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, Relating to the Reporting of Allocations Pursuant to the National Market System Plan Governing the Consolidated Audit Trail
| Citation | 85 FR 67576 |
| Record Number | 2020-23467 |
| Published date | 23 October 2020 |
| Section | Notices |
| Court | Securities And Exchange Commission |
Federal Register, Volume 85 Issue 206 (Friday, October 23, 2020)
[Federal Register Volume 85, Number 206 (Friday, October 23, 2020)]
[Notices]
[Pages 67576-67579]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-23467]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-90223]
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, Relating to the
Reporting of Allocations Pursuant to the National Market System Plan
Governing the Consolidated Audit Trail
October 19, 2020.
I. Introduction
By letter dated August 27, 2020, BOX Exchange LLC, Cboe BYX
Exchange, Inc., Cboe BZX Exchange, Inc., Cboe EDGA Exchange, Inc., Cboe
EDGX Exchange, Inc., Cboe C2 Exchange, Inc., Cboe Exchange, Inc.,
Financial Industry Regulatory Authority, Inc. (``FINRA''), Investors
Exchange LLC, Long Term Stock Exchange, Inc., MEMX LLC, Miami
International Securities Exchange LLC, MIAX Emerald, LLC, MIAX PEARL,
LLC, NASDAQ BX, LLC, 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'') requested
that the Securities and Exchange Commission (``Commission'' or ``SEC'')
grant them exemptive relief from the National Market System Plan
Governing the Consolidated Audit Trail (``CAT NMS Plan''),\1\ pursuant
to its authority under Section 36 of the Securities Exchange Act of
1934 (``Exchange Act'') \2\ and Rule 608(e) of Regulation NMS under the
Exchange Act, from certain allocation reporting requirements of
Sections 6.4(d)(ii)(A)(1) and (2) of the CAT NMS Plan.\3\
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\1\ The CAT NMS Plan was approved by the Commission, as
modified, on November 15, 2016. See Securities Exchange Act Release
No. 79318 (November 15, 2016), 81 FR 84696 (November 23, 2016).
\2\ 15 U.S.C. 78mm(a)(1).
\3\ See letter from the Participants to Vanessa Countryman,
Secretary, Commission, dated August 27, 2020 (the ``August 27, 2020
Exemption Request''). Unless otherwise noted, capitalized terms are
used as defined in the CAT NMS Plan.
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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.'' \4\ Under Rule 608(e) of Regulation NMS, the
Commission may ``exempt from [Rule 608], either unconditionally or on
specified terms and conditions, any self-regulatory organization,
member thereof, or specified security, 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 mechanism of,
a national market system.'' \5\
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\4\ 15 U.S.C. 78mm(a)(1).
\5\ 17 CFR 242.608(e).
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For the reasons set forth below, this Order grants the
Participants' request for an exemption from Sections 6.4(d)(ii)(A)(1)
and (2) of the CAT NMS Plan as set forth in the August 27, 2020
Exemption Request, subject to certain conditions.
II. Background
Pursuant to Section 6.4(d)(ii)(A) of the CAT NMS Plan, each
Participant must, through its Compliance Rule, require its Industry
Members to record and report to the Central Repository, if the order is
executed, in whole or in part: (1) An Allocation Report; \6\ (2) the
SRO-Assigned Market Participant Identifier of the clearing broker or
prime broker, if applicable; and the (3) CAT-Order-ID of any contra-
side order(s). Accordingly, the Participants have implemented
Compliance Rules that, among other things, require their Industry
Members that are executing brokers to submit to the Central Repository,
among other things, Allocation Reports and the SRO-Assigned Market
Participant Identifier of the clearing broker or prime broker, if
applicable.\7\
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\6\ Section 1.1 of the CAT NMS Plan defines an ``Allocation
Report'' as ``a report made to the Central Repository by an Industry
Member that identifies the Firm Designated ID for any account(s),
including subaccount(s), to which executed shares are allocated and
provides the security that has been allocated, the identifier of the
firm reporting the allocation, the price per share of shares
allocated, the side of shares allocated, the number of shares
allocated to each account, and the time of the allocation; provided
for the avoidance of doubt, any such Allocation Report shall not be
required to be linked to particular orders or executions.''
\7\ See, e.g., Cboe Exchange, Inc. Rule 7.22(a)(2)(A); New York
Stock Exchange LLC Rule 6830(a)(2)(A).
