or after 6:30:00 p.m. ET through 11:59:59
p.m. ET, or on a Saturday, a Sunday, a federal or religious holiday or
other day on which the TRACE system is not open at any time during that
day would continue to be reportable as soon as practicable on the next
business day (T+1), but no later than within 15 minutes after the TRACE
system opens (and must be designated ``as/of,'' as appropriate, and
include the date of execution).
B. Exceptions From One-Minute Reporting
FINRA proposed two exceptions from the one-minute reporting
timeframe for: (1) FINRA member firms with ``limited trading activity''
in the TRACE-Eligible Securities that are subject to one-minute
reporting; and (2) manual trades.\28\
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\28\ FINRA also proposed a conforming amendment to Supplementary
Material .03 to refer to the Rule generally rather than ``paragraph
(a)'' to reflect that FINRA members reporting pursuant to one of the
exceptions in new Supplementary Material .08 and .09 are still
required to report their trades ``as soon as practicable.''
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1. Exception for FINRA Members With ``Limited Trading Activity''
New Supplementary Material .08 would provide an exception to the
one-minute reporting timeframe for FINRA members with ``limited trading
activity.'' A FINRA member with ``limited trading activity'' would be
defined as one that, during one of the prior two calendar years,
reported to TRACE fewer than 4,000 transactions in the TRACE-Eligible
Securities that are subject to paragraphs (a)(1)(A) through (a)(1)(D)
of Rule 6730 (i.e., corporate bonds, agency debt, ABS and MBS TBA GD),
including any manual trades. Proposed Supplementary Material .08(b)
would require FINRA members relying on the exception to confirm
annually their qualification for the exception.\29\ As outlined in
proposed Supplementary Material .08(c), qualifying FINRA members would
be required to report these trades as soon as practicable, but no later
than within 15 minutes of the Time of Execution.\30\
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\29\ Evidence of this confirmation should be retained as part of
the FINRA member's books and records. However, FINRA members
eligible for the exception will not need to take other affirmative
steps to have their trade reports processed pursuant to the
exception's 15-minute reporting timeframe, such as submitting a
certification of eligibility to FINRA or adding a modifier or
indicator to their trade reports. See Proposed FINRA Rule 6730
Supplementary Material .08(b).
\30\ However, a trade executed at or after 12:00:00 a.m. through
7:59:59 a.m. ET would need to be reported as soon as practicable the
same day, but no later than within 15 minutes after the TRACE system
opens. Additionally, a trade executed on a business day at or after
6:30:00 p.m. through 11:59:59 p.m. ET; on a business day less than
15 minutes before 6:30 p.m. ET; or on a Saturday, Sunday, federal or
religious holiday, or other day on which the TRACE system is not
open at any time during that day, would need to be reported as soon
as practicable, but no later than within 15 minutes after the TRACE
system opens the next business day (T+1).
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FINRA members exceeding the 4,000-trade threshold for each of two
consecutive calendar years would need to comply with the one-minute
reporting requirements of paragraphs (a)(1)(A) through (a)(1)(D) of the
Rule beginning 90 days after the member no longer meets the criteria
for the exception (i.e., beginning 90 days after January 1 of the next
calendar year). If a FINRA member's reporting activity subsequently
dropped below the 4,000-trade threshold, the FINRA member would again
be eligible for the exception.\31\
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\31\ For example, a FINRA member that reported 3,000 trades in
the relevant TRACE-Eligible Securities to TRACE in 2022 and then
4,150 trades in 2023 would continue to be eligible for the exception
in 2024; however, if the FINRA member then reported 4,100 trades in
2024, the member would be required to comply with the one-minute
reporting requirements starting 90 days after January 1, 2025 (with
January 1 being day one of 90). If the FINRA member proceeded to
report 3,500 trades in 2025, the member would once again be eligible
for the exception from one-minute reporting for 2026 under the two-
year lookback. FINRA states that it believes the two-year lookback
period for eligibility for the exception will accommodate
fluctuations in trading activity that may be due to unusual market-
wide events or unique client demands. See Notice, 89 FR at 5036.
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2. Manual Trades Exception
New Supplementary Material .09 would provide an exception for
manual trades that are not electronic from end to end. Where a trade
qualifies for the manual trades exception, a 15-minute outer limit
would apply for the first year following implementation; a 10-minute
outer limit would apply for the second and third years; and a five-
minute outer limit would apply thereafter.
The manual trades exception would apply to ``transactions that are
manually executed'' or where a ``[FINRA] member must manually enter any
of the trade details or information necessary for reporting the trade
through the TRAQS website or into a system that facilitates trade
reporting to TRACE.'' \32\ A trade that requires manual intervention at
any point to complete the trade execution or reporting process would
qualify.\33\ According to FINRA,\34\ it contemplates that the exception
would be available for a variety of situations, including, for example:
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\32\ See Notice, 89 FR at 5036.
\33\ See id.
\34\ See id.
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<bullet> where a FINRA member executes a trade \35\ by manual or
hybrid means, such as by telephone, email, or through a chat/messaging
function,\36\ and
[[Page 78932]]
subsequently must manually enter into a system that facilitates trade
reporting all or some of the information required to book the trade and
report it to TRACE (FINRA further explains ``that, where the only
manual step involved is to prompt the electronic execution of a trade
(e.g., click `accept'), the manual trades exception would not be
available'' \37\); \38\
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\35\ As stated above, for purposes of Rule 6730, the reporting
timeframe is measured from the Time of Execution as defined by Rule
6710(d), which generally refers to the time that the parties have
agreed to all of the terms of the transaction sufficient to
calculate the dollar price of the trade (or yield, in the case of
when-issued securities priced to a spread). See Notice, 89 FR at n.
15.
\36\ See Notice, 89 FR at 5036. FINRA reminds its members of
their obligation to retain these electronic communications as part
of their books and records, consistent with FINRA and SEC
recordkeeping requirements. See, e.g., Notice to Members 03-33 (July
2003).
\37\ FINRA Letter at 9.
\38\ See Notice, 89 FR at 5036.
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<bullet> where allocations to individual accounts must be manually
input in connection with a trade by a dually-registered broker-dealer/
investment adviser (FINRA states that if a block trade, allocated to
individual accounts by a dually-registered broker-dealer/investment
adviser, were ``executed electronically without manual intervention
between its execution and reporting, the manual trades exception would
not be available for that separately executed block trade'' \39\); \40\
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\39\ FINRA Letter at 8.
\40\ See Notice, 89 FR at 5036.
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<bullet> where an electronic trade is subject to manual review for
risk management or regulatory compliance purposes and, as part of or
following the review, the trade must be manually approved, amended, or
released before the trade is reported to TRACE (e.g., a firm's risk
management procedures require a secondary approver for trades over a
certain threshold; a firm's best execution procedures require manually
checking another market to confirm that a better price is not available
to the customer) (FINRA explains that the exception ``would not be
available with regard to trades that are subject to automated
compliance/risk checks but that are not selected for manual review/
approval, or for trades that were subject to a pre-execution compliance
or risk review, but that do not involve manual intervention between the
time of execution and the trade report'' \41\); \42\
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\41\ FINRA Letter at 9.
\42\ See Notice, 89 FR at 5036.
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<bullet> where a FINRA member trades a bond for the first time and
additional manual steps are necessary to set the bond up in the firm's
systems to book and report the trade (e.g., entering the CUSIP number
and associated bond data into the firm's system); \43\ and
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\43\ See id.
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<bullet> where a FINRA member agrees to trade a basket of
securities at a single price and manual action is required to calculate
the price of component securities in the basket or to book and report
the trade in component securities to TRACE (FINRA further states that
``if manual action was not required to calculate the price of component
securities included in the basket or other steps necessary to book and
report the trades to TRACE, then the manual trades exception would not
be available'' \44\).\45\
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\44\ FINRA Letter at 8.
\45\ See Notice, 89 FR at 5036.
According to FINRA, the above examples are illustrative of the types of
circumstances in which, due to the manual nature of components of the
trade execution or reporting process, reporting a transaction within
one minute of the Time of Execution may be unfeasible, even where a
FINRA member makes reasonable efforts to report the trade as soon as
practicable (as required). FINRA also states that it will assess FINRA
members' trade reporting in connection with manual trades to determine
whether the five-minute trade reporting timeframe (to become applicable
after three years) \46\ is appropriate, and will be prepared to adjust,
as necessary.\47\
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\46\ FINRA Letter at 11.
\47\ See Notice, 89 FR at 5036.
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FINRA will review use of the manual trades exception. FINRA members
may not, in any case, purposely delay the execution or reporting of a
transaction by handling any aspect of a trade manually or introducing
manual steps following the Time of Execution. Additionally, FINRA
states that, considering the overarching obligation to report trades as
soon as practicable, FINRA members should consider the types of
transactions in which they regularly engage and whether they can
reasonably reduce the time between a trade's Time of Execution and its
reporting, and more generally must make a good faith effort to report
their trades as soon as practicable.\48\
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\48\ See id.
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Under amended Rule 6730(d)(4), any FINRA member that executes or
reports a trade manually would be required to append a manual trade
indicator to the trade report. The indicator must be included in any
manual trade, regardless of whether the FINRA member reports outside of
the one-minute timeframe in reliance on the manual trades exception.
FINRA states that application of the indicator would give FINRA
important insight into manual trading and the use of the exception.\49\
The indicator would not be included in publicly disseminated TRACE
data.\50\
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\49\ See id. at 5037.
\50\ See id.
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Finally, FINRA proposed to amend Rule 6730(f) to provide that a
pattern or practice of late reporting may be considered conduct
inconsistent with high standards of commercial honor and just and
equitable principles of trade, in violation of Rule 2010, absent
``reasonable justification'' (in addition to the rule's existing
reference to ``exceptional circumstances'').\51\ Recurring issues in
the systems of a FINRA member firm or its vendor would not be
considered a reasonable justification or exceptional circumstance that
excuses a pattern or practice of late trade reporting.\52\
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\51\ See, e.g., Rule 6623 describing ``exceptional
circumstances'' as instances of system failure by a FINRA member or
service bureau, or unusual market conditions, such as extreme
volatility in a security, or in the market as a whole.
