Regulation ATS for ATSs That Trade U.S. Government Securities, NMS Stock, and Other Securities; Regulation SCI for ATSs That Trade U.S. Treasury Securities and Agency Securities; and Electronic Corporate Bond and Municipal Securities Markets

Federal RegisterDec 31, 2020

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 240, 242 and 249

[Release No. 34-90019; File No. S7-12-20]

RIN 3235-AM45

Regulation ATS for ATSs That Trade U.S. Government Securities, NMS Stock, and Other Securities; Regulation SCI for ATSs That Trade U.S. Treasury Securities and Agency Securities; and Electronic Corporate Bond and Municipal Securities Markets

AGENCY:

Securities and Exchange Commission.

ACTION:

Proposed rule; request for comment; concept release.

SUMMARY:

The Securities and Exchange Commission is proposing amendments to Regulation ATS under the Securities Exchange Act of 1934 (“Exchange Act”) for alternative trading systems (“ATSs”). The Commission is proposing to amend Regulation ATS for ATSs that trade government securities as defined under Section 3(a)(42) of the Exchange Act (“government securities”) or repurchase and reverse repurchase agreements on government securities (“Government Securities ATSs”) to: Eliminate the exemption from compliance with Regulation ATS for an ATS that limits its securities activities to government securities or repurchase and reverse repurchase agreements on government securities, and registers as a broker-dealer or is a bank; require the filing of public Form ATS-G, which would require a Government Securities ATS to disclose information about its manner of operations and the ATS-related activities of the registered broker-dealer or government securities broker or government securities dealer that operates the ATS and its affiliates; require, among other things, public posting of certain Form ATS-G filings and to provide a process for the Commission to review Form ATS-G filings and, after notice and opportunity for hearing, declare Form ATS-G filings ineffective; and apply the fair access rule under Rule 301(b)(5) of Regulation ATS to Government Securities ATSs that meet certain volume thresholds in U.S. Treasury Securities or in a debt security issued or guaranteed by a U.S. executive agency, or government-sponsored enterprise (“Agency Securities”). The Commission is also proposing changes to correct and modernize Regulation ATS, Form ATS, Form ATS-N, and Form ATS-R. In addition, the Commission is proposing to amend Regulation Systems Compliance and Integrity to apply it to ATSs that meet certain volume thresholds in U.S. Treasury Securities or Agency Securities. Finally, the Commission is issuing a concept release on the regulatory framework for electronic platforms that trade corporate debt and municipal securities.

DATES:

Comments should be received on or before March 1, 2021.

ADDRESSES:

Comments may be submitted by any of the following methods:

Electronic Comments

• Use the Commission's internet comment form (

http://www.sec.gov/rules/proposed.shtml

); or

• Send an email to

rule-comments@sec.gov.

Please include File Number S7-12-20 on the subject line.

Paper Comments

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

All submissions should refer to File Number S7-12-20. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's internet website (

http://www.sec.gov/rules/proposed.shtml

). Comments are also available for website viewing and printing in the Commission's Public Reference Room, 100 F Street NE, Washington, DC 20549, on official business days between the hours of 10 a.m. and 3 p.m. All comments received will be posted without change. Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make available publicly.

Studies, memoranda, or other substantive items may be added by the Commission or staff to the comment file during this rulemaking. A notification of the inclusion in the comment file of any materials will be made available on the Commission's website. To ensure direct electronic receipt of such notifications, sign up through the “Stay Connected” option at

www.sec.gov

to receive notifications by email.

FOR FURTHER INFORMATION CONTACT:

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

SUPPLEMENTARY INFORMATION:

The Commission is proposing to: (1) Amend Rule 300 (17 CFR 242.300) and Rule 301 (17 CFR 242.301) of Regulation ATS under the Exchange Act to eliminate the current exemption from compliance with Rules 300 through 304 (17 CFR 242.300 through 242.304) (“Regulation ATS”) under the Exchange Act for an ATS that limits its securities activities to government securities or repurchase and reverse repurchase agreements on government securities, and registers as a broker-dealer or is a bank and require such ATS to comply with applicable provisions of Regulation ATS; (2) amend Rule 3a1-1(b) (17 CFR 242.3a1-1(b)) under the Exchange Act to require a Government Securities ATS, which otherwise qualifies for the Rule 3a1-1(a) exemption, to register as a national securities exchange if the ATS meets certain, specified volume levels in U.S. Treasury Securities and Agency Securities, and the Commission determines that such exemption is not necessary or appropriate in the public interest or consistent with the protection of investors; (3) include Government Securities ATSs within the scope of Rule 304 (17 CFR 242.304) of Regulation ATS,

which would provide new requirements for Government Securities ATSs seeking to use the exemption from the definition of “exchange” under Regulation ATS; (4) require that Government Securities ATSs use new Form ATS-G in accordance with Rule 3a1-1(a) (17 CFR 240.3a1-1(a)); (5) amend Rule 301(b)(5) (17 CFR 242.301(b)(5)) of Regulation ATS (“Fair Access Rule”) to require Government Securities ATSs that meet certain trading volume thresholds in transactions in U.S. Treasury Securities or Agency Securities to comply with the Fair Access Rule; (6) amend Rule 301 of Regulation ATS and Form ATS and Form ATS-R to provide that such forms must be electronically filed; and (7) amend Rule 1000 (17 CFR 242.1000) of Regulation Systems Compliance and Integrity (“Regulation SCI”) under the Exchange Act by expanding the definition of “SCI alternative trading system” to include Government

Securities ATSs that meet a specified volume threshold in transactions in U.S. Treasury Securities or Agency Securities, and as a result subject these Government Securities ATSs to the requirements of Regulation SCI.

The Commission adopted Rule 304 on July 18, 2018.

See

Securities Exchange Act Release No. 83663 (July 18, 2018), 83 FR 38768 (August 7, 2018) (“NMS Stock ATS Adopting Release”).

The Commission adopted Regulation SCI on November 19, 2014.

See

Securities Exchange Act Release No. 73639 (November 19, 2014), 79 FR 72252 (December 5, 2014) (“Regulation SCI Adopting Release”).