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III. Request for Relief
In the August 27, 2020 Exemption Request, the Participants request
that the Participants be permitted to implement an alternative approach
to reporting allocations to the Central Repository, the ``Allocation
Alternative.'' Under the Allocation Alternative, any Industry Member
that performs an allocation to a client
[[Page 67577]]
account would be required through their Compliance Rules to submit an
Allocation Report to the Central Repository when shares/contracts are
allocated to the client account regardless of whether the Industry
Member was involved in executing the underlying order(s). Under the
Allocation Alternative, an ``Allocation'' would be defined as: (1) The
placement of shares/contracts into the same account for which an order
was originally placed; or (2) the placement of shares/contracts into an
account based on allocation instructions (e.g., subaccount allocations,
delivery versus payment (``DVP'') allocations). Pursuant to this
definition and the proposed Allocation Alternative, an Industry Member
that performs an Allocation to an account that is not a client account,
such as proprietary accounts and events including step outs,\8\ or
correspondent flips,\9\ would not be required to submit an Allocation
Report to the Commission for that allocation, but could do so on a
voluntary basis. The Participants propose to allow Industry Members to
report Allocations to accounts other than client accounts, but if
Industry Members report such Allocations, such Allocations must be
marked as Allocations to accounts other than client accounts.\10\
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\8\ ``A step-out allows a broker-dealer to allocate all or part
of a client's position from a previously executed trade to the
client's account at another broker-dealer. In other words, a step-
out functions as a client's position transfer, rather than a trade;
there is no exchange of shares and funds and no change in beneficial
ownership.'' See FINRA, Trade Reporting Frequently Asked Questions,
at Section 301, available at: https://www.finra.org/filing-reporting/market-transparency-reporting/trade-reporting-faq.
\9\ Correspondent clearing flips are the movement of a position
from an executing broker's account to a different account for
clearance and settlement, allowing a broker-dealer to execute a
trade through another broker-dealer and settle the trade in its own
account. See, e.g., The Depository Trust & Clearing Corporation,
Correspondent Clearing, available at: https://www.dtcc.com/clearing-services/equities-trade-capture/correspondent-clearing.
\10\ The Participants state that a ``client account'' is any
account that is not owned or controlled by the Industry Member.
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A. Executing Brokers and Allocation Reports
To implement the Allocation Alternative, the Participants request
exemptive relief from Section 6.4(d)(ii)(A)(1) of the CAT NMS Plan, to
the extent that the provision requires each Participant to, through its
Compliance Rule, require its Industry Members that are executing
brokers, who do not perform Allocations, to record and report to the
Central Repository, if the order is executed, in whole or in part, an
Allocation Report. Under the Allocation Alternative, when an Industry
Member other than an executing broker (e.g., a prime broker or clearing
broker) performs an Allocation, that Industry Member would be required
to submit the Allocation Report to the Central Repository. When an
executing broker performs an Allocation for an order that is executed,
in whole or in part, the burden of submitting an Allocation Report to
the Central Repository would remain with the executing broker under the
Allocation Alternative. In certain circumstances this would result in
multiple Allocation Reports--the executing broker (if self-clearing) or
its clearing firm would report individual Allocation Reports
identifying the specific prime broker to which shares/contracts were
allocated and then each prime broker would itself report an Allocation
Report identifying the specific customer accounts to which the shares/
contracts were finally allocated.
The Participants state that granting exemptive relief from
submitting Allocation Reports for executing brokers who do not perform
an Allocation, and requiring the Industry Member other than the
executing broker that is performing the Allocation to submit such
Allocation Reports, is consistent with the basic approach taken by the
Commission in adopting Rule 613. Specifically, the Participants believe
that the Commission sought to require each broker-dealer and exchange
that touches an order to record the required data with respect to
actions it takes on the order.\11\ Without the proposed exemptive
relief, executing brokers that do not perform Allocations would be
required to submit Allocation Reports. In addition, the Participants
state because shares/contracts for every execution must be allocated to
an account by the clearing broker, there would be no loss of
information by shifting the reporting obligation from the executing
broker to the clearing broker.
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\11\ See Securities Exchange Act Release No. 67457 (July 18,
2012), 77 FR 45722, 45748 (Aug. 1, 2012).
