[Federal Register Volume 85, Number 117 (Wednesday, June 17, 2020)]
[Notices]
[Pages 36631-36633]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-12998]
[[Page 36631]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-89051]
Order Granting Conditional Exemptive Relief, Pursuant to Section
36 of the Securities Exchange Act of 1934 (``Exchange Act'') and Rule
608(e) of Regulation NMS Under the Exchange Act, From Sections
6.4(d)(ii)(A)(2) and (B) of the National Market System Plan Governing
the Consolidated Audit Trail
June 11, 2020.
I. Introduction
By letter dated June 5, 2020 (``Participant Letter''), BOX
Exchange, LLC, Cboe BYX Exchange, Inc., Cboe BZX Exchange, Inc., Cboe
C2 Exchange, Inc., Cboe EDGA Exchange Inc., Cboe EDGX Exchange, Inc.,
Cboe Exchange, Inc., Financial Industry Regulatory Authority, Inc.
(``FINRA''), Investors Exchange LLC, Long Term Stock Exchange, Inc.,
Miami International Securities Exchange LLC, MIAX Emerald, LLC, MIAX
PEARL, LLC, NASDAQ BX, Inc., Nasdaq GEMX, LLC, Nasdaq ISE, LLC, Nasdaq
MRX, LLC, NASDAQ PHLX LLC, The NASDAQ Stock Market LLC, New York Stock
Exchange LLC, NYSE American LLC, NYSE Arca, Inc., NYSE Chicago, Inc.,
and NYSE National, Inc. (collectively, the ``Participants'') request
that the Securities and Exchange Commission (the ``Commission'' or the
``SEC''), pursuant to the Commission's authority under Section 36 of
the Exchange Act \1\ and Rule 608(e) of Regulation NMS under the
Exchange Act,\2\ grant exemptive relief from Sections 6.4(d)(ii)(A)(2)
and (B) of the national market system plan governing the consolidated
audit trail (the ``CAT NMS Plan'').\3\ Specifically, the Participants
request that the Commission provide exemptive relief from Section
6.4(d)(ii)(A)(2) and (B) of the CAT NMS Plan, which state that each
Participant, through its Compliance Rule,\4\ must require its Industry
Members \5\ to record and report to the Central Repository \6\ the
following information: (1) The SRO-Assigned Market Participant
Identifier \7\ of the clearing broker or prime broker, if applicable,
for orders that are executed in whole or in part; \8\ and (2) a
cancelled trade indicator for trades that are cancelled.\9\
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\1\ 15 U.S.C. 78mm.
\2\ 17 CFR 242.608(e).
\3\ The Commission approved the CAT NMS Plan, as modified, on
November 15, 2016. See Securities Exchange Act Release Nos. 79318
(November 15, 2016), 81 FR 84696 (November 23, 2016) (``CAT NMS Plan
Approval Order''). The CAT NMS Plan functions as the limited
liability company agreement of the jointly owned limited liability
company formed under Delaware state law through which the
Participants conduct activities related to the consolidated audit
trail (the ``Company'').
\4\ The CAT NMS Plan defines ``Compliance Rule'' as ``the
rule(s) promulgated by such Participant as contemplated by Section
3.11.'' See id., at Section 1.1.
\5\ The CAT NMS Plan defines ``Industry Member'' as a ``member
of a national securities exchange or a member of a national
securities association.'' See id.
\6\ The CAT NMS Plan defines ``Central Repository'' as ``a
repository responsible for the receipt, consolidation, and retention
of all information reported to the CAT pursuant to SEC Rule 613 and
this Agreement.'' See id.
\7\ The CAT NMS Plan defines ``SRO-Assigned Market Participant
Identifier'' as ``an identifier assigned to an Industry Member by a[
self-regulatory organization or ``SRO''] or an identifier used by a
Participant.'' See id.
\8\ See id. at Section 6.4(d)(ii)(A)(2).
\9\ See id. at Section 6.4(d)(ii)(B). See also Letter from Mike
Simon, CAT NMS Plan Operating Committee Chair, to Vanessa
Countryman, Secretary, Commission, dated June 5, 2020, available at
https://catnmsplan.com/sites/default/files/2020-06/06.05.20-Exemptive-Request-RE-TRF-Facility.pdf (``Participant Letter'').
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For the reasons set forth below, this Order grants the
Participants' request for exemptive relief from the above-described
provisions of the CAT NMS Plan, subject to certain conditions.