Table of Contents

I. Government Securities ATS: Background

A. ATS Markets for U.S. Government Securities

B. Current Regulatory Framework for Government Securities ATSs

C. Prior Comments Received About Government Securities Markets

II. Proposed Amendments to Regulation ATS for Government Securities ATSs

A. Proposed Amendment to Exchange Act Rule 3a1-1(b)

B. Proposed Definitions for Government Securities ATSs Rules

C. Proposed Elimination of the Exemption for ATSs That Limit Securities Activities to Government Securities and Repos

D. Application of Fair Access to Government Securities ATSs

E. Filing Requirements for Broker-Dealers That Operate ATSs That Trade Government Securities and Non-Government Securities

F. Enhanced Filing Requirements for Government Securities ATSs

G. Public Disclosure of Form ATS-G and Related Commission Orders

H. Form ATS-G Requirements

III. Proposed Form ATS-G for Government Securities ATSs

A. Cover Page and Part I of Form ATS-G

1. Cover Page

2. Part I of Form ATS-G: Identifying Information

B. Part II of Form ATS-G: ATS-Related Activities of the Broker-Dealer Operator and Affiliates

1. Broker-Dealer Operator and Its Affiliate Trading Activities on the Government Securities ATS

2. Order Interaction With Broker-Dealer Operator; Affiliates

3. Arrangements With Other Trading Venues

4. Other Products and Services

5. Activities of Service Providers

6. Protection of Confidential Trading Information

C. Part III Form ATS-G: Manner of ATS Operations

1. Types of ATS Subscribers

2. Eligibility for ATS Services

3. Exclusion From ATS Services

4. Hours of Operations

5. Means of Entry

6. Connectivity and Co-Location

7. Order Types and Attributes

8. Order Sizes

9. Indications of Interest

10. Opening and Reopening

11. Trading Services, Facilities and Rules

12. Liquidity Providers

13. Segmentation; Notice

14. Counter-Party Selection

15. Display

16. Interaction With Related Markets

17. Closing

18. Trading Outside of Regular Trading Hours

19. Fees

20. Suspension of Trading

21. Trade Reporting

22. Clearance and Settlement

23. Market Data

24. Fair Access

25. Aggregate Platform-Wide Data; Trading Statistics

D. Part IV of Proposed Form ATS-G

IV. EDGAR Filing Requirements; Structured Data

V. Amendments to Regulation ATS, Form ATS, Form ATS-R, and Form ATS-N

A. Amendments to Rules 301(b)(5) and 301(b)(6) of Regulation ATS

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

C. Modernization and Electronic Filing of Form ATS and Form ATS-R

D. Changes to Form ATS-N

VI. Proposed Amendments to Regulation SCI for Government Securities ATS

VII. General Request for Comment

VIII. Concept Release on Electronic Corporate Bond and Municipal Securities Market

IX. Paperwork Reduction Act

A. Summary of Collection of Information

1. Requirements Relating to Application of Rule 301(b) of Regulation ATS to Currently Exempted Government Securities ATSs

2. Requirements Relating To Proposed Amendments to Rules 301(b)(2)(viii) and 304 of Regulation ATS, Including Proposed Form ATS-G, and Amendments to Rule 301(b)(9)

3. Requirements Relating To Proposed Amendments to Rule 301(b)(5)

4. Requirements Related To Proposed Amendments to Rule 301(b)(2), Form ATS, and Form ATS-R

5. Requirements Related to Amendments to Regulation SCI

B. Proposed Use of Information

1. Proposed Amendments To Apply Rule 301(b) of Regulation ATS to Currently Exempted Government Securities ATSs

2. Proposed Amendments to Rule 301(b)(5) of Regulation ATS

3. Proposed Amendments to Rule 301(b)(2), Form ATS, and Form ATS-R

4. Proposed Application of Regulation SCI to Government Securities ATSs

5. Proposed Rules 301(b)(2)(viii) and 304 of Regulation ATS, Including Proposed Form ATS-G, and Proposed Rule 301(b)(9)

C. Respondents

D. Total Initial and Annual Reporting and Recordkeeping Burdens

1. Rule 301(b) of Regulation ATS to Currently Exempted Government Securities ATSs

2. Proposed Amendments to Rules 301(b)(2)(viii) and 304 of Regulation ATS, Including Proposed Form ATS-G

3. Proposed Amendments to Rule 301(b)(5) of Regulation ATS

4. Proposed Amendments to Rule 301(b)(2), Form ATS, and Form ATS-R

5. Proposed Amendments to Regulation SCI

E. Collection of Information Is Mandatory

F. Confidentiality of Responses to Collection of Information

G. Retention Period for Recordkeeping Requirements

H. Request for Comments

X. Economic Analysis

A. Introduction

B. Baseline

1. Current State of Competition in the Market for Trading Government Securities

2. Reporting Requirements for Government Securities ATSs

3. Information Asymmetries Due to Limited Public Information About Operations of Government Securities ATSs

4. Government Securities ATSs Treatment of Subscriber Confidential Trading Information

5. Fair Access Rule

6. Regulation SCI

7. Implications for Efficiency

C. Economic Effects and Effects on Efficiency, Competition, and Capital Formation

1. Benefits

2. Costs

3. Efficiency, Competition, and Capital Formation

D. Reasonable Alternatives

1. Require Currently Exempted Government Securities ATSs To File a Non-Public Form ATS

2. Require Proposed Form ATS-G Be Filed But Treat the Information as Confidential

3. Initiate Differing Levels of Public Disclosure Depending on Government Securities ATS Dollar Volume

4. Extend the Transparency Requirements of Regulation ATS to All Non-ATS Trading Venues for Government Securities

5. Alter the Volume Thresholds for the Fair Access Rule and Regulation SCI

6. Apply Rule 301(b)(6) of Regulation ATS to Government Securities ATSs

7. Require Forms ATS-G, ATS, and ATS-R To Be Submitted in the Inline XBRL Format

8. Require Forms ATS-G, ATS, and ATS-R To Be Filed on EFFS or on Individual ATS Websites

E. Request for Comments

XI. Consideration of Impact on the Economy

XII. Regulatory Flexibility Act Certification

XIII. Statutory Authority and Text of Proposed Amendments

I. Government Securities ATS: Background

A. ATS Markets for U.S. Government Securities

An ATS is a trading system for securities that meets the definition of “exchange” under federal securities laws but is not required to register with the Commission as a national securities exchange if it complies with the conditions to an exemption provided under Regulation ATS. Since Regulation ATS was adopted in 1998, ATSs have become increasingly important venues

for trading government securities.

Currently, ATSs, particularly those that operate in the secondary interdealer markets for on-the-run U.S. Treasury Securities, have become a significant source of orders and trading interest for government securities.

ATSs for government securities now operate with complexity similar to that of markets that trade NMS stocks in terms of automation and speed of trading, the use of limit order books, order types, algorithms, connectivity, data feeds, and the active participation of principal trading firms (“PTFs”) on ATSs.

Furthermore, government securities

make up more than half of the outstanding debt issuances in the U.S. bond market

and play a critical role in the U.S. and global economies. Over the last six months of 2019, the average daily trading volume in government securities was approximately $835 billion, or roughly 95 percent of all fixed income trading volume in the U.S.

A venue for trading government securities can include, among other things, an exchange, an ATS, an OTC market maker, or any other broker or dealer operated platform for executing trading interest internally by trading as principal or crossing orders as agent.

See infra

Section X.B.1.

See

NMS Stock ATS Adopting Release,

supra

note 1, at 38771 for a discussion about the current operational complexities of ATSs that trade National Market System stocks (“NMS Stock ATSs”).