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B. Identity of Prime Broker
To implement the Allocation Alternative, the Participants request
exemptive relief from Section 6.4(d)(ii)(A)(2) of the CAT NMS Plan, to
the extent that the provision requires each Participant to, through its
Compliance Rule, require its Industry Members to record and report to
the Central Repository, if an order is executed, in whole or in part,
the SRO-Assigned Market Participant Identifier of the prime broker, if
applicable. Currently, under the CAT NMS Plan, an Industry Member is
required to report the SRO-Assigned Market Participant Identifier of
the clearing broker or prime broker in connection with the execution of
an order, and such information would be part of the order's lifecycle,
rather than in an Allocation Report that is not linked to the order's
lifecycle.\12\ Under the Allocation Alternative, the identity of the
prime broker would be required to be reported by the clearing broker on
the Allocation Report, and, in addition, the prime broker itself would
be required to report the ultimate allocation, which the Participants
believe would provide more complete information.
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\12\ The Participants are not requesting exemptive relief
relating to the reporting of the SRO-Assigned Market Participant
Identifier of clearing brokers.
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The Participants state that associating a prime broker with a
specific execution, as is currently required by the CAT NMS Plan, does
not reflect how the allocation process works in practice as allocations
to a prime broker are done post-trade and are performed by the clearing
broker of the executing broker. The Participants also state that with
the implementation of the Allocation Alternative, it would be
duplicative for the executing broker to separately identify the prime
broker for allocation purposes.
The Participants state that if a particular customer only has one
prime broker, the identity of the prime broker can be obtained from the
customer and account information through the DVP accounts for that
customer that contain the identity of the prime broker. The
Participants further state that Allocation Reports related to those
executions would reflect that shares/contracts were allocated to the
single prime broker. The Participants believe that there is no loss of
information through the implementation of the Allocation Alternative
compared to what is required in the CAT NMS Plan and that this approach
does not decrease the regulatory utility of the CAT for single prime
broker circumstances.
In cases where a customer maintains relationships with multiple
prime brokers, the Participants assert that the executing broker will
not have information at the time of the trade as to which particular
prime broker may be allocated all or part of the execution.\13\ Under
the Allocation Alternative, the executing broker (if self-clearing) or
its
[[Page 67578]]
clearing firm would report individual Allocation Reports identifying
the specific prime broker to which shares/contracts were allocated and
then each prime broker would itself report an Allocation Report
identifying the specific customer accounts where the shares/contracts
were ultimately allocated. To determine the prime broker for a
customer, a regulatory user would query the customer and account
database using the customer's CCID to obtain all DVP accounts for the
CCID at broker-dealers. The Participants state that when a customer
maintains relationships with multiple prime brokers, the customer
typically has a separate DVP account with each prime broker, and the
identities of those prime brokers can be obtained from the customer and
account information.
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\13\ Based on discussions with members of the Advisory
Committee, the Participants understand that multiple prime broker
arrangements are common, particularly with respect to customers that
are large funds. August 27, 2020 Exemption Request, supra note 3, at
5, n.13.
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C. Additional Conditions to Exemptive Relief
Currently, the definition of Allocation Report in the CAT NMS Plan
only refers to shares. To implement the Allocation Alternative, the
Participants propose to require that all required elements of
Allocation Reports apply to both shares and contracts, as applicable,
for all Eligible Securities. Specifically, Participants would require
the reporting of the following in each Allocation Report: (1) The FDID
for the account receiving the allocation, including subaccounts; (2)
the security that has been allocated; (3) the identifier of the firm
reporting the allocation; (3) the price per share/contracts of shares/
contracts allocated; (4) the side of shares/contracts allocated; (4)
the number of shares/contracts allocated; and (5) the time of the
allocation.
Furthermore, to implement the Allocation Alternative, the
Participants propose to require the following information on all
Allocation Reports: (1) Allocation ID, which is the internal allocation
identifier assigned to the allocation event by the Industry Member; (2)
trade date; (3) settlement date: (4) IB/correspondent CRD Number (if
applicable); (5) FDID of new order(s) (if available in the booking
system); \14\ (6) allocation instruction time (optional); (7) if the
account meets the definition of institution under FINRA Rule 4512(c);
\15\ (8) type of allocation (allocation to a custody account,
allocation to a DVP account, step out, correspondent flip, allocation
to a firm owned or controlled account, or other non-reportable
transactions (e.g., option exercises, conversions); (9) for DVP
allocations, custody broker-dealer clearing number (prime broker) if
the custodian is a U.S. broker-dealer, DTCC number if the custodian is
a U.S. bank, or a foreign indicator, if the custodian is a foreign
entity; and (10) if an allocation was cancelled, a cancel flag, which
indicates that the allocation was cancelled, and a cancel timestamp,
which represents the time at which the allocation was cancelled.