II. Description
As described in the Participant Letter, FINRA's Trade Reporting
Facilities, FINRA's OTC Reporting Facility, and FINRA's Alternative
Display Facility (collectively, ``FINRA Facility'') already collect and
are required to report to the Central Repository, among other data, the
clearing number of the clearing broker and the cancelled trade
indicator in order to clear and publish trades (``FINRA Facility
Data'').\10\ The Participants propose an approach wherein the FINRA
Facility Data submitted to the Central Repository would be used as the
source for the clearing number of the clearing broker \11\ instead of
requiring Industry Members to record and report the SRO-Assigned Market
Participant Identifier of the clearing broker (if applicable) for
orders that are executed in whole or in part.\12\ Likewise, instead of
requiring Industry Members to record and report a cancelled trade
indicator for trades that are cancelled, FINRA Facility Data submitted
to the Central Repository would be the source of the cancelled trade
indicator.\13\
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\10\ See Participant Letter, at 2. FINRA Rules 6380A, 6380B,
6622, and 6282 require participants of a FINRA Facility to report
transactional data. See FINRA Rules, available at https://www.finra.org/rules-guidance/rulebooks/finra-rules.
\11\ Although Section 6.4(d)(ii)(A)(2) of the CAT NMS Plan also
states that the Participants must require, through their Compliance
Rules, that Industry Members record and report the SRO-Assigned
Market Participant Identifier of the prime broker (if applicable)
for orders that are executed in whole or in part, the Participants
have not requested exemptive relief from that requirement.
\12\ The Participants state that the clearing number of the
clearing broker is an SRO-Assigned Market Participant Identifier
under the CAT NMS Plan, because it is assigned by The Depository
Trust Company, which is an SRO under the Exchange Act. See
Participant Letter, at 3 n.10.
\13\ See id. at 3.
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The Participants explain that FINRA Facility Data would still be
reported to the Central Repository in each instance currently required
under the CAT NMS Plan. Industry Members would continue to be required
to submit either a trade report or a trade cancellation with the
requisite information to a FINRA Facility, in accordance with existing
rules set by each Participant for its members.\14\ For cancelled
trades, Industry Members would continue to be required to submit a
trade cancellation to a FINRA Facility. The Compliance Rules would
further require Large Industry Members \15\ and Small Industry Members
that report to the Order Audit Trail System (``Small OATS Reporters'')
that are unable to submit a cancelled trade indicator to a FINRA
Facility to record and report directly to the Central Repository a
cancelled trade indicator, as well as a cancelled trade timestamp,
beginning on June 22, 2020.\16\ Similarly, for orders executed in part
or in whole, Industry Members would continue to be required to submit a
trade report with the clearing number of the clearing broker to a FINRA
Facility. The Compliance Rules would further require Large Industry
Members and Small OATS Reporters that are unable to submit the clearing
number of the clearing broker to a FINRA Facility to record and report
directly to the Central Repository the clearing number for the order,
as well as contra party
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information, beginning on April 26, 2021.\17\
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\14\ See id. at 6.
\15\ For the purposes of this exemptive relief, the term ``Large
Industry Members'' shall mean all Industry Members other than Small
Industry Members. The CAT NMS Plan defines ``Small Industry Member''
as ``an Industry Member that qualifies as a small broker-dealer as
defined in SEC Rule 613.'' See CAT NMS Plan, supra note 3, at
Section 1.1. Small Industry Members that do not report to the Order
Audit Trail System are not scheduled to begin reporting to the
Central Repository until December 13, 2021, see Participant Letter,
at 6 n.19, but they would be subject to the same Compliance Rules
that would already be in place for Large Industry Members and Small
OATS Reporters.
\16\ See Participant Letter, at 3, 6. If the cancellation is
rejected by the FINRA Facility and is not successfully re-entered by
the Industry Member, then the Industry Member would be required to
report to the Central Repository a cancelled trade indicator, as
well as a cancelled trade timestamp. If the cancellation is rejected
but successfully re-entered by the Industry Member, the Industry
Member would not be required to separately report the cancellation
to the Central Repository. See id. at 3 n.10.
\17\ See id. at 6-7.