Under the Exchange Act, government securities are defined as, among other things, securities which are direct obligations of, or obligations guaranteed as to principal or interest by, the United States.

See

15 U.S.C. 78c(42)(A). Government securities include U.S. Treasury securities, debt securities issued or guaranteed by a U.S. executive agency, as defined in 5 U.S.C. 105, or government-sponsored enterprise, as defined in 2 U.S.C. 622(8), and Agency Mortgage-Backed Securities. Government securities also include (i) securities which are issued or guaranteed by the Tennessee Valley Authority or by corporations in which the United States has a direct or indirect interest and which are designated by the Secretary of the Treasury for exemption as necessary or appropriate in the public interest or for the protection of investors; (ii) securities issued or guaranteed as to principal or interest by any corporation the securities of which are designated, by statute specifically naming such corporation, to constitute exempt securities within the meaning of the laws administered by the Commission; and (iii) any put, call, straddle, option, or privilege on one of the aforementioned (subject to limited exceptions). 15 U.S.C. 78c(42)(B)-(C).

See infra

Section X.B.1.

See

SIFMA Fixed Income Trading Volume,

available at

https://www.sifma.org/resources/research/us-fixed-income-trading-volume/.

This includes U.S. Treasury Securities, Agency Mortgage-Backed Securities, and Federal Agency Securities. The six-month average is the mean of the average daily trading volume for these instruments from July to December 2019.

The most liquid and commonly traded government securities are U.S. Treasury Securities, which are direct obligations of the U.S. Government issued by the U.S. Department of the Treasury (“Treasury Department”). The Treasury Department issues several different types of securities, including Treasury bills, nominal coupons notes and bonds, Floating Rate Notes, and Treasury Inflation Protected Securities. For each security type, the most recently issued (“on-the-run”) securities are generally considered most liquid in the secondary market.

Market participants commonly refer to securities issued prior to “on-the-run” securities as “off-the-run” securities.

Market participants use U.S. Treasury Securities as an investment instrument, hedging vehicle, and to source orders and trading interest, among other things. U.S. banks commonly own U.S. Treasury Securities due to their low risk and strong liquidity characteristics. Additionally, U.S. Treasury Securities are often used as collateral in lending arrangements or as margin on other financial transactions.

On-the-run U.S. Treasury Securities are the most recently issued nominal coupon securities. Nominal coupon securities pay a fixed semi-annual coupon and are currently issued at original maturities of 2, 3, 5, 7, 10, 20, and 30 years. These standard maturities are commonly referred to as “benchmark” securities because the yields for these securities are used as references to price a number of private market transactions.

Off-the-run or “seasoned” U.S. Treasury Securities are the issues that preceded the current on-the-run securities. The U.S. Treasury Securities market also comprises futures and options on U.S. Treasury Securities, and securities financing transactions in which U.S. Treasury Securities are used as collateral.

See

Department of the Treasury Release No. 2015-0013 (January 22, 2016), Notice Seeking Public Comment on the Evolution of the Treasury Market Structure, 81 FR 3928, 3928 (“Treasury Request for Information”). For the purpose of this proposal, the Commission focuses on the secondary cash market.

For U.S. Treasury Securities, the secondary market is generally bifurcated between the dealer-to-customer market, in which dealers trade with their customers (

e.g.,

investment companies, pension funds, insurance companies, corporations, or retail) and the interdealer market, in which dealers and specialty firms trade with one another.

Trading in the U.S. Treasury Securities dealer-to-customer market is generally—and has historically been—conducted through bilateral transactions. Customers, also referred to as “end users,” have not traditionally traded directly with other end users.

Rather, end users primarily trade with dealers, and dealers use the interdealer market as a source of orders and trading interest to help facilitate their trading with clients in the dealer-to-customer market. Such trading often occurs either over the phone or on trading venues that facilitate the matching of buy and sell orders through electronic systems. Broker-dealers also internalize a portion of their customer flow, although the extent to which broker-dealers internalize is unclear.

See id.

For the purposes of this proposal, internalization refers to a broker filling a customer order either from the firm's own inventory or by matching the order with other customer order flow, instead of sending the order to an interdealer market for execution.

See id.

at 3928 n.5.

In the interdealer market, the majority of trading in on-the-run U.S. Treasury Securities currently occurs on ATSs using central limit order books supported by advanced electronic trading technology.

For off-the-run U.S. Treasury Securities,

the majority of interdealer trading occurs via bilateral transactions through traditional voice-assisted brokers and electronic trading platforms that offer various trading protocols to bring together buyers and sellers,

though, some interdealer trading of off-the-run U.S. Treasury Securities does occur on ATSs.

Furthermore, interdealer trading for on-the-run U.S. Treasury Securities is generally concentrated within a very small number of ATSs, especially when compared to the market for NMS stocks, which is dispersed among many trading venues. Specifically, over the past several years, the majority of overall trading in the interdealer secondary market for on-the-run U.S. Treasury Securities has

occurred on ATSs.

For example, during the 4th quarter of 2019, one ATS accounted for $15.60 trillion in total dollar volume in all U.S. government securities, the majority of which were on-the-run U.S. Treasury Securities.

See

Joint Staff Report: The U.S. Treasury Market on October 15, 2014, at 11, 35-36,

available at

https://www.sec.gov/files/treasury-market-volatility-10-14-2014-joint-report.pdf

(“October 15 Staff Report”). The October 15 Staff Report is a joint report about the unusually high level of volatility and rapid round-trip in prices that occurred in the U.S. Treasuries market on October 15, 2014. Among other things, the October 15 Staff Report provides an overview of the market structure, liquidity, and applicable regulations of the U.S. Treasury market, as well as the broad changes to the structure of the U.S. Treasury market that have occurred over the past two decades.

Also, as noted in the October 15 Staff Report issued by the U.S. Department of the Treasury, Board of Governors of the Federal Reserve System, Federal Reserve Bank of New York, the Commission, and U.S. Commodity Futures Trading Commission, trading in off-the-run U.S. Treasury Securities has always been less active than trading in on-the-run U.S. Treasury Securities, and price discovery in the cash markets primarily occurs in on-the-run securities.

See id.

at 35.

While trading in on-the-run securities likely accounts for more than half of total daily trading volumes, off-the-run U.S. Treasury Securities make up over 95 percent of the outstanding marketable U.S. Treasury Securities.

See

James Clark, Chris Cameron, and Gabriel Mann,

Examining Liquidity in On-the-Run and Off-the-Run Treasury Securities,

Treasury Notes Blog,

https://www.treasury.gov/connect/blog/Pages/Examining-Liquidity-in-On-the-Run-and-Off-the-Run-Treasury-Securities.aspx.

See

text accompanying

infra

note 583; Table X.2 and accompanying text.

For an additional discussion of trading volume in the U.S. bond market as a whole and U.S. Treasury Securities,

see infra

Section X.B.