\52\ See, e.g., FINRA Trade Reporting Frequently Asked
Questions, Q206.21, available at <a href="https://www.finra.org/filing-reporting/market-transparency-reporting/trade-reporting-faq">https://www.finra.org/filing-reporting/market-transparency-reporting/trade-reporting-faq</a>.
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III. Summary of Comments, FINRA's Response, and Commission Findings
After carefully reviewing the Notice, Partial Amendment No. 1, and
comment letters received, the Commission finds that the Proposal is
consistent with the requirements of the Act and the rules and
regulations thereunder applicable to a national securities
association.\53\ In particular, the Commission finds that the Proposal
is consistent with Section 15A(b)(6) of the Act,\54\ which requires,
among other things, that FINRA rules be designed to promote just and
equitable principles of trade, to foster cooperation and coordination
with persons engaged in regulating, clearing, settling, processing
information with respect to, and facilitating transactions in
securities, to remove impediments to and perfect the mechanism of a
free and open market and a national market system and, in general, to
protect investors and the public interest; and are not designed to
permit unfair discrimination between customers, issuers, brokers, or
dealers. The Commission also finds that the Proposal is consistent, in
particular, with Section 15A(b)(9) of the Act,\55\ which requires that
FINRA rules do not impose any burden on competition not necessary or
appropriate in furtherance of the purposes of the Act.
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\53\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f); see also infra sections
III.A (discussing the Proposal's impact on efficiency of U.S.
capital markets); and III.B and III.G (discussing comments and
responses regarding the Proposal's burden on competition).
\54\ 15 U.S.C. 78o-3(b)(6).
\55\ 15 U.S.C. 78o-3(b)(9).
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In approving the original TRACE rules in 2002, the Commission
stated that price transparency plays a fundamental role in promoting
fairness and efficiency
[[Page 78933]]
of U.S. capital markets.\56\ Since 2002, FINRA has increased
transparency by requiring more contemporaneous reporting and broadening
the scope of securities included in TRACE. In 2005, FINRA shortened the
deadline for reporting most transactions to TRACE to 15 minutes.\57\
From 2010 through 2013, FINRA gradually expanded the classes of TRACE-
eligible securities subject to reporting within 15 minutes.\58\ In
2015, FINRA required FINRA member firms to report transactions in
TRACE-Eligible Securities as soon as practicable but no later than
within 15 minutes of the Time of Execution or other timeframe specified
in FINRA Rule 6730.\59\
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\56\ See supra note 11.
\57\ See supra note 17.
\58\ See supra notes 17-20.
\59\ See supra note 21; see also <a href="https://www.finra.org/rules-guidance/notices/15-41">https://www.finra.org/rules-guidance/notices/15-41</a>.
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A. One-Minute Reporting
The Commission received comments on the proposed rule change.\60\
Several commenters support the proposal to shorten the 15-minute TRACE
reporting timeframe to one minute and its aim of increasing
transparency in the fixed income markets.\61\ Some commenters support
increasing price transparency in general through reporting but caution
restraint and the need for broad exceptions, citing the potential for
reduced liquidity and execution quality.\62\ Some commenters oppose one
minute reporting, questioning the feasibility and cost of compliance
due to technical limitations and the prevalence of manual
processes.\63\ Some commenters that oppose one minute reporting state
that if the Commission moves forward with the adoption of the one
minute reporting requirement, it should only do so in conjunction with
the manual trades and de minimis exceptions.\64\ Some commenters
suggest FINRA withdraw the Proposal and instead require market
participants to report trades as soon as practicable but no later than
five minutes after execution.\65\ One commenter also states that the
one-minute reporting timeframe for electronic trades ``will not
meaningfully change the status quo for fully electronic trades,'' as
``FINRA acknowledges that the overwhelming majority of fully electronic
transactions are already reported within one minute.'' \66\ Some
commenters that oppose one minute reporting state FINRA did not
sufficiently justify the need for the rule.\67\ One commenter states
that the Proposal ``lack[s] evidence of a market failure to justify''
the changes.\68\ Another commenter states that Commission should reject
the Proposal as amended by Partial Amendment No. 1.\69\ This commenter
states that ``FINRA and the Commission should improve the timeliness of
TRACE reporting and dissemination,'' \70\ but also states that the
manual trades exception ``eviscerates any potentially added value from
the `electronic' provisions'' and ``encourages the return to `manual'
trading by those seeking to avoid transparency.'' \71\
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\60\ See supra note 9.
\61\ See, e.g., Letter from Stephen John Berger, Managing
Director, Global Head of Government and Regulatory Policy, Citadel
(February 15, 2024) (``Citadel Letter I'') at 1; Letter from Joanna
Mallers, Executive Director, FIA Principal Traders Group (February
15, 2024) (``FIA PTG Letter'') at 1; Letter from Gerard O'Reilly,
Co-Chief Executive Officer and Co-Chief Investment Officer,
Dimensional Fund Advisors LP and David A. Plecha, Global Head of
Fixed Income, Dimensional Fund Advisors LP (February 15, 2024)
(``Dimensional Letter'') at 1; Letter from Ursula Baerlein (May 14,
2024); Letter from Dylan Parker, Chief Executive Officer, Moment
Technology (May 15, 2024) (``Moment Technology Letter'') at 1.
\62\ See, e.g., Letter from Sarah A. Bessin, Deputy General
Counsel, Investment Company Institute and Kevin Ercoline, Assistant
General Counsel, Investment Company Institute (February 15, 2024)
(``ICI Letter'') at 2; Letter from Frank Fairman, Managing Director,
Piper Sandler (May 17, 2024) (``Piper Sandler Letter'') at 1.
\63\ See, e.g., Letter from Kenneth E. Bentsen, Jr., President
and CEO, Securities Industry and Financial Markets Association
(February 15, 2024) (``SIFMA Letter I'') at 2; Letter from Kenneth
E. Bentsen, Jr., President and CEO, Securities Industry and
Financial Markets Association (May 17, 2024) (``SIFMA Letter II'')
at 2 (suggesting transitioning to one-minute reporting would
``expos[e] the broker-dealer community to significant regulatory
risk and clients to diminished liquidity and service from their
broker-dealers''); Letter from Christopher A. Iacovella, President &
Chief Executive Officer, American Securities Association (February
16, 2024) (``ASA Letter I'') at 2; Letter from Melissa P. Hoots,
CEO/CCO, Falcon Square Capital (February 15, 2024) (``Falcon Letter
I'') at 1-2; Letter from Melissa P. Hoots, CEO/CCO, Falcon Square
Capital (August 21, 2024) (``Falcon Letter II'') at 2; Letter from
Mark D. Griffin, SVP & Risk Control Manager, FHN Financial (May 17,
2024) (``FHN Letter'') at 2; LPL Letter at 1; Letter from Michael
Decker, Senior Vice President, Bond Dealers of America (February 15,
2024) (``BDA Letter I'') at 2.
\64\ See, e.g., SIFMA Letter I at 2; SIFMA Letter II at 2; FHN
Letter at 2; BDA Letter I at 1; Letter from Michael Decker, Senior
Vice President, Bond Dealers of America (May 17, 2024) (``BDA Letter
II'') at 2; LPL Letter at 2.
\65\ See Citadel at 4; FIA PTG at 4. But cf. SIFMA Letter II at
9 (stating that any alternative proposal that materially differs
from the existing Proposal must be subject to notice and comment
rulemaking and an economic analysis).
\66\ Letter from Stephen John Berger, Managing Director, Global
Head of Government & Regulatory Policy, Citadel (August 13, 2024)
(``Citadel Letter II'') at 1.
\67\ See, e.g., Falcon Letter I at 1; ASA Letter I at 2; Letter
from Christopher A. Iacovella, President & Chief Executive Officer,
American Securities Association (May 17, 2024) (``ASA Letter II'')
at 1-2; Letter from Christopher A. Iacovella, President & Chief
Executive Officer, American Securities Association (August 21, 2024)
(``ASA Letter III'') at 1-2; FHN Letter at 2; SIFMA Letter II at 2.
\68\ See ASA Letter I at 1; see also Falcon Letter II at 2
(``FINRA has still not substantiated the need for a reduction in
reporting time for TRACE-eligible securities'').
\69\ Letter from Tyler Gellasch, President and CEO, Healthy
Markets Association (September 15, 2024) (``HMA Letter II'') at 1.
This commenter states that it is writing to supplement its past
support for shortening the TRACE reporting timeframe to more broadly
object to the Proposal, citing, among other things, its prior
comment letter on the Proposal. See id. (citing Letter from Tyler
Gellasch, President and CEO, Healthy Markets Association (February
15, 2024) (``HMA Letter I'')).
\70\ HMA Letter II at 3.
\71\ Id. at 1. This commenter also suggests changes to TRACE
reporting protocols that are outside of the scope of the Proposal to
provide for separate reports of information for price transparency
and data useful to just regulators. See id. at 2.