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In the Participant Letter, the Participants state that they would
require the Plan Processor \18\ to link FINRA Facility Data to Industry
Member execution reports submitted to the Central Repository beginning
on October 26, 2020.\19\ The Participants explain that the Compliance
Rules would require Industry Members to submit to the Central
Repository an execution report submitted to a FINRA Facility for the
corresponding trade report or trade cancellation, beginning on June 22,
2020.\20\ Industry Members would be required to report a unique trade
identifier, beginning on October 26, 2020, that would be used by the
Plan Processor to link the FINRA Facility Data, including the number of
the clearing broker and cancelled trade information, with the Industry
Member's execution report.\21\ Specifically, if an Industry Member
submits a trade report to a FINRA Facility pursuant to applicable
Participant rules and reports the corresponding execution to the
Central Repository, the Industry Member would also be required to
report to the Central Repository the unique trade identifier reported
by the Industry Member to such FINRA Facility for the trade.\22\
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\18\ The CAT NMS Plan defines ``Plan Processor'' as ``the
Initial Plan Processor or any other Person selected by the Operating
Committee pursuant to SEC Rule 613 and Sections 4.3(b)(i) and 6.1,
and with regard to the Initial Plan Processor, the Selection Plan,
to perform the CAT processing functions required by SEC Rule 613 and
set forth in this Agreement.'' See CAT NMS Plan, supra note 3, at
Section 1.1.
\19\ See Participant Letter, at 6. The Company has entered into
an agreement with FINRA CAT LLC that obligates FINRA CAT LLC to act
as the Plan Processor and to perform the functions and duties
contemplated by the CAT NMS Plan. The Company may further obligate
the Plan Processor to perform the necessary linkage through this
agreement.
\20\ See id. The Participants clarify that ``the unique trade
identifier for the OTC Reporting Facility and the Alternative
Display Facility would be the Compliance ID, for the FINRA/Nasdaq
Trade Reporting Facilities would be the Branch Sequence Number, and
for the FINRA/NYSE Trade Reporting Facility would be the FINRA
Compliance Number.'' See id.
\21\ The Participants clarify that ``the unique trade identifier
for the OTC Reporting Facility and the Alternative Display Facility
would be the Compliance ID, for the FINRA/Nasdaq Trade Reporting
Facilities would be the Branch Sequence Number, and for the FINRA/
NYSE Trade Reporting Facility would be the FINRA Compliance
Number.'' See id.
\22\ See id.
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The Participants state that there are four limited instances in
which an Industry Member would be unable to provide a link between the
execution reported to the Central Repository and the related FINRA
Facility trade report. The first scenario involves the circumstances in
which an Industry Member executes a trade between two desks or
departments involving proprietary accounts. Because there is no change
in beneficial ownership, no trade is reported to a FINRA Facility.\23\
The second scenario involves the circumstances in which an Industry
Member executes a trade and must report the trade via Form T instead of
to a FINRA Facility, such as where the security symbol is no longer
available or the firm's market participant identifier is no longer
active.\24\ The third scenario involves the circumstances in which a
trade is executed by a non-FINRA member firm that has no FINRA Facility
reporting obligation and was reported to the FINRA Facility by the
FINRA member counterparty.\25\ The fourth scenario involves the
circumstances in which an Industry Member is on the contra side of a
negotiated trade reported to a FINRA Facility via a Qualified Service
Representative Agreement or Automatic Give-up Agreement, such that the
trade was automatically submitted to a FINRA Facility without the
Industry Member taking any action on the trade.\26\ The Participants
represented to the Commission that these scenarios are rare and do not
involve a large number of trades. In these instances, the Participants
stated that the Compliance Rules would require an Industry Member to
record and report the relevant data directly to the Central Repository
by June 22, 2020 for cancelled trades and by April 26, 2021 for orders
executed in whole or in part.\27\
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\23\ See id. at 3. According to the Participants, these types of
trade represented approximately 0.3 percent of the trades captured
in FINRA's Order Audit Trail System in the fourth quarter of 2019.
See id. at 3-4.
\24\ See id. at 4. According to the Participants, in 2019, there
were only 1,640 trades reported on Form T. See id.
\25\ See id. The Participants do not provide statistics for this
scenario, but stated that it did not implicate a large number of
trades. See id.
\26\ See id. According to the Participants, only 2 percent of
the executions in the fourth quarter of 2019 were negotiated trades
and only approximately 0.1 percent of executions were the above-
described type of negotiated trades. Id.
\27\ See id. at 6-7. See also notes 14-17 and associated text
supra, for a discussion of the data that the Compliance Rules would
require an Industry Member to record and report to the Central
Repository.