Another type of government securities is Agency Securities. Agency Securities include securities issued by or guaranteed by U.S. Government corporations and U.S. Government sponsored enterprises (“GSEs”).

For example, the Government National Mortgage Association (“Ginnie Mae”) is a U.S. Government corporation that issues mortgage-backed securities guaranteed by the full faith and credit of the U.S. Government. The assets collateralized into the securities issued by Ginnie Mae are federally insured and guaranteed mortgage loans. Agency Securities issued by GSEs include those issued by the Federal Home Loan Banks (“FHLBs”), the Federal National Mortgage Association (“Fannie Mae”), the Federal Home Loan Mortgage Corporation (“Freddie Mac”), and the Student Loan Marketing Association (“Sallie Mae”).

Agency Securities issued by GSEs are not normally backed by the full faith and credit of the U.S. Government and therefore, may present some default and credit risk.

See

U.S. Department of the Treasury Resource Center, “Fixed Income: Agency Securities,”

available at

https://www.treasury.gov/resource-center/faqs/Markets/Pages/fixedfederal.aspx.

See id.

The housing sector GSEs are Fannie Mae, Freddie Mac, and the FHLB institutions, the latter of which issue debt through the joint Office of Finance. Sallie Mae is a higher education sector GSE that currently is in the transition process to full privatization.

See id.

Agency Securities, while often not backed by the full faith and credit of the U.S. Government, are generally considered to be very liquid and offer state and local tax advantages to the holder. Market participants frequently use ATSs to buy and sell Agency Securities, although, based on the Commission's review of Form ATS-R filings, transaction volume of Agency Securities is not as large as that of U.S. Treasury Securities on ATSs.

Investors, banks, and other market participants often acquire Agency Securities in the secondary market to support various investing strategies, such as hedging against other more risky investments in a given portfolio.

Additionally, repurchase and reverse repurchase agreements on government securities are also traded on some ATSs.

Trading of both U.S. Treasury Securities and Agency Securities has become increasingly electronic, and ATSs that trade government securities have evolved into very complex markets. This is particularly true for the trading of on-the-run U.S. Treasury Securities,

but is also the case for the trading of other U.S. Treasury Securities and Agency Securities.

For example, based on the Commission's review of Form ATS filings by ATSs that trade government securities, and discussions with market participants for government securities, the Commission believes that Government Securities ATSs often offer subscribers a variety of order types to pursue both aggressive and passive trading strategies, and low latency, high-speed connectivity to the ATS. These ATSs frequently use automated systems, such as a central limit order book, to match orders anonymously on a price/time priority basis, and offer subscribers direct data feeds and co-location services. Some Government Securities ATSs also segment orders into categories by participants or allow participants the ability to interact with specific counterparty groups on the ATS and facilitate order interaction and execution.

The growth of electronic trading has contributed to a marked shift in the composition of the interdealer cash market for U.S. Treasury Securities over time. Traditionally, interdealer brokers only allowed primary dealers to access their trading venues. After 1992, however, interdealer brokers expanded access to all entities that were netting members of the Government Securities Clearing Corporation (which is now the Fixed Income Clearing Corporation's Government Securities Division). Thereafter, other entities gained access to these trading venues through their prime brokers, who themselves had access, and in recent years the trading venues granted direct access to an even wider range of participants, including non-dealer PTFs, which account for more than half of the trading activity in the futures and electronically brokered interdealer cash markets.

See

October 15 Staff Report,

supra

note 14, at 36.

See also

Treasury Request for Information,

supra

note 10, at 3928.

See

James Collin Harkrader and Michael Puglia,

Fixed Income Market Structure: Treasuries

vs.

Agency MBS,

Board of Governors of the Federal Reserve System: FEDS NOTES (August 25, 2020),

available at

https://www.federalreserve.gov/econres/notes/feds-notes/fixed-income-market-structure-treasuries-vs-agency-mbs-20200825.htm

(“August 25th FEDS Notes”) (explaining the recent evolution of the government securities market structure).

This evolution in the interdealer secondary cash markets for U.S. Treasury Securities was also highlighted in the October 15 Staff Report,

see

October 15 Staff Report,

supra

note 14, the Treasury Request for Information,

see

Treasury Request for Information,

supra

note 10, at 3928, and public comment received by the Commission,

see infra

Section I.C.

With regard to the interdealer secondary markets for on-the-run U.S. Treasury Securities, the continued growth of electronic trading has contributed to an increased presence of PTFs in the marketplace.

Currently, PTFs account for the majority of trading and provide significant top-of-the-book liquidity for on-the-run U.S. Treasury Securities on electronic interdealer trading venues.

From July 1, 2019 to December 31, 2019, PTFs traded on 13 Government Securities ATSs accounting for approximately 55 percent of total Government Securities ATS trading volume.

PTFs usually have direct access to electronic interdealer trading venues for U.S. Treasury Securities, and as is the case with the equity markets, PTFs trading on the electronic interdealer trading venues for on-the-run U.S. Treasury Securities often employ automated algorithmic trading strategies that rely on speed and allow the PTFs to cancel or modify quotes in response to perceived market events.

Furthermore, most PTFs trading U.S. Treasury Securities on these trading venues for on-the-run U.S. Treasury Securities also restrict their activities to principal trading and do not hold positions long term

while dealers use the interdealer market as a source of orders and trading interest to help facilitate their trading with clients in the dealer-to-customer market. As explained in the October 15 Staff Report, the increase in trading by PTFs in the interdealer market may affect the amount of liquidity available to end users in the dealer-to-customer market.

PTFs are not, however, very active in the electronic markets for Agency Securities.

See

August 25th FEDS Notes,

supra

note 24 (“Though parts of the agency MBS market have moved from voice-based to screen-based trading since the early 2000s, algorithmic high-frequency electronic trading still does not comprise a meaningful share of average daily volume and the market remains devoid of PTF participation.”).

See

October 15 Staff Report,

supra

note 14, at 36; Remarks of Deputy Secretary Justin Muzinich at the 2019 U.S. Treasury Market Structure Conference (September 23, 2019),

available at

https://home.treasury.gov/news/press-releases/sm782

(“Muzinich Remarks”).

See infra

Table X.2. (ATS PTF volume/ATS volume) × 100 = PTF share of ATS volume (%).

See

October 15 Staff Report,

supra

note 14, at 32, 35-36, 39.

See id.

at 38.

See id.

at 37.

B. Current Regulatory Framework for Government Securities ATSs

Despite the critical role of government securities in the U.S. and global economy, the significant volume in government securities transacted on ATSs, and these ATSs' growing importance to investors and overall securities market structure, an ATS that limits its securities activities to government securities or repurchase and reverse repurchase agreements on

government securities (“repos”), and registers as a broker-dealer or is a bank (“Currently Exempted Government Securities ATS”) is exempt from exchange registration and is not required to comply with Regulation ATS. Furthermore, ATSs that trade

both

government securities and non-government debt securities (

e.g.,

corporate bonds) are not subject to all the provisions of Regulation ATS, such as the Fair Access Rule, and are not subject to Regulation SCI.