---------------------------------------------------------------------------
FINRA states that ``approximately 83% of transactions in TRACE-
eligible securities currently subject to the 15-minute reporting
timeframe are reported within one minute of execution under
requirements that, for some TRACE-eligible securities, have been in
place for nearly 20 years, and FINRA believes it is appropriate and
prudent to consider whether this timeframe continues to meet regulatory
objectives given the passage of time and the changes in the fixed
income securities industry in the intervening years.'' \72\
Additionally, FINRA states that it believes that ``identifying possible
regulatory improvements need not be limited to instances where there
has already been a market failure.'' \73\ FINRA further states that it
continues to believe that the Proposal ``represents an important step
in modernizing the trade reporting timeframes for TRACE-eligible
securities to facilitate more timely transaction data, enhancing
transparency and the value of disseminated transaction data by allowing
investors and other market participants to obtain and evaluate more
timely pricing information for the impacted securities.'' \74\
Additionally, with respect to feasibility of one-minute reporting,
especially with respect to fully electronic allocated trades, FINRA
acknowledges this concern and describes its approach to enforcement of
late reporting of transactions to TRACE under the Proposal by stating
``that a pattern or practice of late reporting without reasonable
justification may be considered conduct inconsistent with high
standards of commercial honor and just and equitable principles of
trade, in violation of Rule 2010,'' but FINRA adds: ``In considering
whether `reasonable justification' exists under proposed Rule 6730(f),
FINRA will take into account factors such as the size and complexity of
the trade, such as in the
[[Page 78934]]
case of allocation and portfolio trades.'' \75\
---------------------------------------------------------------------------
\72\ FINRA Letter at 3.
\73\ Id. at 3.
\74\ Id. at 3-4.
\75\ FINRA Response Letter at 17.
---------------------------------------------------------------------------
As discussed below, the Proposal is consistent with the Exchange
Act. In particular, the Proposal will further increase price
transparency by reducing the 15-minute TRACE reporting window to one
minute while providing appropriately tailored exceptions for manual
trades and FINRA members with de minimis reporting activity. The as
soon as practicable but no later than 15-minute deadline for reporting
trades by FINRA member firms with de minimis reporting activity,
representing 1.41% of trades or 0.43% of the total par value traded,
would remain unchanged.\76\ FINRA states that the Proposal will likely
result in at least an additional 5.3% of total trades reported within
one minute.\77\ FINRA additionally estimates that, ``after adjusting
for the proposed de minimis exception and prior to accounting for the
manual exception, the Proposal could result in up to 16.4% of current
annual trading volume, or up to 6.1 million trades and 20 trillion
dollars in par value, being reported faster.'' \78\ Accordingly, the
Commission views the Proposal as one that is reasonably designed to
provide more timely trade reporting.
---------------------------------------------------------------------------
\76\ See Notice, 89 FR at 5043.
\77\ See Notice, 89 FR at 5042.
\78\ Id. at 4.
---------------------------------------------------------------------------
As the Commission has found previously, more timely reporting
promotes fairness and efficiency of the U.S. capital markets.\79\
Accordingly, the Commission finds that the Proposal will promote fair
and orderly markets and protect investors and the public interest by
increasing market transparency and providing the market with more
timely pricing information, which may improve price efficiency. And as
discussed below, FINRA responded to comments regarding the feasibility
of complying with a one minute reporting requirement, including the
feasibility and cost of compliance due to technical limitations and the
prevalence of manual processes.\80\ FINRA also responded to comments
with respect to the feasibility of one-minute reporting for fully
electronic allocated trades, for which FINRA provides data showing that
68% of allocated trades already were reported within one minute and
90.6% were reported within three minutes,\81\ describes its approach to
enforcement,\82\ and states that it will continue to study reporting
times to determine if any regulatory changes are appropriate.\83\
Moreover, FINRA responded to comments with respect to gamesmanship of
the exceptions.\84\ After carefully reviewing the Notice, Partial
Amendment No. 1, and comment letters received, the Commission views the
Proposal as reasonably balancing the benefits of more contemporaneous
transaction reporting and transparency against the burden of requiring
all transactions to be reported within one minute. Furthermore, the
Commission agrees with FINRA that improving rules need not require a
previous market failure.\85\
---------------------------------------------------------------------------
\79\ See supra notes 56-59 and accompanying text.
\80\ See infra sections III.C and III.D (discussing comments,
and FINRA's responses, on the de minimis and manual trades
exceptions, including with respect to concerns regarding the
feasibility of complying and the application of the rule in the
context of manual trades).
\81\ See FINRA Letter at 17 (citing Notice, 89 FR at 5034,
5041).
\82\ See supra note 75 and accompanying text.
\83\ See FINRA Letter at 17.
\84\ See infra notes 117 and 144 accompanying text.
\85\ See infra section III.H (discussing that the Exchange Act
does not require that a self-regulatory organization establish the
existence of a market failure to justify a proposed rule change).
---------------------------------------------------------------------------
B. General Comments on Exceptions to One-Minute Reporting
Commenters express varied views on the proposed exceptions to one
minute reporting. Some commenters state the exceptions are essential to
the success of the rule.\86\ These commenters cite the burdens of
compliance with one-minute reporting on broker-dealers that rely on
manual processes.\87\ Other commenters state that the exceptions are
too narrow \88\ or too broad.\89\ One commenter states that for both
exceptions, anything less than 15-minute reporting is infeasible and
cites the issue that compliance costs associated with faster reporting
could price small broker-dealers out of fixed income markets.\90\ One
commenter that states the exceptions are too broad also states that the
exceptions ``create significant risk to the efficacy and legal
durability of the entire rule.'' \91\ This commenter also states that
instead of improving market transparency the Proposal would
``exacerbate, rather than reduce, information asymmetries.'' \92\ One
commenter encourages FINRA to phase out both exceptions completely over
time, which it states would incentivize FINRA members to modernize
their execution processes.\93\ Another commenter states that both
exceptions ``complicate the rollout of the reporting compression
process and unnecessarily deprive market participants of information
necessary to achieve full market transparency,'' and that
``technological advances, particularly the use of APIs, make the need
for these exceptions unnecessary and expensive relative the overall
cost savings associated with transparency.'' \94\ Another commenter
highlights that while 96.9% of non-ATS transactions are reported within
five minutes, ``[i]t is curious that the Proposal would sanction an
outer reporting limit that is 3 times longer than the time it takes to
report the overwhelming majority of `manual' transactions today.'' \95\
The commenter states that this could contribute to undermining the
transition to electronic trading in the fixed income markets.\96\ Two
commenters respond that commenters critical of the exceptions as
proposed fail to recognize unique features of fixed income markets,
such as the prevalence of manual trading and the heterogeneity of
market participants, that make broad exceptions necessary.\97\ One
commenter also states that phasing out the de minimis exception, as
suggested by another commenter, would drive small firms out of the
fixed income business.\98\
---------------------------------------------------------------------------
\86\ See, e.g., BDA Letter I at 1; BDA Letter II at 2; Letter
from Michael Decker, Senior Vice President, Research and Public
Policy, Bond Dealers of America (August 21, 2024) (``BDA Letter
III'') at 2; Letter from Howard Meyerson, Managing Director,
Financial Information Forum (February 15, 2024) (``FIF Letter I'')
at 2; Letter from Howard Meyerson, Managing Director, Financial
Information Forum (May 17, 2024) (``FIF Letter III'') at 2; SIFMA
Letter I at 3-4; SIFMA Letter II at 2; FHN Letter at 2; Piper
Sandler Letter at 1 (stating that the Proposal ``strike[s] an
appropriate balance'').
\87\ See BDA Letter I at 1; FIF Letter I at 2; FIF Letter III at
2; LPL Financial Letter at 1-2; SIFMA Letter I at 3-4; SIFMA Letter
II at 2; see also BDA Letter II at 4 (stating small broker-dealers
benefit fixed income markets and would be especially negatively
affected by higher compliance costs associated with the Proposal).
\88\ See, e.g., ASA Letter I at 1-2; Falcon Letter I at 1.
\89\ See, e.g., Dimensional Letter at 2; HMA Letter II at I; HMA
Letter I at 9-12; Citadel Letter I at 2-3; FIA PTG Letter at 1-2;
Moment Technology Letter at 1.
\90\ See ASA Letter I at 2; see also Falcon Letter I at 4
(``[O]ur fear is that the Filing will, over time, eliminate smaller
fixed-income brokers''); Falcon Letter II at 1 (``Given the limits
of [the de minimis and manual trades] exceptions, smaller broker-
dealers like us risk being driven out of the fixed-income markets
due to prohibitive costs.''); ASA Letter III at 2 (stating that the
commenter's concerns about the Proposal's potential harm to market
competition, particularly for smaller and mid-sized broker-dealers,
remain unaddressed).
\91\ HMA Letter I at 2.
\92\ HMA Letter II at 3 (stating that the manual trades
exception creates an opportunity to avoid transparency).
\93\ See Dimensional Letter at 2.
\94\ Moment Technology Letter at 2.
\95\ Citadel Letter II at 2.
\96\ Id.
\97\ See BDA Letter II at 2-3; SIFMA Letter II at 8.
\98\ See BDA Letter II at 4.
---------------------------------------------------------------------------
[[Page 78935]]
With respect to the manual trades exception, FINRA explains that
``as is the case today, under the Proposal members would be required to
report the subject transactions to TRACE--including manual trades--`as
soon as practicable' but no later than the applicable outer limit from
the time of execution. Therefore, the current reporting requirements
already account for the various ways that trades can be executed.''
\99\
---------------------------------------------------------------------------
\99\ FINRA Letter at 6 (citations omitted).
---------------------------------------------------------------------------
The Commission finds that the Proposal would not impose any burden
on competition not necessary or appropriate in furtherance of the
purposes of the Act because it creates exceptions for manual trades and
firms with de minimis reporting activity. In doing so, the Proposal
takes into account competitive and liquidity concerns that could arise
as a result of the costs associated with complying with a shortened
reporting timeframe that could lead some FINRA members to curtail their
activities, or lead some FINRA members with less trade volume to exit
the market, and thereby reasonably balances the benefits to market
participants of increased transparency while mitigating the burdens of
a shortened trade reporting deadline. In this regard, the Proposal is
also reasonably designed to not permit unfair discrimination between
brokers or dealers.
The Commission views the manual trades exception as facilitating
greater transparency while still allowing needed time to report for
trades with manual processes. Further, the phase-in of the manual
trades exception's five-minute outer limit over three years is
reasonably designed to provide FINRA members time during which to
assess trade execution and post-trade processes and make changes
necessary to meet a shorter reporting deadline, thereby facilitating
any changes to manual interventions currently employed by FINRA members
to complete the trade execution or reporting process.