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Noting the current difference in the timestamp granularity
requirements for Industry Member reporting to a FINRA Facility and
Industry Member reporting to the Central Repository,\28\ the
Participants further state that FINRA will seek to amend its FINRA
Facility rules and technical specifications to accept timestamps up to
the granularity required by the CAT NMS Plan and to implement such
changes by December 15, 2021 for FINRA's Trade Reporting Facilities and
FINRA's Alternative Display Facility and by December 15, 2022 for
FINRA's OTC Reporting Facility.\29\
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\28\ The CAT NMS Plan states that Participants shall, through
their Compliance Rules, require Industry Members to report
transaction data to the Central Repository in milliseconds or in
finer increments if Industry Members utilize such finer increments
in their order handling or execution systems. See CAT NMS Plan,
supra note 3, at Section 6.8(b); see also Securities Exchange Act
Release No. 88608 (April 8, 2020), 85 FR 20743 (April 14, 2020)
(granting time-limited exemptive relief allowing the Participants to
require Industry Members using timestamps finer than the minimum
required by the CAT NMS Plan to truncate such timestamps after the
nanosecond level). A FINRA Facility, by contrast, only collects data
using timestamps up to milliseconds. See Participant Letter, at 5.
\29\ See Participant Letter, at 7.
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III. Request for Relief
The Participants request that the Commission grant each Participant
exemptive relief from Section 6.4(d)(ii)(A)(2) and (B) of the CAT NMS
Plan, which state that the Participants must require, through their
Compliance Rules, that Industry Members record and report to the
Central Repository the SRO-Assigned Market Participant Identifier of
the clearing broker, if applicable, for orders that are executed in
whole or in part, and a cancelled trade indicator for trades that are
cancelled, when such data is reported by FINRA to the Central
Repository as part of the FINRA Facility Data and subject to the above-
described conditions.\30\
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\30\ See Participant Letter, at 5-7. See notes 14-22, 27-29 and
associated text supra for a discussion of these conditions.
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Once the alternative approach described above is fully implemented,
the Participants believe that the FINRA Facility Data would be an
equivalent and more reliable source for the clearing and cancellation
data required by the CAT NMS Plan than similar data provided separately
by each Industry Member.\31\ The FINRA Facility Data is already used
for clearing and publishing trades.\32\ Inadvertent errors reported to
a FINRA Facility may also result in a trade break.\33\ In addition, the
Participants state that their proposed alternative approach would avoid
burdening Industry Members with the cost and effort of reporting data
regarding clearing brokers and cancelled
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trades pursuant to two reporting regimes.\34\
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\31\ See Participant Letter, at 5.
\32\ See id.
\33\ See id. at 2 n.9.
\34\ See id. at 5.
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IV. Discussion
Section 36 of the Exchange Act grants the Commission the authority,
with certain limitations, to ``conditionally or unconditionally exempt
any person, security, or transaction . . . from any provision or
provisions of [the Exchange Act] or of any rule or regulation
thereunder, to the extent that such exemption is necessary or
appropriate in the public interest, and is consistent with the
protection of investors.'' \35\ Rule 608(e) of Regulation NMS under the
Exchange Act authorizes the Commission to exempt, either
unconditionally or on specified terms and conditions, any self-
regulatory organization, member thereof, or specified security, from
the provisions of the rule if the Commission determines that such
exemption is consistent with the public interest, the protection of
investors, the maintenance of fair and orderly markets and the removal
of impediments to, and perfection of the mechanisms of, a national
market system.\36\
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\35\ 15 U.S.C. 78mm(a)(1).
\36\ 17 CFR 242.608(e).
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The Commission believes that, pursuant to Section 36 of the
Exchange Act, exemptive relief is appropriate in the public interest
and consistent with the protection of investors, and that, pursuant to
Rule 608(e) under the Exchange Act, exemptive relief is consistent with
the public interest, the protection of investors, the maintenance of
fair and orderly markets and the removal of impediments to, and the
perfection of the mechanisms of, a national market system. Relying on
FINRA Facility Data in lieu of requiring Industry Members to report the
SRO-Assigned Market Participant Identifier of the clearing broker, if
applicable, and a cancelled trade indicator will be more efficient and
more cost-effective for Industry Members, because this proposed
alternative approach will avoid burdening Industry Members with
reporting data regarding clearing brokers and cancelled trades pursuant
to two reporting regimes. Moreover, once the alternative approach is
fully implemented, FINRA Facility Data provided to the CAT would be
equivalent to the data required by Sections 6.4(d)(ii)(A)(2) and (B).