Regulation ATS and its related rules provide an exemption from the definition of “exchange” under Section 3(a)(1) of the Exchange Act,

coupled with alternate regulatory requirements with which ATSs must comply to achieve and maintain their eligibility for the exemption. Exchange Act Rule 3b-16(a) provides a functional test to assess whether a trading platform meets the definition of “exchange” under Section 3(a)(1) of the Exchange Act.

Under Rule 3b-16(a), an organization, association, or group of persons shall be considered to constitute, maintain, or provide a market place or facilities for bringing together purchasers and sellers of securities or for otherwise performing with respect to securities the functions commonly performed by a stock exchange, if such organization, association, or group of persons: (1) Brings together the orders for securities of multiple buyers and sellers; and (2) uses established, non-discretionary methods (whether by providing a trading facility or by setting rules) under which such orders interact with each other, and the buyers and sellers entering such orders agree to the terms of a trade.

Accordingly, an entity that provides a marketplace for bringing together buyers and sellers for government securities, regardless of the applied technology, would need to consider whether its activities meet the definition of an “exchange” under the federal securities laws.

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

See

15 U.S.C. 78e and 78f.

17 CFR 240.3b-16(a). Exchange Act Rule 3b-16(b) explicitly excludes from that definition certain systems that do not meet the definition of “exchange,” such as order routers and systems that allow persons to enter orders for execution against the bids and offers of a single dealer.

See

17 CFR 240.3b-16(b).

See also

NMS Stock ATS Adopting Release,

supra

note 1, at n.32 and accompanying text.

For example, whether or not a particular system is an exchange does not turn solely on the level of automation used; “orders” can be given over the telephone, as well as electronically.

See

Securities Exchange Act Release No. 40760 (December 8, 1998), 63 FR 70844, 70850 (December 22, 1998) (“Regulation ATS Adopting Release”).

Section 5 of the Exchange Act

requires an organization, association, or group of persons that meets the definition of “exchange” under Section 3(a)(1) of the Exchange Act,

unless otherwise exempt, to register with the Commission as a national securities exchange pursuant to Section 6 of the Exchange Act.

Exchange Act Rule 3a1-1(a)(2)

provides an exemption from national securities exchange registration for ATSs, which are systems that meet the Rule 3b-16(a) criteria and do not perform self-regulatory activities.

As a result of the exemption, an organization, association, or group of persons that meets the definition of an exchange and complies with Regulation ATS is not required by Section 5 of the Exchange Act to register as a national securities exchange pursuant to Section 6 of Exchange Act and is not a self-regulatory organization (“SRO”), and therefore, is not required to comply with regulatory requirements applicable to national securities exchanges and SROs.

15 U.S.C. 78e.

15 U.S.C. 78c(a)(1).

15 U.S.C. 78f.

See

17 CFR 240.3a1-1(a)(2).

See

17 CFR 242.300(a). Rule 300(a) of Regulation ATS defines an ATS as any organization, association, person, group of persons, or system: (1) That constitutes, maintains, or provides a market place or facilities for bringing together purchasers and sellers of securities or for otherwise performing with respect to securities the functions commonly performed by a stock exchange within the meaning of Rule 3b-16; and (2) that does not: (i) Set rules governing the conduct of subscribers other than the conduct of such subscribers' trading on such organization, association, person, group of persons, or system; or (ii) discipline subscribers other than by exclusion from trading.

See

15 U.S.C. 78e (Section 5 of the Exchange Act); 78f (Section 6 of the Exchange Act); and 78s (Section 19 of the Exchange Act).

See also

NMS Stock ATS Adopting Release,

supra

note 1, at 78772. An ATS that fails to comply with Regulation ATS would no longer qualify for the exemption provided under Rule 3a1-1(a)(2) and thus risks operating as an unregistered exchange in violation of Section 5 of the Exchange Act.

See

15 U.S.C. 78e.

See also

NMS Stock ATS Adopting Release,

supra

note 1, at 78772.

The vast majority of ATSs that operate today do so pursuant to the exemption provided by Exchange Act Rule 3a1-1(a)(2), which requires the ATSs to comply with Regulation ATS and register as broker-dealers. Currently Exempted Government Securities ATSs, however, operate pursuant to Exchange Act Rule 3a1-1(a)(3)

and Rule 301(a)(4)(ii)(A).

These provisions currently exempt an ATS from compliance with the requirements in Rule 301(b) of Regulation ATS

if, in relevant part, the ATS is registered as a broker-dealer under Sections 15(b)

or 15C

of the Exchange Act, or is a bank, and limits its securities activities to government securities, as defined in Section 3(a)(42) of the Exchange Act, repos, any puts, calls, straddles, options, or privileges on government securities, other than puts, calls, straddles, options, or privileges that: (1) Are traded on one or more national securities exchanges; or (2) for which quotations are disseminated through an automated quotation system operated by a registered securities association, and commercial paper.

Accordingly, such Currently Exempted Government Securities ATSs are not required to register as a national securities exchange or comply with Regulation ATS.

To the Commission's knowledge, most Currently Exempted Government Securities ATSs operating pursuant to this exemption limit their securities activities solely to government securities and register as broker-dealers with the Commission.

17 CFR 240.3a1-1(a)(3).

17 CFR 242.301(a)(4)(ii)(A).

17 CFR 242.301(b).

See

15 U.S.C. 78o(b) (Section 15(b) of the Exchange Act pertains to the registration and regulation of brokers and dealers).

See

15 U.S.C. 78o-5 (Section 15C of the Exchange Act pertains to government securities brokers and dealers).

See

15 U.S.C. 78c(a)(42). The Commission notes that the definition of “government securities” in Section 3(a)(42) of the Exchange Act includes certain puts, calls, straddles, options, or privileges on government securities, other than puts, straddles, options, or privileges that: (1) Are traded on one or more national securities exchanges; or (2) for which quotations are disseminated through an automated quotation system operated by a registered securities association.

See supra

note 6. Therefore, references to “government securities” throughout this proposal include such puts, calls, straddles, options, or privileges on government securities.

See

17 CFR 242.301(a)(4)(i) and (ii)(A). Although not required to register as a national securities exchange or comply with Regulation ATS, a Currently Exempted Government Securities ATS may need to register as a broker-dealer under Section 15(b) or as a government securities broker or government securities dealer pursuant to Exchange Act Section 15C, and comply with associated regulatory requirements.

See, e.g.,

17 CFR, Subchapter A—Regulations under Section 15C of the Securities Exchange Act of 1934.

Some ATSs that are eligible for the exemption voluntarily comply with Regulation ATS, even though ATSs that trade only government securities are not required to comply with Regulation ATS at all.