With respect to the de minimis exception, as discussed below, the
exception reasonably and appropriately balances the burdens that would
otherwise fall on FINRA members that process limited trade volume
without diluting the overall benefits of the Proposal.\100\
---------------------------------------------------------------------------
\100\ See infra section III.C (discussing comments, and FINRA's
responses, on the de minimis exception, including FINRA's data in
support of the threshold and look-back period for the exception, as
well as the Commission view that the exception strikes an
appropriate balance between fulfilling the goal of increased
transparency and mitigating any disproportionate cost of compliance
on certain, small FINRA members). Also, the Proposal would not phase
out the de minims exception, as requested by a commenter and opposed
by another commenter. See supra notes 93 and 98 and accompanying
text; see also new Supplementary Material .08 and supra section
II.B.1.
---------------------------------------------------------------------------
FINRA responded to the comments regarding the de minimis and manual
trades exceptions, including regarding whether the exceptions are too
narrow or too broad, as well as the potential impact of the costs
associated with faster reporting for small broker-dealers.\101\ After
carefully reviewing the Notice, Partial Amendment No. 1, and comment
letters received, including the FINRA Letter, the Commission views the
Proposal as striking a reasonable balance between requiring more
contemporaneous transaction reporting and transparency and the burden
of requiring all transactions to be reported within one minute.\102\
The Proposal both facilitates greater transparency through faster post-
trade reporting and provides FINRA member firms with an exception from
the one-minute reporting deadline that will permit continued reliance
on manual processes and another for FINRA members that process limited
trade volume. Additionally, the Commission disagrees with the comment
that the exceptions ``unnecessarily'' deprive market participants of
information; the Proposal and its exceptions are a reasonable balance
between providing information to market participants, thereby
increasing transparency, and mitigating the burdens of one-minute trade
reporting.
---------------------------------------------------------------------------
\101\ See infra section III.C and III.D (discussing comments,
and FINRA's response, on the de minimis and manual trades
exceptions, including those regarding the scope of the exceptions
and impact on smaller broker-dealers).
\102\ See FINRA Letter at 2-7, 14-15.
---------------------------------------------------------------------------
C. De Minimis Exception
Several commenters specifically address the de minimis exception.
Some commenters state support for the de minimis exception.\103\ One of
these commenters states the de minimis exception is appropriately
tailored to protect minority, veteran, and women owned business
enterprises and small dealers from incurring significant costs.\104\
The commenter also states the proposed two-year look back period will
prevent surprise application of the rule and allow newly impacted
broker-dealers time to comply.\105\ Another commenter that supports the
de minimis exception states that market participants falling under the
threshold represent an insignificant portion of the market and that the
exception will not materially affect market transparency.\106\ Some
commenters state opposition to the de minimis exception.\107\ One of
these commenters supports the logic behind the de minimis exception but
states the proposed 4,000-trade report threshold is too low and
insufficiently justified.\108\ This commenter also requests FINRA
expand the threshold or at minimum provide more analysis to support its
proposed limit.\109\ Another commenter that opposes the de minimis
exception states FINRA did not sufficiently justify the need for the
exception, nor its decisions to set the exception's threshold at 4,000
annual trades and the lookback period for applicability of the
threshold at two years.\110\ Additionally, this commenter states that
the exception would create information asymmetries and could lead to
gamesmanship, evasion, and market distortions.\111\ Further, the
commenter stated that this exception could allow a firm that ``engaged
in 5 trades in one year, and 100,000 trades'' the next to continue its
15 minute reporting the following year.\112\ In addition, the de
minimis exception, the commenter stated, ``could incentivize a firm
seeking to mask its trading activities . . . to use an `excepted'
broker to effectuate its trading.'' \113\
---------------------------------------------------------------------------
\103\ See, e.g., SIFMA Letter I at 9; Letter from Kenneth E.
Bentsen, Jr., President and CEO, Securities Industry and Financial
Markets Association (August 21, 2024) (``SIFMA Letter III'') at 2;
BDA Letter I at 2.
\104\ See SIFMA Letter I at 9; SIMFA Letter II at 7; see also
BDA Letter II at 4 (``Smaller dealers need [the de minimis]
exception because many conduct the trade reporting process entirely
manually.'')
\105\ See SIFMA Letter I at 9; SIMFA Letter II at 7.
\106\ See BDA Letter II at 4.
\107\ See, e.g., Falcon Letter I at 2-4; see also HMA Letter I
at 9-11, 13 (this commenter also more broadly opposes the Proposal,
see HMA Letter II).
\108\ See Falcon Letter I at 2-3; Falcon Letter II at 2-3.
\109\ See id.
\110\ See HMA Letter I at 11. As discussed above, this commenter
supplemented its prior comments to more broadly object to the
Proposal. See HMA Letter II at 1; supra note 69 and accompanying
text.
\111\ See HMA Letter I at 1 at 10.
\112\ See id. at 11.
\113\ See id. at 10.
---------------------------------------------------------------------------
FINRA states ``that the proposed de minimis exception balances the
regulatory goal of providing for timelier reporting with the impact and
burdens on members that are less active in this space, including
smaller market participants. In response to Regulatory Notice 22-17,
numerous commenters expressed concern regarding the impact that a one-
minute reporting standard would have on small [FINRA] member firms,
including minority, women, and veteran-owned broker-dealers. Some of
these commenters believed that small broker-dealers would exit the
market for fixed income secondary market trading
[[Page 78936]]
because of the high implementation and compliance costs and cautioned
that this would harm retail investors that depend on small [FINRA]
member firms for access to the market.'' \114\ Accordingly, FINRA
believes the Proposal adequately established the need for the de
minimis exception.\115\
---------------------------------------------------------------------------
\114\ FINRA Letter at 14 (citations omitted).
\115\ Id.
---------------------------------------------------------------------------
Additionally, FINRA states that ``[w]ith respect to the 4,000-trade
threshold (with a two-year lookback) for the de minimis exception, as
discussed in the Proposal, FINRA believes that the proposed threshold
is appropriately tailored to balance the compliance and implementation
burdens on [FINRA] members with the benefits to transparency. Based on
2022 data, the proposed de minimis threshold would provide relief to
640 (out of 838 currently active) [FINRA] members that, in the
aggregate, accounted for 1.41% of trades or 0.43% of the total par
value traded. FINRA continues to believe that this threshold
appropriately balances the benefits of timelier reporting with the
potential costs of disrupting markets and disproportionally impacting
less active and smaller participants. Additionally, based on FINRA's
analysis of historical trading data over the last five years, FINRA
does not believe that some of the concerns raised by HMA about the two-
year lookback are likely to occur (e.g., that a firm may go from five
trades in one year to 100,000 the next). FINRA's analysis of trading
data indicates that, in reality, the difference between a one- and two-
year lookback impacted only 11 firms annually, on average, whose
activity increased over the 4,000-trade threshold by 67% on average and
a maximum of 421%.'' \116\
---------------------------------------------------------------------------
\116\ Id. at 14-15 (citations omitted).
---------------------------------------------------------------------------
Further, FINRA responds to the comment that the exception may lead
to ``gamesmanship, evasion, and market distortions'' by stating that
``members relying on the de minimis exception continue to be subject to
the requirement that they report their trades to TRACE as soon as
practicable. Existing requirements under Rule 6730.03(a) make clear,
among other things, that firms' policies and procedures must be
reasonably designed to comply with the `as soon as practicable'
reporting requirement by implementing systems that commence the trade
reporting process at the time of execution without delay, and that
`[i]n no event may a [FINRA] member purposely withhold trade reports,
e.g., by programming its systems to delay reporting until the end of
the reporting time period.' Second, to the extent commenters are
concerned that market participants may begin routing orders to members
qualifying for the de minimis exception to take advantage of the longer
outer-limit reporting timeframe, FINRA notes that this would increase
the member's activity level and, if significant, would cause the firm
to no longer be eligible for the de minimis exception. As with the
manual trades exception, FINRA has extensive trading data history for
members and can monitor for unusual trading patterns that might
indicate gamesmanship or efforts to delay the reporting of large
trades.'' \117\
---------------------------------------------------------------------------
\117\ Id. at 15.
---------------------------------------------------------------------------
With respect to the de minimis exception, FINRA responded to the
comments regarding whether the proposed 4,000-trade threshold is too
low, including by providing data and analysis for the threshold and
lookback period, and addressed the role of the exception in balancing
the goal of timelier reporting and the burden on less active members,
including smaller broker-dealers.\118\ After carefully reviewing the
Notice, Partial Amendment No. 1, and comment letters received,
including the FINRA Letter, the Commission views the de minimis
exception as reasonably and appropriately balancing the burdens that
would otherwise fall on FINRA members that process limited trade volume
without diluting the overall benefits of the Proposal. As FINRA states,
the de minimis exception is expected to cover 640 FINRA members, which
account in aggregate for 1.41% of trades and 0.43% of total par value
traded.\119\ The Commission is sensitive to comments cautioning that
small broker-dealers may exit the market for fixed income secondary
market trading because of the burdens associated with one-minute
reporting.\120\ Retaining the 15 minute outside limit on reporting
transactions by FINRA members qualifying for the de minimis exception
would avoid imposing the burdens of compliance with one-minute
reporting on less active market participants, including smaller broker-
dealers. At the same time, FINRA members qualifying for the de minimis
exception report a relatively small portion of transactions.
Accordingly, the Proposal strikes an appropriate balance between
fulfilling the goal of increased transparency and mitigating any
disproportionate cost of complying with a shorter reporting deadline on
certain, small FINRA members.
---------------------------------------------------------------------------
\118\ See supra notes 114-116 and accompanying text.
\119\ See Notice, 89 FR at 5043.
\120\ See supra note 90.