The Commission believes that the conditions proposed by the
Participants in their request for exemptive relief are also
appropriate, including the condition that FINRA will continue to report
FINRA Facility Data to the Central Repository, the condition that the
Participants will require the Plan Processor to link FINRA Facility
Data to Industry Member execution reports submitted to the Central
Repository, conditions specifying that the Participants' Compliance
Rules will require Industry Members to report directly to the Central
Repository if they do not submit the required information to a FINRA
Facility or are unable to provide a link between the execution reported
to the Central Repository and the corresponding FINRA Facility trade
report or trade cancellation, and the condition that FINRA would seek
to amend its FINRA Facility rules and technical specifications to
permit each FINRA Facility to accept timestamps up to the granularity
required by the CAT NMS Plan.\37\ The Commission believes that such
conditions will help to ensure the collection of relevant and
equivalent data regarding cancelled trades and clearing brokers.
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\37\ See notes 14-22, 27-29 and associated text supra for a
discussion of these conditions. The Participants have an obligation
to enforce Industry Member compliance with their own rules,
including the Compliance Rules and FINRA's rules relating to its
trade reporting facilities. See, e.g., note 10 supra.
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The Commission also believes that the phased implementation of the
Participants' alternative approach is appropriate. Although some
elements of the Participants' alternative approach will not be fully
implemented until 2021 or 2022, including direct reporting by Industry
Members of clearing numbers and contra party information in certain
circumstances, the Participants have indicated that these elements
would only affect a limited or de minimis amount of data.\38\ The
Commission therefore believes that granting the requested exemptive
relief according to the timeline proposed by the Participants is
unlikely to have a significant impact on regulators' short-term ability
to use the transactional data reported to the Central Repository.
Moreover, the Commission believes that granting exemptive relief
according to the timeline proposed by the Participants will
simultaneously provide Industry Members with immediate relief from
incurring duplicative costs and encourage progress towards full
implementation of the alternative approach on a reasonable and feasible
schedule.
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\38\ See, e.g., notes 23-26 and associated text supra.
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To the extent that the Participants are availing themselves of
exemptive relief from a CAT NMS Plan requirement, such requirement
shall not be included in the requirements for a Financial
Accountability Milestone, provided that the conditions of the exemption
are satisfied.\39\
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\39\ See Securities Exchange Act Release No. 88890 (May 15,
2020), 85 FR 31322, 31335 (May 22, 2020). If the Participants do not
meet the conditions set forth herein, on the schedule set forth
herein, their ability to recover fees from Industry Members could be
impacted pursuant to the terms of Section 11.6 of the CAT NMS Plan.
See CAT NMS Plan, supra note 3, at Section 11.6 (effective June 22,
2020). Specifically, linkage of execution reports submitted to the
Central Repository by Industry Members to corresponding FINRA trade
reports and Industry Member reporting of unique trade identifiers,
scheduled to begin on October 26, 2020, along with any related
changes to the Compliance Rules, will now be relevant to the Full
Implementation of Core Equity Reporting milestone (Period 2), which
must be satisfied no later than December 31, 2020. Functionality
enabling Industry Members to report clearing numbers and contra
party information directly to the Central Repository, scheduled to
begin on April 26, 2021 for Large Industry Members and Small OATS
Reporters, along with any related changes to the Compliance Rules
and FINRA's Trade Reporting Facilities and FINRA's Alternative
Display Facility acceptance of timestamps up to the granularity
required by the CAT NMS Plan, scheduled to begin by December 15,
2021, will now be relevant to the Full Availability and Regulatory
Utilization of Transactional Database Functionality milestone
(Period 3), which must be satisfied no later than December 31, 2021.
FINRA's OTC Reporting Facility acceptance of timestamps up to the
granularity required by the CAT NMS Plan, scheduled to begin by
December 15, 2022, will now be relevant to the Full Implementation
of CAT NMS Plan Requirements milestone (Period 4), which must be
satisfied no later than December 30, 2022.
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Accordingly, it is hereby ordered, pursuant to Section 36(a)(1) of
the Exchange Act \40\ and Rule 608(e) under the Exchange Act,\41\ that
the Commission grants the Participants' request for exemptive relief,
as set forth in the Participant Letter, from the requirements in
Section 6.4(d)(ii)(A)(2) and (B) of the CAT NMS Plan, subject to the
conditions described by the Participants and in this Order.
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\40\ 15 U.S.C. 78mm(a)(1).
\41\ 17 CFR 242.608(e).
By the Commission.
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-12998 Filed 6-16-20; 8:45 am]
BILLING CODE 8011-01-P