ATSs that trade government securities or repos and other securities—such as corporate bonds or municipal securities—cannot use this exemption

because these ATSs do not limit their securities activities solely to government securities or repos. Such ATSs must either register as a national securities exchange or comply with Regulation ATS pursuant to Exchange Act Rule 3a1-1(a)(2), which includes, among other things, registering as a broker-dealer under Section 15 of the Exchange Act. As a registered broker-dealer, an ATS must also, in addition to complying with Regulation ATS, comply with broker-dealer filing and conduct obligations, including becoming a member of an SRO, such as the Financial Industry Regulatory Authority (“FINRA”). Among other things, Government Securities ATSs that are currently subject to Regulation ATS must report transactions in U.S. Treasury Securities and Agency Securities to the Trade Reporting and Compliance Engine (“TRACE”),

and FINRA publicly disseminates data about these transactions. Currently, FINRA publishes weekly aggregated transaction information on U.S. Treasury Securities and disseminates certain transaction information on Agency Securities immediately upon receipt of a transaction report.

See

FINRA Rule 6730(a)(1) requires FINRA members to report transactions in TRACE-Eligible Securities, which FINRA Rule 6710 defines to include U.S. Treasury Securities and Agency Securities. For each transaction in U.S. Treasury Securities and Agency Securities, a FINRA member would be required to report the CUSIP number or similar numeric identifier or FINRA symbol; size (volume) of the transaction; price of the transaction (or elements necessary to calculate price); symbol indicating whether transaction is a buy or sell; date of trade execution (“as/of” trades only); contra-party's identifier; capacity (principal or agent); time of execution; reporting side executing broker as “give-up” (if any); contra side introducing broker (in case of “give-up” trade); the commission (total dollar amount), if applicable; date of settlement; if the member is reporting a transaction that occurred on an ATS, the ATS's separate Market Participant Identifier (“MPID”); and trade modifiers as required. For when-issued transactions in U.S. Treasury Securities, a FINRA member would be required to report the yield in lieu of price.

See

FINRA Rule 6730(c).

FINRA Rule 6750(a) requires FINRA to disseminate information on all transactions on certain securities, including Agency Securities (but excluding U.S. Treasury Securities), immediately upon receipt of the transaction report. FINRA is permitted to publish or distribute weekly aggregated transaction information and statistics on U.S. Treasury Securities, and has stated that it intends to publish weekly volume information aggregated by U.S. Treasury subtype (

e.g.,

Bills, Floating Rate Notes, Treasury Inflation-Protected Securities, and Nominal Coupons).

See

Securities Exchange Release No. 87837 (December 20, 2019), 84 FR 71986 (December 30, 2019) (approving a proposed rule change to allow FINRA to publish or distribute aggregated transaction information and statistics on U.S. Treasury Securities).

In addition to registering as a broker-dealer, an ATS that trades government securities or repos and securities other than government securities or repos must file notices with the Commission on Form ATS (which are “deemed confidential” and “available only to the examination of Commission staff, state securities authorities, and the self-regulatory organizations”) to disclose their operations to the Commission pursuant to Rule 301(b)(2); cooperate with the Commission's or an SRO's inspection, examination, or investigation of the ATS or any of the ATS's subscribers pursuant to Rule 301(b)(7); make, keep current, and preserve certain records as prescribed under Rule 302 and Rule 303 of Regulation ATS pursuant to Rule 301(b)(8); periodically report certain information about trading activities on Form ATS-R pursuant to Rule 301(b)(9); adopt written safeguards and written procedures to protect subscriber confidential trading information and separate ATS functions from other broker-dealer functions, including principal and customer trading pursuant to Rule 301(b)(10); and not use in its name the word “exchange,” or derivations of the word “exchange” pursuant to Rule 301(b)(11).

See

17 CFR 242.301(b)(1); 301(b)(2); and 301(b)(7) through (b)(11). The order display and execution access provisions under Rule 301(b)(3) and the related fee restrictions of Rule 301(b)(4) of Regulation ATS only apply to an ATS's NMS stock activities.

See

17 CFR 242.301(b)(3)-(4).

Such Government Securities ATSs, however, are subject to only certain provisions of Regulation ATS because not all the provisions of Regulation ATS are applicable to trading in government securities. In particular, government securities are not included in any category of securities under the Fair Access Rule.

Today, the categories of securities under the Fair Access Rule include NMS stocks, equity securities that are not NMS stocks and for which transactions are reported to an SRO, municipal securities, and corporate debt securities.

Under the Fair Access Rule, an ATS that meets the average daily volume threshold for a category of securities during at least four of the preceding six calendar months must: (1) Establish written standards for granting access to trading on its system; (2) not unreasonably prohibit or limit any person in respect to access to services offered by such ATS by applying the above written standards in an unfair or discriminatory manner; and (3) make and keep certain records. In addition, Regulation SCI does not apply to ATSs with respect to their trading in government securities.

The capacity, integrity, and security of automated systems provisions of Rule 301(b)(6) under Regulation ATS (“Capacity, Integrity, and Security Rule”)

also do not apply to the government securities activities of an ATS.

17 CFR 242.301(b)(5).

See id.

See infra

Section VI (describing the types of entities that are currently subject to the requirements of Regulation SCI).

17 CFR 242.301(b)(6).

Rule 301(b)(6) requires an ATS that trades only municipal securities or corporate debt securities with 20 percent or more of the average daily volume traded in the United States during at least four of the preceding six calendar months to comply with the Capacity, Integrity, and Security Rule. Prior to the Commission's adoption of Regulation SCI, the requirements of Rule 301(b)(6) also applied to ATSs with regard to their trading in NMS stocks and non-NMS stocks; however, Regulation SCI superseded and replaced the requirements of Rule 301(b)(6) with regard to ATSs that trade NMS stocks and non-NMS stocks.

See infra

Section VI (describing each requirement of Regulation SCI).

Finally, Government Securities ATSs that trade only government securities or repos are not required to comply with rules applicable to ATSs that trade NMS stocks, including Rule 304 of Regulation ATS.

Rule 304 requires only NMS Stock ATSs to file a public Form ATS-N, which discloses the manner of the NMS Stock ATS's operations and the ATS-related activities of the broker-dealer operator and its affiliates. Form ATS-N disclosures are subject to review by the Commission and an NMS Stock ATS is prohibited from operating unless the Form ATS-N is effective. ATSs that transact in government securities or repos are also not required to comply with the order display and execution access provisions under Rule 301(b)(3)

and the related fee restrictions of Rule 301(b)(4),

both of which only apply to an ATS's NMS stock activities.

17 CFR 242.304.

Rule 301(b)(3) only applies to ATSs that (1) display subscriber orders in an NMS stock to any person (other than an employee of the ATS) and (2) during at least four of the preceding six calendar months, had an average daily trading volume of 5 percent or more of the aggregate average daily share volume for that NMS stock, as reported by an effective transaction reporting plan.