---------------------------------------------------------------------------
D. Manual Trades Exception
Several commenters offer specific views about the scope of the
manual trades exception. Some commenters characterize the manual trades
exception as essential to ensuring compliance with the rule.\121\ One
commenter states that the exception should be expanded to include
certain fully electronic transactions that cannot feasibly be reported
within one minute, such as transactions with a large number of post-
trade allocations, batch-processed trades, and trades involving
multiple systems in trade workflow.\122\ This commenter states that
transactions with a large number of post-trade allocations are
especially difficult to report within one minute for broker-dealers
also registered as investment advisers.\123\ Other commenters state
support for FINRA's proposal to apply the exception to a scenario where
a firm has not previously traded a bond.\124\ A commenter also states
that FINRA should harmonize the scope of the manual trades exception
with a similar proposal by the Municipal Securities Rulemaking Board
(``MSRB'') that would apply to transactions in municipal
securities.\125\ In addition, this commenter describes certain
scenarios that could be experienced by a reporting firm, questioning
whether the manual trades exception would apply and suggesting a
dialogue with industry about such scenarios.\126\ A different commenter
suggests that the exception apply to ``any manual intervention in
[[Page 78937]]
the trade execution or reporting process.'' \127\ Another commenter
states that there should not be a manual trades exception, nor a
distinction between manual and electronic trades at all.\128\
---------------------------------------------------------------------------
\121\ See BDA Letter I at 1; BDA Letter II at 2; FIF Letter I at
2; FIF Letter III at 2; SIFMA Letter I at 6; SIFMA Letter II at 3-6;
SIFMA Letter III at 2; FHN Letter at 2.
\122\ See SIFMA Letter I at 7-9; SIFMA Letter II at 6-7; SIFMA
Letter III at 2; see also LPL Letter at 2.
\123\ See SIFMA Letter I at 7-8; SIFMA Letter II at 5-7; SIFMA
Letter III at 4; see also BDA Letter I at 3-4; BDA Letter II at 2
(stating that reporting post-trade allocations in one minute
sometimes ``is not feasible even in a fully automated
environment''); FIF Letter I at 3; Falcon Letter II at 4 (stating
that the concern about manual allocations also extends to broker-
dealers that are not dual-registrants).
\124\ See FIF Letter I at 4; see also FIF Letter III at 3
(requesting FINRA provide guidance that a firm would not be held to
the applicable reporting timeframe in a scenario where FINRA is
delayed in providing a symbol requested by a firm); BDA Letter III
at 2 (stating that it would be ``difficult or impossible to report
in less than 15 minutes'' trades when a firm trades a bond for the
first time); SIFMA Letter III at n. 6 (referencing the time it
currently takes to set up and report new bonds using FINRA's TRAQS
and New Issue Portal).
\125\ See FIF Letter I at 3.
\126\ See Letter from Howard Meyerson, Managing Director,
Financial Information Forum (February 26, 2024) (``FIF Letter II'')
at 2-4; FIF Letter I at 3-4; FIF Letter III at 3.
\127\ See Falcon Letter II at 4.
\128\ See Citadel Letter II at 1-2.
---------------------------------------------------------------------------
Several commenters state the manual trades exception is too
broad.\129\ Some of these commenters state that FINRA failed to meet
its burden to demonstrate consistency with the Act, particularly by
failing to estimate the number of transactions expected to qualify for
the manual trades exception,\130\ and one of these commenters states
that the manual trades exception was not included in FINRA Regulatory
Notice 22-17, which was issued by FINRA to solicit comment on
shortening the trade reporting timeline from 15 minutes to one minute
for certain TRACE-Eligible securities.\131\ These commenters
questioning the lack of estimates in the Proposal raise the issue that
a large proportion of the total number of trades currently reported
outside of one minute could fall within the proposed rule's manual
trades exception, undermining the goal of increasing post-trade
transparency.\132\ These commenters also raise the issue that firms
could build manual steps into the trade execution process as a means of
qualifying for the longer manual trades reporting window.\133\ One
commenter responds to this issue by stating that under the Proposal any
action purposefully intended to extend the trade reporting time is a
violation.\134\ The commenter also states that there is no evidence to
suggest market participants intentionally delay reporting transactions,
nor do market participants have any incentive to do so.\135\ This
commenter disagrees with the comment that FINRA has not met the
requirements of the Act, stating it is convinced FINRA demonstrated the
Proposal's consistency with the Act by providing supporting information
and statistics throughout the rulemaking process.\136\
---------------------------------------------------------------------------
\129\ See, e.g., HMA Letter II at 2-3; HMA Letter I at 11-12;
Citadel Letter I at 2-3; FIA PTG Letter at 2-4.
\130\ See Citadel Letter I at 1-3; Citadel Letter II at 3-5; FIA
PTG Letter at 2-3; see also Falcon Letter I at 1; Falcon Letter II
at 2 (both stating that FINRA did not adequately justify the
exceptions to the rule).
\131\ See Citadel Letter I at 2.
\132\ See Citadel Letter I at 2-3; FIA PTG Letter at 2; Citadel
Letter II at 1-3.
\133\ See Citadel Letter I at 3; FIA PTG at 3; see also HMA
Letter I at 12 (stating that the Proposal as originally proposed did
``not assuage our concerns that firms may intentionally add a
`manual' component to their post-execution processes so as to avoid
timely reporting (and dissemination) of their trading activity.'');
HMA Letter II at 3 (stating that the Proposal, as modified by
Partial Amendment No. 1, did not materially revise the extremely
broad examples of manual trades and further offer relevant guidance
as to when a manual component or process may nevertheless not
qualify for the exception, and would lead to market abuses); supra
note 92 and accompanying text.
\134\ BDA Letter I at 3.
\135\ Id.
\136\ See BDA Letter II at 4.
---------------------------------------------------------------------------
FINRA states that it disagrees with the comments that the manual
trades exception should be eliminated and that the distinction between
manual and electronic trades should not exist or that the manual trades
exception should be expanded to include certain fully electronic
trades. Specifically, as discussed above, FINRA states, ``as is the
case today, under the Proposal members would be required to report the
subject transactions to TRACE--including manual trades--`as soon as
practicable' but no later than the applicable outer limit from the time
of execution. Therefore, the current reporting requirements already
account for the various ways that trades can be executed and the
resultant differences in the reporting times--some trades may be
reported in 30 seconds and others in two minutes today, depending upon
the mode of execution and reporting, and what is practicable under the
circumstances. Thus, the Proposal is not introducing tiers or causing
additional variance; rather it is reducing the permissible variance by
significantly refining the outer limit for both manual and electronic
trades. The proposed five-minute outer limit for reporting that
eventually would be applicable to manual trades recognizes, consistent
with other FINRA trade reporting rules, that trades that are manually
executed or reported may not be able to be reported as quickly as
trades that are electronically executed and reported.'' \137\
---------------------------------------------------------------------------
\137\ FINRA Letter at 6 (citations omitted).
---------------------------------------------------------------------------
With respect to large post-trade allocations, batch-processed
trades, and trades involving multiple systems in trade workflow, FINRA
states that it ``contemplates that the manual trades exception would
apply `where a member agrees to trade a basket of securities at a
single price and manual action is required to calculate the price of
component securities in the basket or to book and report the trade in
component securities to TRACE.' However, if manual action was not
required to calculate the price of component securities included in the
basket or other steps necessary to book and report the trades to TRACE,
then the manual trades exception would not be available. Therefore, for
example, if the firm employed an automated process to calculate prices
for, and book and report the trades in, the component securities, the
manual trades exception would not be available since this process was
completed electronically without manual intervention.'' \138\ FINRA
also states that, as discussed in the Proposal, ``FINRA examined
transaction reporting times for trades that were subsequently
suballocated across multiple accounts and found that, for allocated
trades, 68% were reported within one minute, and 90.6% were reported
within three minutes.'' \139\ FINRA also stated that it ``was unable to
distinguish between allocations that involved manual intervention from
fully electronic allocations in the data; therefore, reporting within
one minute for fully electronic allocations may be greater than 68%.''
\140\ As discussed above, FINRA also acknowledges concerns with respect
to feasibility of one-minute reporting, especially with respect to
fully electronic allocated trades, and describes its approach to
enforcement of late reporting of transactions to TRACE.\141\
---------------------------------------------------------------------------
\138\ Id. at 8 (citations omitted, citing Notice, 89 FR at 5036,
5045).
\139\ Id. at 17 (citing Notice, 89 FR at 5034, 5041).
\140\ Id. at 17 (citing Notice, 89 FR at 5034, 5041 n.32).
\141\ See supra note 75 and accompanying text.
---------------------------------------------------------------------------
With respect to post-trade allocations by broker-dealers also
registered as investment advisers, FINRA states that the proposed rule
``contemplates that the manual trades exception would apply `where
allocations to individual accounts must be manually input in connection
with a trade by a dually-registered broker-dealer/investment adviser.'
'' \142\
---------------------------------------------------------------------------
\142\ Id. at 7-8 (citing Notice, 89 FR at 5036, 5045).
---------------------------------------------------------------------------
With respect to a scenario where a firm has not previously traded a
bond, FINRA states that the proposed rule ``contemplates that the
manual trades exception would be available `where a member trades a
bond for the first time and additional manual steps are necessary to
set the bond up in the firm's systems to book and report the trade
(e.g., entering the CUSIP number and associated bond data into the
firm's system).' '' \143\
---------------------------------------------------------------------------
\143\ Id. at 7 (citing Notice, 89 FR at 5036, 5045).