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\14\ The Participants propose that for scenarios where the
Industry Member responsible for reporting the Allocation has the
FDID of the related new order(s) available, such FDID must be
reported. This would include scenarios in which: (1) The FDID
structure of the top account and subaccounts is known to the
Industry Member responsible for reporting the Allocation(s); and (2)
the FDID structure used by the IB/Correspondent when reporting new
orders is known to the clearing firm reporting the related
Allocations.
\15\ FINRA Rule 4512(c) states the for purposes of the rule, the
term ``institutional account'' means the account of: (1) A bank,
savings and loan association, insurance company or registered
investment company; (2) an investment adviser registered either with
the SEC under Section 203 of the Investment Advisers Act or with a
state securities commission (or any agency or office performing like
functions); or (3) any other person (whether a natural person,
corporation, partnership, trust or otherwise) with total assets of
at least $50 million.
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IV. Discussion
The Commission believes that granting exemptive relief from
Sections 6.4(d)(ii)(A)(1) and (2) of the CAT NMS Plan as set forth
below to allow for the Allocation Alternative, subject to the
conditions described herein, is appropriate in the public interest and
consistent with the protection of investors, and that pursuant to Rule
608(e), this 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 the perfection of a national
market system.
A. Executing Brokers and Allocation Reports
The Commission is granting the Participants an exemption from the
requirement that the Participants, through their Compliance Rule,
require executing brokers to submit Allocation Reports. The Commission
understands that executing brokers that are not self-clearing do not
perform allocations themselves, and such allocations are handled by
prime and/or clearing brokers, and these executing brokers therefore do
not possess the requisite information to provide Allocation Reports.
Correspondingly, the Commission believes that it is appropriate to
condition this exemption on the Participants adopting Compliance Rules
that require prime and/or clearing brokers to submit Allocation Reports
when such brokers perform allocations. The Commission believes granting
exemptive relief would improve efficiency and reduce the costs and
burdens of reporting allocations for Industry Members because the
reporting obligation would belong to the Industry Member with the
requisite information, and executing brokers that do not have the
information required to provide an Allocation Report would not be
required to develop the infrastructure and processes required to
obtain, store and report the information. This exemptive relief should
not reduce the regulatory utility of CAT because an Allocation Report
would still be submitted covering each executed trade allocated to a
client account, which in certain circumstances could still result in
multiple Allocation Reports,\16\ just not necessarily by the executing
broker.
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\16\ As noted above, under the Allocation Alternative, for
certain executions, the executing broker (if self-clearing) or its
clearing firm would report individual Allocation Reports identifying
the specific prime broker to which shares/contracts were allocated
and then each prime broker would itself report an Allocation Report
identifying the specific customer accounts to which the shares/
contracts were finally allocated.
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B. Identity of Prime Broker
The Commission believes that exempting Participants from the
requirement that they, through their Compliance Rules, require
executing brokers to provide the SRO-Assigned Market Participant
Identifier of the prime broker is appropriate because, as stated by the
Participants, allocations are done on a post-trade basis and the
executing broker will not have the requisite information at the time of
the trade. Because an executing broker, in certain circumstances, does
not have this information at the time of the trade, this relief
relieves executing brokers of the burdens and costs of developing
infrastructure and processes to obtain this information in order to
meet the contemporaneous reporting requirements of the CAT NMS
Plan.\17\
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\17\ See CAT NMS Plan, supra note 1, at Section 6.4(b)(i).
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The Commission believes that, although executing brokers would no
longer be required to provide this information, regulators will still
be able to determine the prime broker(s) associated with orders through
querying the customer and account information database. If an executing
broker has only one prime broker, the identity of the prime broker can
be obtained from the customer and account information associated with
the executing broker. For customers with multiple prime brokers, the
identity of the prime brokers can be obtained from the customer and
account information
[[Page 67579]]
which will list the prime broker, if there is one, that is associated
with each account.