See

17 CFR 242.301(b)(3).

Under Rule 301(b)(4), an ATS must not charge any fee to broker-dealers that access the ATS through a national securities exchange or national securities association that is inconsistent with the equivalent access to the ATS that is required under Rule 301(b)(3)(iii), and thus, the requirements of Rule 301(b)(4) also only apply to ATSs that transact in NMS stock and trigger the order display requirements of Rule 301(b)(3).

See

17 CFR 242.301(b)(4).

C. Prior Comments Received About Government Securities Markets

On July 18, 2018, the Commission adopted amendments to Regulation ATS and Exchange Act Rule 3a1-1 to enhance operational transparency of,

and increase Commission oversight for, NMS Stock ATSs.

In the Commission's proposal for these amendments, the Commission solicited comment about whether the proposal should apply to other types of ATSs, including Currently Exempted Government Securities ATSs and Government Securities ATSs. The Commission also acknowledged the observations made in the October 15 Staff Report about the significance of the government securities markets and the rapid and continuing evolution of the electronic secondary market in U.S. Treasury Securities. The Commission solicited comment about removing the exemption for Currently Exempted Government Securities ATSs and amending Regulation ATS to apply provisions of Regulation ATS to Government Securities ATSs, including the Fair Access Rule.

See

NMS Stock ATS Adopting Release,

supra

note 1.

See

Securities Exchange Act Release No. 76474 (November 18, 2015), 80 FR 80998, 81018-20 (December 28, 2015) (“NMS Stock ATS Proposing Release”).

The Commission received several comments regarding Government Securities ATSs.

Commenters generally supported increasing operational transparency for Government Securities ATSs.

Several commenters suggested that the current exemption should be eliminated or that Regulation ATS should be amended to apply to Currently Exempted Government Securities ATSs,

and several commenters stated that the proposal relating to the oversight of NMS Stock ATSs should be expanded to include Government Securities ATSs.

One commenter, however, stated that Government Securities ATSs should not be subject to increased regulation, as such requirements would place such ATSs at a disadvantage with respect to non-ATS trading venues that trade government securities.

Another commenter stated that Government Securities ATSs should be excluded from the scope of the Form ATS-N-like requirements because of the different trading characteristics they offer and the relatively recent entry of ATSs into this space.

The commenter also stated that any additional regulatory proposals with respect to Government Securities ATSs should be informed by the results of any review of the U.S. Treasury Securities market structure in connection with the October 15 Staff Report.

All comments received on the NMS Stock ATS Proposing Release regarding Government Securities ATS are available at:

https://www.sec.gov/comments/s7-23-15/s72315.shtml.

See, e.g.,

Letter from Venu Palaparthi, Senior Vice President, Virtu Financial, to Brent J. Fields, Secretary, Commission, dated December 2, 2015 (“Virtu Letter”), at 2; Letter from Dennis M. Kelleher, President and Chief Executive Officer, Stephen W. Hall, Legal Director & Securities Specialist, and Allen Dreschel, Attorney, Better Markets, Inc., to Brent J. Fields, Secretary, Commission, dated February 26, 2016 (“Better Markets Letter”), at 8; and Letter from Theodore R. Lazo, Managing Director and Associate General Counsel, Securities Industry and Financial Markets Association, to Brent J. Fields, Secretary, Commission, dated March 7, 2016 (“SIFMA Letter”), at 36.

See also

Letter from Jonathan A. Clark, Chief Executive Officer, and James C. Dolan, Chief Compliance Office, Luminex Trading & Analytics LLC, to Brent J. Fields, Secretary, Commission, dated February 23, 2016 (“Luminex Letter”), at 3 (supporting public disclosure of Form ATS for all ATSs); Letter from David W. Blass, General Counsel, Investment Company Institute, to Brent J. Fields, Secretary, Commission, dated February 25, 2016 (“ICI Letter”), at 11-12; and Letter from Marc R. Bryant, Senior Vice President and Deputy General Counsel, Fidelity Investments, to Brent J. Fields, Secretary, Commission, dated February 26, 2016 (“Fidelity Letter”), at 7 (generally supporting improving transparency into the operations of non-NMS Stock ATSs by providing public disclosure of Form ATS).

See

Virtu Letter,

supr

a note 64, at 2 (stating that Regulation ATS should be amended to include electronic platforms for government securities because greater public transparency and enhanced monitoring of trading activity in these securities would result in greater investor confidence with respect to U.S. Treasury Securities markets); Letter from Rick A. Fleming, Investor Advocate, Office of the Investor Advocate, Commission, to Brent J. Fields, Secretary, Commission, dated September 9, 2016 (“OIA Letter”), at 16-19 (supporting the elimination of the exemption for Currently Exempted Government Securities ATSs and making their Form ATS public as an interim step); and Letter from Adam C. Cooper, Senior Managing Director and Chief Legal Officer, Citadel LLC, to Brent J. Fields, Secretary, Commission, dated March 1, 2016 (“Citadel Letter”), at 4. Another commenter also did not object to applying the requirements of Regulation ATS to systems that cross trades in government securities.

See

Letter from Howard Meyerson, General Counsel, Liquidnet, Inc., to Brent J. Fields, Secretary, Commission, dated February 26, 2016 (“Liquidnet Letter”), at 3.

See, e.g.,

Letter from Kurt N. Schacht, Managing Director, Standards & Advocacy, CFA Institute, and James C. Allen, Head, Capital Markets Policy, CFA Institute, to Brent J. Fields, Secretary, Commission, dated February 26, 2016, at 3-4 (stating that there is not a compelling case that public disclosure of relatively fundamental organizational structure would harm trading venues and should, therefore, be hidden from market participants); Letter from Micah Hauptman, Financial Services Counsel, Consumer Federation of America, to Brent J. Fields, Secretary, Commission, dated February 26, 2016, at Section II.A (stating that requiring all ATSs to publicly disclose their Form ATS-N should foster greater competition for order flow among ATSs on terms that are beneficial to investors); Better Markets Letter,

supra

note 64, at 8 (stating that all investors in securities deserve equally robust protections against conflicts of interest and assurances of access to transparent information relating to their trading venues, and that all trading venues should be able to conduct their businesses on a level regulatory playing field regardless of the types of securities trading they seek to offer to investors); Letter from Dave Lauer, Chairman, Healthy Markets Association, to Brent J. Fields, Secretary, Commission, dated February 26, 2016 (“HMA Letter”), at 5-6 (stating that while market characteristics across asset classes are different and such differences may render information that is extremely material for one asset class irrelevant to trading in another asset class, those circumstances are generally rare); Citadel Letter,

supra

note 65, at 4; and Letter from Stuart J. Kaswell, Executive Vice President, Managing Director, and General Counsel, Managed Funds Association, and Jiří Król, Deputy Chief Executive Officer, Global Head of Government Affairs, Alternative Investment Management Association, to Brent J. Fields, Secretary, Commission, dated February 26, 2016 (“MFA/AIMA Letter”), at 2-4.