---------------------------------------------------------------------------
With respect to the comment that the manual trades exception
incentivizes firms to build in manual processes in order to qualify for
the exception, FINRA states that it ``has explicitly considered and
addressed this concern in the Proposal. Specifically, the text of the
manual trades exception would explicitly prohibit a [FINRA] member from
`purposely delay[ing] the execution or reporting of a transaction by
handling a trade manually or
[[Page 78938]]
introducing manual steps following the Time of Execution.' FINRA also
is very familiar with [FINRA] members' usual reporting timeframes and
possesses extensive data with which to establish a baseline for
comparison in identifying changes in behavior. As noted in the
Proposal, FINRA will review [FINRA] members' use of the manual trades
exception and their reporting timeliness in light of their historic
behaviors reporting transactions to TRACE. Thus, FINRA believes that
the manual trades exception continues to be appropriate and balanced in
order to support the overall goal of the Proposal--facilitating more
timely access to market information--while ensuring that compliance is
achievable for the subset of trades that rely on manual intervention
between the trade's time of execution and when it is reported to
TRACE.'' \144\
---------------------------------------------------------------------------
\144\ FINRA Letter at 6-7 (citations omitted).
---------------------------------------------------------------------------
The Proposal both facilitates greater transparency through faster
post-trade reporting and provides FINRA member firms with an exception
from the one-minute reporting deadline that will permit continued
reliance on manual processes. The Commission agrees with FINRA's
statement that ``the proposed five-minute outer limit for reporting
that eventually would be applicable to manual trades recognizes,
consistent with other FINRA trade reporting rules, that trades that are
manually executed or reported may not be able to be reported as quickly
as trades that are electronically executed and reported.'' \145\
Moreover, as described above,\146\ FINRA provided additional discussion
in its letter in response to specific scenarios raised by commenters
regarding the application of the proposed manual trades exception to
large post-trade allocations, batch-processed trades, trades involving
multiple systems in trade workflow, post-trade allocations by broker-
dealers also registered as investment advisers, and scenarios where
firms have not previously traded a bond by clarifying that such
scenarios would not qualify for the manual trades exception when manual
intervention between the time of execution and the trade report does
not occur. FINRA also provided data in support of not including fully
electronic allocated trades in the manual trades exception and
described its regulatory standard for potential violations of its
reporting rules. Finally, with respect to the comment that the scope of
the manual trades exception should be harmonized with the MSRB's
proposal that would apply to transactions in municipal securities, the
definitions of ``manual trades'' in proposed Supplementary Material .09
to FINRA Rule 6730 and a ``trade with a manual component'' in proposed
MSRB Rule G-14(d)(xii) \147\ are consistent.
---------------------------------------------------------------------------
\145\ See supra note 137 and accompanying text.
\146\ See supra notes 137-143 and accompanying text.
\147\ See Exchange Act Release No. 99402 (Jan. 19, 2024), 89 FR
5384.
---------------------------------------------------------------------------
Additionally, the Proposal's manual trades exception is
appropriately tailored for facilitating more timely access to market
information as well as promoting compliance, and, as FINRA discussed in
the Proposal, the manual trades exception included in the Proposal was
informed by comments received in response to FINRA Regulatory Notice
22-17. FINRA is not required under the Act to publish a FINRA notice
soliciting comment on a potential proposed rule change prior to filing
such change as a proposed rule change with the Commission. FINRA
included the manual trades exception in the Proposal as well as a
discussion of comments received on FINRA Regulatory Notice 22-17 \148\
and the Commission provided three 21-day public comment periods in
connection with publication of the Notice, the OIP, and Partial
Amendment No. 1. Furthermore, FINRA provided additional analysis and
data in its comment letter.\149\ As FINRA states, ``the manual trades
exception appropriately accommodates transactions that cannot feasibly
be reported within one minute, balancing the burdens on members with
the benefits to transparency.'' \150\ The Commission agrees: the manual
trades exception provides a reasonable accommodation for transactions
that cannot feasibly be reported within one minute, and FINRA has
provided sufficient justification for the Proposal. The Commission
anticipates that FINRA will monitor its members to ensure compliance
with the ``as soon as practicable'' requirement and detect changes in
reporting behavior. This should address concerns about manipulation. In
particular, this should address comments regarding FINRA members
purposefully delaying the reporting of transactions by building manual
steps into the trade execution process and help ensure that the manual
trades exception would not result in a degradation in trade reporting
timeliness. Additionally, in response to comments concerning FINRA's
lack of estimates of the number of trades that are expected to qualify
for the manual trades exception, proposed changes to FINRA Rule
6730(d)(4) would require FINRA members to ``append a manual trade
indicator to the trade report so that FINRA can identify manual trades.
The new manual trade indicator would be required regardless of whether
the [FINRA] member reported the manual trade outside of the one-minute
timeframe in reliance on the manual trades exception, which would
provide FINRA with important insights into manual trading and the use
of the exception.'' \151\ Accordingly, the addition of the manual trade
indicator will allow FINRA to collect data on the extent to which
manual processes are employed by FINRA members, data that, due to the
current lack of a manual trade indicator, is not currently available.
---------------------------------------------------------------------------
\148\ See Notice, 89 FR at 5044-5046.
\149\ See, e.g., notes 184-185 and accompanying text.
\150\ See FINRA Letter at 10.
\151\ See Notice, 89 FR at 5036-5037.
---------------------------------------------------------------------------
1. Manual Trade Indicator
Several commenters offer specific views about the manual trade
indicator. Some commenters state it would be more operationally
feasible to flag trades subject to one-minute reporting, rather than
flagging all manual trades.\152\ One of these commenters states that
requiring personnel to identify the manual component of a trade will
hinder compliance and delay reporting.\153\ Some commenters state that
FINRA should offer an interim period during which firms are permitted,
but not required, to report the manual trade indicator.\154\ One
commenter requests clarification regarding the operation of the manual
trade indicator in specific scenarios.\155\
---------------------------------------------------------------------------
\152\ See BDA Letter I at 3; SIFMA Letter I at 9; SIFMA Letter
II at 7-8.
\153\ See SIFMA Letter II at 7.
\154\ See FIF Letter I at 6; SIFMA Letter II at 8.
\155\ See, e.g., FIF Letter I at 4-5.
---------------------------------------------------------------------------
With respect to the manual trade indictor, FINRA states that rather
than identifying electronic trades, ``identifying manual trades would
be more appropriate from a regulatory perspective because manual trades
are the universe of trades for which additional time may be warranted
under the proposed framework, and requiring members to identify these
trades would align the responsibility for assessing and representing
the nature of the trade to FINRA with the legal framework for
reporting. As stated in the Proposal, FINRA believes that the proposed
manual trade indicator would provide FINRA with important insights into
manual trading and the use of the exception.'' \156\
---------------------------------------------------------------------------
\156\ FINRA Letter at 12.
---------------------------------------------------------------------------
[[Page 78939]]
FINRA also responds to one commenter's requests for clarification
about certain scenarios. With respect to the commenter's request for
clarification about whether the manual trade indicator must be reported
for trades that are manually corrected, FINRA states that ``As stated
in the Proposal, `[t]o the extent the trade was originally fully
electronic, when the member amends the trade report, it should add the
Manual Trade Indicator.' '' \157\ For a commenter's request for
clarification about whether the manual trade indicator is applicable to
general systems fixes necessary to correct a technical issue that
adversely impacted trade reporting, FINRA states that ``the manual
trade indicator must be appended `[i]f reporting a transaction that is
manually executed or where such member must manually enter any of the
trade details or information necessary for reporting the trade through
the TRAQS website or into a system that facilitates trade reporting to
TRACE.' '' \158\ Finally, in response to a commenter's request for
clarification that the manual trade indicator would not be included in
TRACE's trade report matching criteria, ``FINRA confirms that it does
not intend to use the manual trade indicator in TRACE's trade report
matching criteria.'' \159\
---------------------------------------------------------------------------
\157\ Id. at 12.
\158\ Id. at 13.
\159\ Id.
---------------------------------------------------------------------------
The Commission agrees with FINRA that the indicator should identify
manual trades instead of electronic trades, and that the manual trade
indicator will provide FINRA with important insight into the extent to
which FINRA members utilize manual intervention between execution and
trade reporting. Electronic trades will be required to be reported as
soon as practicable but no later than one minute and adding a
requirement for FINRA members to identify electronic trades could
introduce a delay in reporting such electronic trades. Further, to the
extent that the manual trade indicator requirement adds a burden on
reporting manual trades that otherwise would not be present on
electronic trades, FINRA members may have an incentive to eliminate
manual intervention to complete the trade execution or reporting
process, which would result in a greater number of electronic trades
facilitating greater transparency through faster post-trade reporting.
Accordingly, the manual trade indicator requirement reasonably balances
the benefits gained against any compliance hinderance or reporting
delay for manual trades. The Commission is not persuaded by the view
that there should be an interim period for voluntary use of the manual
trade indicator because such a period would reduce the benefits of the
insights into manual trading and the use of the exception.
2. Five-Minute Reporting Phase-In
Several commenters address the gradual phase-in of five-minute
reporting written into the proposed rule for manual trades.\160\
Multiple commenters request FINRA propose for notice and comment each
time it seeks to reduce the timeframe.\161\ One of these commenters
also states that FINRA must consider that the proposed rule will be
implemented alongside other regulatory initiatives, such as the
shortened securities settlement cycle (T+1), and potentially other
rules that have been proposed.\162\ Other commenters state that the
absence of data in the Proposal justifying accelerated reporting
timeframes for manual trades reflects insufficient understanding of the
complexities involved in manual trade reporting.\163\ Another commenter
states that FINRA's amendment to extend the 10-minute reporting
timeframe from one year to two is ``encouraging.'' \164\
---------------------------------------------------------------------------
\160\ See, e.g., ICI Letter at 3-4; Falcon Letter at 4; SIFMA
Letter I at 6; SIFMA Letter II at 6; BDA Letter I at 2-3; ASA Letter
II at 2.