C. Additional Conditions for Exemptive Relief
The Commission is granting the relief conditioned upon the adoption
of Compliance Rules that implement the reporting requirements of the
Allocation Alternative. The Commission believes that the proposed
definition of Allocation is reasonable. The Commission is also
exempting Participants from the requirement that they amend their
Compliance Rules to require Industry Members to report Allocations for
accounts other than client accounts. The Commission believes that
allocations to client accounts, and not allocations to proprietary
accounts or events such as step-outs and correspondent flips,\18\
provide regulators the necessary information to detect abuses in the
allocation process because it would provide regulators with detailed
information regarding the fulfillment of orders submitted by clients,
while reducing reporting burdens on broker-dealers. For example,
Allocation Reports would be required for allocations to registered
investment advisor and money manager accounts. The Commission further
believes that the proposed approach should facilitate regulators'
ability to distinguish Allocation Reports relating to allocations to
client accounts from other Allocation Reports because Allocations to
accounts other than client accounts would have to be identified as
such. This approach could reduce the time CAT Reporters expend to
comply with CAT reporting requirements and lower costs by allowing
broker-dealers to use existing business practices.
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\18\ See, supra notes 8 and 9.
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The Commission is conditioning this exemption on the Participants
amending their Compliance Rules to require additional elements in
Allocation Reports.\19\ These additional elements would enhance the
utility of CAT by providing more information related to allocations and
will ultimately assist market surveillance, market reconstructions, and
examinations. The Commission further believes that applying the
requirements for Allocation Reports to contracts in addition to shares
is appropriate because CAT reporting requirements apply to both options
and equities.
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\19\ Specifically, the Participants would be required to modify
their Compliance Rules such that all required elements of Allocation
Reports apply to both shares and contracts, as applicable, for all
Eligible Securities. In addition, the Participants would be required
to modify their Compliance Rules so that Allocation Reports include
the following additional elements: (1) Allocation ID, which is the
internal allocation identifier assigned to the allocation event by
the Industry Member; (2) trade date; (3) settlement date: (4) IB/
correspondent CRD Number (if applicable); (5) FDID of new order(s)
(if available in the booking system); (6) allocation instruction
time (optional); (7) if account meets the definition of institution
under FINRA Rule 4512(c); (8) type of allocation (allocation to a
custody account, allocation to a DVP account, step out,
correspondent flip, allocation to a firm owned or controlled
account, or other non-reportable transactions (e.g., option
exercises, conversions); (9) for DVP allocations, custody broker-
dealer clearing number (prime broker) if the custodian is a U.S.
broker-dealer, DTCC number if the custodian is a U.S. bank, or a
foreign indicator, if the custodian is a foreign entity; and (10) if
an allocation was cancelled, a cancel flag, which indicates if the
allocation was cancelled, and a cancel timestamp, which represents
the time at which the allocation was cancelled.
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The proposed approach described in the August 27, 2020 Exemption
Request would require Participants to amend their Compliance Rules to
require Industry Members to provide Allocation Reports to the Central
Repository any time they perform Allocations to a client account,
whether or not the Industry Member was the executing broker for the
trades. The Participants also would be required to amend their
Compliance Rules to require their Industry Members reporting the
Allocation Reports to include the additional elements set forth above
on all Allocation Reports, in addition to those elements currently
required under the CAT NMS Plan.
Based on the foregoing, the Commission believes that, pursuant to
Section 36 of the Exchange Act, this exemption is appropriate in the
public interest and consistent with the protection of investors, and
that pursuant to Rule 608(e), this 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 the
perfection of a national market system.
Accordingly, it is hereby ordered, pursuant to Section 36(a)(1) of
the Exchange Act,\20\ and Rule 608(e) of the Exchange Act \21\ and with
respect to the proposed Allocation Alternative specifically described
above, that the Participants are granted an exemption from the
requirements set forth in Section 6.4(d)(ii)(A)(1) and (2) of the CAT
NMS Plan, subject to the conditions described above.
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\20\ 15 U.S.C. 78mm(a)(1).
\21\ 17 CFR 242.608(e).
By the Commission.
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-23467 Filed 10-22-20; 8:45 am]
BILLING CODE 8011-01-P