\161\ See ICI Letter at 3; see also SIFMA Letter I at 6 (stating
that FINRA should conduct an impact assessment before reducing the
reporting window for manual trades to five minutes); SIFMA Letter II
at 6; ASA Letter II at 2 (stating that the proposal to gradually
phase in the reporting window for manual trades without opportunity
for formal industry input presents risk and complicates compliance
for market participants); Falcon Letter at 4 (stating that FINRA
must produce supporting data before proposing a mandatory phase-in
period for the manual trades exception); LPL Letter at 2 (stating
FINRA should examine impact on liquidity, depth, concentration, and
transparency prior to further decreasing reporting times); BDA
Letter II at 3, 5 (asking FINRA to commit to seeking public comment
before any reduction in trade reporting times for manual trades
takes effect). But see BDA Letter I at 3 (stating support for the
phase-in approach, but asking FINRA to communicate with industry
during the transition period regarding operational roadblocks that
could arise). One commenter states that extension of the phase-in in
Partial Amendment No. 1 does not address its earlier comment that
any alteration of the compliance threshold should necessitate
additional input from stakeholders, such as through a formal request
for comment or a new proposal. See ASA Letter III at 1.
\162\ See ICI Letter at 3-4.
\163\ See ASA Letter II at 2; see also Falcon Letter II at 3-4.
\164\ SIFMA Letter III at 3.
---------------------------------------------------------------------------
FINRA states that it ``appreciates that members may be concerned by
the degree to which some manual trades are not reported within five
minutes today. In response to these comments, FINRA has amended the
manual trades exception to provide FINRA members with an additional
year to transition to five-minute reporting for manual trades.'' \165\
In particular, a FINRA member relying on the manual trades exception
will be required to report the manual trade ``as soon as practicable
and no later than within 15 minutes of the time of execution (for up to
one calendar year from the effectiveness of the proposed amendments),
within 10 minutes of the time of execution (for up to three calendar
years from the effectiveness of the proposed amendments), and within
five minutes of the time of execution (three or more calendar years
from the effectiveness of the proposed amendments).'' \166\ FINRA's
original proposal, as described in the Notice, would have required
FINRA members relying on the manual trades exception to report such
manual trades as soon as practicable but no later than five minutes of
the time of execution two or more calendar years from the effectiveness
of the proposed amendments.
---------------------------------------------------------------------------
\165\ FINRA Letter at 10-11 (citations omitted).
\166\ Id. at 11; see also Partial Amendment No. 1, 89 FR at
61515.
---------------------------------------------------------------------------
In addition to this extended phase-in timeline, FINRA states that
it ``intends to closely study the trade reporting data (this will be
facilitated by the manual trade indicator, which will allow FINRA to
identify manual trades) and will continue its engagement with [FINRA]
members on whether feasibility concerns continue to exist once firms
review and revise their trade reporting processes in light of the
Proposal. Moreover, within nine to 12 months of the effectiveness of
the 10-minute outer-limit reporting timeframe for manual trades, FINRA
intends to publish a Regulatory Notice soliciting comment from [FINRA]
members regarding the operation and impact of the reduced reporting
timeframe for these manual trades. FINRA would evaluate TRACE data and
the comments received and consider if any measures are appropriate.''
\167\ FINRA states that such measures could include filing a ``proposed
rule change with the Commission prior to the effectiveness of the five-
minute reporting timeframe to extend the implementation of, or
eliminate, the five-minute reporting requirement for manual trades, as
warranted.'' \168\
---------------------------------------------------------------------------
\167\ Id.
\168\ Id.
---------------------------------------------------------------------------
The Commission views the phase-in of the manual trades exception's
five-minute outer limit over three years as reasonably designed to
provide FINRA members time during which to assess trade execution and
post-trade processes
[[Page 78940]]
and make changes necessary to meet a shorter reporting deadline. As
part of the Proposal, FINRA included in new Supplementary Material .09
to FINRA Rule 6730 a schedule for implementing reductions in the
deadline for reporting trades eligible for the manual trades exception.
The three-year phase-in of the manual trades exception reasonably
balances the costs of implementation with the goal of increased
transparency, by giving FINRA members more time to meet the
requirements. FINRA need not provide an additional round of notice and
comment for every phase of the transition. But FINRA nonetheless
intends to engage with and solicit comment from FINRA members
throughout the phase-in period regarding implementation of the reduced
reporting requirement for manual trades.\169\ The Commission will
consider any future proposed rule changes filed with the Commission
regarding the implementation. Additionally, in response to the comment
stating that the Proposal would need to be implemented alongside other
regulatory initiatives, the Commission views FINRA's statement that it
``will endeavor to publish updated technical specifications as far as
possible in advance of the effective date'' \170\ as a reasonable
response, as the more time FINRA members are afforded to implement
system changes to conform to updated technical specifications in
support of the Proposal, the greater flexibility FINRA members will
have to schedule such system changes. Further, in response to the
comment specifically referencing the implementation of amendments to
SEC rules to shorten the standard settlement cycle to T+1, the
compliance date for such amendments was May 28, 2024.\171\ In addition,
the other proposals cited by the commenter have not been adopted, so
FINRA cannot take such possible regulatory changes into consideration
in determining the compliance dates as part of this Proposal.
---------------------------------------------------------------------------
\169\ See supra note 167 and accompanying text.
\170\ FINRA Letter at 18.
\171\ See Securities Exchange Act Release No. 96930 (February
15, 2023), 88 FR 13872 (March 6, 2023); see also 17 CFR 240.15c6-1.
---------------------------------------------------------------------------
E. Reporting Requirement Consistency
Several commenters discuss the consistent application of reporting
requirements,\172\ including some that state that the differing
reporting windows for manual and electronic trades violate the Act by
discriminating based on the mode of execution and unduly burdening
competition.\173\ Two commenters describe the potential negative
consequences of applying different levels of post-trade transparency
depending on a trade's mode of execution.\174\ One of these commenters
states that ``[t]he massive disparity in timeliness of reporting
between the two execution methods not only creates a significant risk
of losing the benefits of transparency, but also creates new
opportunities to manipulate markets.'' \175\
---------------------------------------------------------------------------
\172\ See, e.g., Citadel Letter I at 1-3; HMA Letter II at 1-3;
HMA Letter I at 8-9; BDA Letter II at 3.
\173\ See Citadel Letter I at 3; FIA PTG Letter at 3-4.
\174\ See Citadel Letter I at 1-3; HMA Letter II at 3
\175\ See HMA Letter II at 3.
---------------------------------------------------------------------------
Another commenter raises the issue of different reporting
requirements under the proposal depending on a trade's time of
execution.\176\ The commenter states that under the current rule,
trades executed when TRACE is closed must be reported within 15 minutes
of TRACE being open, mirroring the deadline for reporting of trades
executed when TRACE is open.\177\ But, the commenter continues, under
the Proposal, trades executed outside of the hours when TRACE is open
will still be subject to the deadline to report within 15 minutes of
TRACE being open while trades executed when TRACE is open will be
subject to the new one minute requirement.\178\ The commenter urges
consistent reporting times in this scenario.\179\ One commenter
responds to this comment, stating that few bond trades take place after
hours because of limited liquidity and that no evidence suggests market
participants abuse existing exceptions to permit next-day reporting of
after-hours trades.\180\
---------------------------------------------------------------------------
\176\ See HMA Letter I at 8.
\177\ See id.
\178\ See id.
\179\ See HMA Letter I at 9.
\180\ BDA Letter II at 3.
---------------------------------------------------------------------------
In response to the comment to make consistent the different times
of reporting trades executed when TRACE is closed and open, FINRA
states that ``the continued application of a 15-minute reporting
timeframe to afterhours trades would impact a small portion of trading
activity--only 1.18% of total par value. Consistent with [FINRA]
members' obligation to report trades as soon as practicable, a
significant portion of these trades are already reported well before
the 15-minute outer limit, (e.g., over 90% of trades executed before
8:00 a.m. or after 6:29 p.m. ET or on a nonbusiness day were reported
within three minutes of the TRACE system open), and FINRA's analysis of
trading near the close of TRACE system hours found no indication that
market participants execute trades near the close of TRACE system hours
to delay reporting. Accordingly, FINRA does not believe, at this time,
that the potential benefits of a one-minute reporting requirement for
afterhours trades outweigh the burdens such a requirement may impose.
In particular, FINRA is sensitive to the concerns previously expressed
by commenters that reporting afterhours trades within one minute of the
TRACE system open would present operational obstacles. FINRA also notes
that the Proposal's continued application of a 15-minute reporting
timeframe for afterhours trades is consistent with the rules governing
other trade reporting facilities.'' \181\
---------------------------------------------------------------------------
\181\ FINRA Letter at 16-17 (citations omitted).
---------------------------------------------------------------------------
With respect to the potential negative consequences of applying
different levels of post-trade transparency depending on a trade's mode
of execution, FINRA states that ``as is the case today, under the
Proposal members would be required to report the subject transactions
to TRACE--including manual trades--``as soon as practicable'' but no
later than the applicable outer limit from the time of execution.
Therefore, the current reporting requirements already account for the
various ways that trades can be executed and the resultant differences
in the reporting times.'' \182\
---------------------------------------------------------------------------
\182\ FINRA Letter at 6 (citations omitted); see also supra
section III.D (discussing comments and responses, including the
Commission's views, on the potential for manipulation).
---------------------------------------------------------------------------
The Proposal will set three outside limits for reporting
transactions: a one-minute default deadline, a 15-minute deadline that
will shorten to five minutes three years after the Proposal becomes
operative for transactions eligible for the manual trades exception,
and a 15-minute deadline for FINRA member firms with de minimis
reporting activity. The Commission disagrees with the comment that this
will result in varying levels of post-trade transparency or create new
opportunities for market manipulation.\183\ The Proposal's varying
reporting deadlines do not change the existing requirement that
transactions be reported as soon as practicable, which applies to all
transactions covered by the Proposal, and is accommodative of unique
aspects of different transactions. Because of the current ``as soon as
practicable'' requirement, FINRA-provided data show that 82.9% of
transactions are reported within one minute, 97.6% reported within five
minutes, and
[[Page 78941]]
99.4% reported within 15 minutes.\184\ Accordingly, transaction
reporting times currently are variable. However, ``FINRA estimates
that, after adjusting for the proposed de minimis exception and prior
to accounting for the manual exception, the Proposal could result in up
to 16.4% of current annual trading volume, or up to 6.1 million trades
and 20 trillion dollars in par value, being reported faster. As further
detailed in the Proposal, for non-ATS trades (some of which may qualify
for the manual trades exception), 96.9% were reported within five
minutes. Given that some non-ATS trades are fully electronic while
others involve manual intervention between execution and trade
reporting, FINRA conservatively estimates that the Proposal would
result in at least another 2.03%, or over 755,000 trades representing
approximately $3.702 trillion traded (accounting for the impact of the
proposed de minimis exception), being reported faster.'' \185\
Additionally, FINRA states that ``[a]s evidenced by FINRA's analysis of
trades executed between one and 15 minutes after a prior trade of the
same bond but before the prior trade was reported, the Proposal could
potentially benefit the ability to evaluate pricing in a substantial
amount of trades--over 486,100 corporate bond trades alone representing
approximately $459.6 billion traded (accounting for the impact of the
proposed de minimis exception).'' \186\ Thus, the Proposal will reduce
variation in reporting times by shortening the outer limit reporting
time for FINRA member firms with more than de minimis reportable
activity.
---------------------------------------------------------------------------
\183\ See supra notes 174 and 176.
\184\ See Notice, 89 FR at Table 1.
\185\ FINRA Letter at 4 (citations omitted).
\186\ Id. at 4-5.
---------------------------------------------------------------------------
A similar proposed rule change by the MSRB,\187\ on which the MSRB
closely coordinated with FINRA,\188\ would result in a consistent
standard for trade reporting for municipal securities and the TRACE-
Eligible Securities covered by the Proposal. Accordingly, the
Commission finds that the Proposal would foster cooperation and
coordination between the MSRB and FINRA by establishing consistent
trade reporting requirements across various classes of fixed income
securities. Consistent trade reporting requirements for municipal
securities covered by MSRB rules and the TRACE-Eligible Securities
covered by the Proposal also may reduce compliance burdens resulting
from inconsistent obligations and standards for different classes of
fixed income securities.
---------------------------------------------------------------------------
\187\ See supra note 147.
\188\ See, e.g. Letter from Ernesto A. Lanza, Chief Regulatory
and Policy Officer, MSRB, dated July 18, 2024, available at <a href="https://www.sec.gov/comments/sr-msrb-2024-01/srmsrb202401-491663-1411646.pdf">https://www.sec.gov/comments/sr-msrb-2024-01/srmsrb202401-491663-1411646.pdf</a>.
---------------------------------------------------------------------------
F. Implementation Period
Some commenters address the implementation period.\189\ Two
commenters request an implementation period of two years from the time
of approval due to the high cost of compliance.\190\ Another commenter
states the cost of implementing the proposal is anticipated to be
especially high for smaller firms and suggests an implementation period
of at least 18 months from the date of publication of updated technical
specifications and guidance.\191\ The commenter also requests that
FINRA provide an expanded free testing period of 90 days instead of the
standard free testing period of 30 days.\192\
---------------------------------------------------------------------------
\189\ See, e.g., SIFMA Letter I at 10; BDA Letter I at 4; FIF
Letter I at 5-7; SIFMA Letter II at 8.
\190\ See SIFMA Letter I at 10; BDA Letter I at 4.
\191\ See FIF Letter I at 5.
\192\ See id. at 6-7; see also SIFMA Letter II at 8 (encouraging
FINRA to eliminate its charge for testing and instead to offer no-
cost testing). Comments related to FINRA's free testing period and
current practice to charge for testing after such free testing
period are outside of the scope of this proposal.
---------------------------------------------------------------------------
FINRA responds that it ``intends to provide [FINRA] members with a
sufficient implementation timeframe (for example, approximately within
18 months from any SEC approval) to make the changes necessary to
comply with the Proposal. If approved by the SEC, FINRA will announce
the effective date of the Proposal in a Regulatory Notice. As is
generally the case for TRACE rule changes, FINRA will endeavor to
publish updated technical specifications as far as possible in advance
of the effective date(s) and will work with [FINRA] members to provide
interpretive guidance, where needed.'' \193\
---------------------------------------------------------------------------
\193\ FINRA Letter at 18.
---------------------------------------------------------------------------
The Commission views FINRA's statements with respect to
implementation as reasonable and appropriate. As stated above, FINRA
intends to provide FINRA members with a sufficient implementation
timeframe, publish updated technical specifications as far as possible
in advance of the effective date, and be responsive to requests for
interpretive guidance. FINRA represents that it will announce the
effective date of the proposed rule change in a FINRA Regulatory
Notice.
G. Consistency With the Administrative Procedure Act (``APA'')
One commenter questions the proposed rule's consistency with the
APA.\194\ This commenter asserts that FINRA filed the proposed rule at
the direction of the Commission, and objects to the Commission's
alleged use of self-regulatory organizations such as FINRA ``as a
conduit to carry out rulemakings that are the ultimate responsibility
of the Commission.'' \195\ The commenter further argues that there is
``no demonstrable market failure in the fixed income markets that would
justify reducing the reporting timeframe from 15 minutes to 1 minute.''
\196\
---------------------------------------------------------------------------
\194\ See ASA Letter III at 2-3; ASA Letter II at 2; ASA Letter
1 at 3.
\195\ See id.; ASA Letter III at 2 & n.4.
\196\ See ASA Letter III at 1; see also ASA Letter II at 2; ASA
Letter I at 3.
---------------------------------------------------------------------------
The Commission did not direct FINRA to file the proposed rule and
it is not using FINRA as a conduit to enact the proposed rule.\197\
Rather, as FINRA explains, FINRA reassessed the TRACE trade reporting
timeframe because FINRA believes that it is ``appropriate and prudent
to consider whether this timeframe continues to meet regulatory
objectives given the passage of time and the changes in the fixed
income securities industry in the intervening years.'' \198\ FINRA
designed the Proposal itself based on ``extensive data analysis,''
``carefully consider[ing] the different ways trades can be executed in
the fixed income markets and craft[ing] the manual trades exception to
address a range of execution and reporting scenarios to account for
these differences.'' \199\ In support of the Proposal, FINRA states
that it ``represents an important step in modernizing the trade
reporting timeframes for TRACE-eligible securities to facilitate more
timely transaction data, enhancing transparency and the value of
disseminated transaction data by allowing investors and other market
participants to obtain and evaluate more timely pricing information for
the impacted securities.'' \200\
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\197\ The commenter cites a speech by the Chair in stating to
the contrary, but that speech does not specifically address the
TRACE trade reporting timeframe at all. See ASA Letter III at 2 n.4
(citing Gary Gensler, Chair, Securities and Exchange Commission,
Prepared Remarks before SEC Speaks: U.S. Capital Markets and the
Public Good (Apr. 2, 2024) (transcript available at <a href="https://www.sec.gov/newsroom/speeches-statements/prepared-remarks-sec-speaks-us-capital-markets-public-good">https://www.sec.gov/newsroom/speeches-statements/prepared-remarks-sec-speaks-us-capital-markets-public-good</a>). And, in any event, the
speech reflects the views of the Chair alone, not the Commission.
\198\ FINRA Letter at 3.
\199\ Id.
\200\ Id. at 3-4.
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[[Page 78942]]
Nor does the Exchange Act require that a self-regulatory
organization establish the existence of a market failure to justify a
proposed rule change. Under Section 19(b) of the Exchange Act, the
Commission must approve a rule change proposed by FINRA if the
Commission finds that the proposed change is consistent with the
requirements of the Act and the rules and regulations thereunder,
including the requirements of section 15A(b).\201\ For the reasons
discussed above, the Commission finds that the Proposal is consistent
with those requirements because, among other things, it is designed to
promote just and equitable principles of trade, to remove impediments
to and perfect the mechanism of a free and open market and a national
market system and, in general, to protect investors and the public
interest; and is not designed to permit unfair discrimination between
customers, issuers, brokers, or dealers. The Proposal also does not
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act.\202\
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\201\ 15 U.S.C. 78o-3(b), 78s(b)(2)(C).
\202\ The commenter's references to the Supreme Court's
decisions in Loper Bright Enterprises v. Raimondo, 144 S. Ct. 2244
(2024) and Ohio v. EPA, 144 S. Ct. 2040 (2024), are similarly
misplaced. Loper Bright is inapposite because the question here is
whether FINRA's proposed rule change is consistent with the
requirements of Section 15A(b)--in which case the Exchange Act
requires the Commission to approve it--not whether the Commission
would have statutory authority to adopt its own market-wide rule.
And Ohio is inapposite because we explain above why commenters'
concerns do not establish that the Proposal is inconsistent with the
requirements of the Act.
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H. Consultation With the Treasury Department
Pursuant to section 19(b)(6) of the Act,\203\ the Commission has
considered the sufficiency and appropriateness of existing laws and
rules applicable to government securities brokers, government
securities dealers, and their associated persons in approving the
proposed rule change. Pursuant to section 19(b)(5) of the Act,\204\ the
Commission consulted with and considered the views of the Treasury
Department in determining whether to approve the proposed rule change.
The Treasury Department did not object to the proposed rule change.
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\203\ 15 U.S.C. 78s(b)(6).
\204\ 15 U.S.C. 78s(b)(5) (providing that the Commission ``shall
consult with and consider the views of the Secretary of the Treasury
prior to approving a proposed rule filed by a registered securities
association that primarily concerns conduct related to transactions
in government securities, except where the Commission determines
that an emergency exists requiring expeditious or summary action and
publishes its reasons therefor'').
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IV. Conclusion
It is therefore ordered, pursuant to section 19(b)(2) of the
Act,\205\ that the proposed rule change (SR-FINRA-2024-004), as
modified by Partial Amendment No. 1, be, and hereby is, approved.
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\205\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\206\
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\206\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-22027 Filed 9-25-24; 8:45 am]
BILLING CODE 8011-01-P
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</html>Indexed from Federal Register on September 26, 2024.
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