See

Letter from John A. McCarthy, General Counsel, KCG Holdings, Inc., to Brent J. Fields, Secretary, Commission, dated March 15, 2016 (“KCG Letter”), at 13.

See also

Liquidnet Letter,

supra

note 65, at 3 (stating that the enhanced transparency requirements should be limited to the trading of equity securities). This commenter, however, did not object to the requirements of Regulation ATS applying to ATSs that cross trades in government securities.

See id.

See

SIFMA Letter,

supra

note 64, at 35-36. This commenter, however, generally supported increased transparency for Government Securities ATSs, although it stated that disclosure to give effect to this goal should be tailored to the unique characteristics of the government securities market, and that it would support making current Form ATS for Government Securities ATSs publicly available as an interim step.

Id.

at 36. Another commenter stated that the disclosure required by Form ATS-N might not be appropriate for securities other than NMS stocks at this time in their development, and recommended that the Commission carefully study these other markets before proceeding with an enhanced disclosure regime for ATSs that offer trading exclusively in non-NMS stocks.

See

ICI Letter,

supra

note 64, at 11. However, this commenter did not explicitly comment on Government Securities ATSs, or whether ATSs that currently transact solely in government securities should or should not be required to comply with the Regulation ATS requirements or be subject to any transparency requirements at this time.

Id.

See

SIFMA Letter,

supra

note 64, at 35.

See also

October 15 Staff Report,

supra

note 14, at 47 (stating that the authors of the report, among other items, support a review of the current regulatory requirements applicable to the government securities market and its participants).

Of the several commenters that expressed support for expanding the ATS-N disclosure regime to include Government Securities ATSs,

one commenter in particular described the importance of the U.S. Treasury Securities market and the depth, liquidity, and significant volume in recently issued benchmark or on-the-run U.S. Treasury Securities transacted on ATSs.

This commenter also stated that the U.S. Treasury Securities market has undergone significant changes with the transition to electronic trading and the entry of new liquidity providers.

The commenter stated that removing the exemption for Government Securities ATSs would subject them to appropriate oversight and that market participants using these ATSs would benefit from increased operational transparency

regarding subscriber segmentation, potential conflicts of interest, order types, and fees.

See supra

note 64.

See

Citadel Letter,

supra

note 65, at 4.

See id.

Another commenter stated that many of the concerns surrounding potential conflicts of interest that arise between an ATS and the activities of its broker-dealer operator and affiliates are equally relevant with respect to Government Securities ATSs as with NMS Stock ATSs.

This commenter stated that there is little information available to investors and the public about Government Securities ATSs and that Form ATS-N-like disclosures for these ATSs could greatly enhance public transparency of these markets.

Another commenter stated that making the Form ATS public for Government Securities ATSs would enhance transparency and provide important disclosures to market participants and the public about increasingly important venues of cash trading in government securities.

In addition, of the commenters who stated that Government Securities ATSs should be subject to similar obligations as NMS Stock ATSs,

one commenter specifically asserted that Government Securities ATSs should be subject to the Fair Access Rule to prevent them from arbitrarily excluding specific market participants.

This commenter stated that these requirements would not only promote market safety, stability, and integrity, but would also improve conditions for investors through increased transparency, more competition, better pricing, and new sources of orders and trading interest.

Moreover, this commenter supported a comprehensive review of the current regulatory framework for electronic trading platforms for government securities in an effort to improve market transparency, fairness, and resiliency. This commenter stated that requiring electronic trading platforms for government securities to comply with the systems compliance and integrity standards in Regulation SCI, among other things, would promote a transparent, efficient, and resilient market.

See

MFA/AIMA Letter,

supra

note 66, at 3.

See id.

This commenter also stated that at a minimum, a trading venue should clearly disclose the manner of its operations.

See id.

at 4.

See

OIA Letter,

supra

note 65, at 19.

See supra

note 64.

See

Citadel Letter,

supra

note 65, at 4. This commenter also stated that government securities trading venues that do not currently meet the definition of ATS, such as trading venues that use request for quote systems, should be subject to equivalent regulation as well.

Id.

at 5.

See id.

at 4.

See id.

II. Proposed Amendments to Regulation ATS for Government Securities ATSs

The Commission recognizes that Form ATS and the requirements of Regulation ATS were designed before Government Securities ATSs operated as electronic platforms with the automation, speed, and complexity that they do today, and that market conditions for government securities have substantially changed since the adoption of Regulation ATS in 1998. The Commission has carefully considered prior comments it received relating to Government Securities ATSs, the significant role of Government Securities ATSs in today's government securities market structure, and the complexity of Government Securities ATS operations, and is proposing the amendments described below.

See infra

Sections II.A-H and III.

A. Proposed Amendment to Exchange Act Rule 3a1-1(b)

The Commission is proposing to amend the existing classes of securities set forth in Exchange Act Rule 3a1-1(b)(3)

to add U.S. Treasury Securities and Agency Securities for which transactions are reported to an SRO.

As a result of the proposed change, the Commission could require a Government Securities ATS, which otherwise meets the conditions to the Rule 3a1-1(a) exemption,

to register as a national securities exchange if the ATS meets specified volume levels in U.S. Treasury Securities or Agency Securities

and the Commission finds that the exemption would not be necessary or appropriate in the public interest or consistent with the protection of investors.

17 CFR 240.3a1-1(b).

The Commission is proposing to specify that Rule 3a1-1(b) would apply to U.S. Treasury Securities and Agency Securities for which transactions are reported to an SRO to allow the Commission and market participants to calculate the volume level threshold provided under the rule.

See supra

note 40 and accompanying text.

The volume thresholds are met if during three of the preceding four calendar quarters, the ATS had (i) fifty percent or more of the average daily dollar trading volume in any security and five percent or more of the average daily dollar trading volume in any class of securities; or (ii) forty percent or more of the average daily dollar trading volume in any class of securities.

See

17 CFR 240.3a1-1(b)(1).

See

17 CFR 240.3a1-1(b)(2).

The Commission would provide a Government Securities ATS with notice and an opportunity to respond before determining the exemption from national securities exchange registration is not necessary or appropriate in the public interest or consistent with the protection of investors. The Commission would take into account the requirements for exchange registration under Section 6 of the Exchange Act and the objectives of the national market system. This amendment would extend the existing provision under Rule 3a1-1(b) applicable to ATSs that trade NMS stocks, corporate debt, municipal securities, and OTC equity securities to ATSs that trade U.S. Treasury Securities or Agency Securities and enhance the Commission's ability to regulate certain large volume ATSs whose registration as a national securities exchange, and the associated increased obligations that arise therefrom, may be in the public interest.

Request for Comment

1. Should the Commission amend Exchange Act Rule 3a1-1(b) to add U.S. Treasury Securities and Agency Securities to the list of existing classes of securities set forth in Rule 3a1-1(b)(3)?

B. Proposed Definitions for Government Securities ATSs Rules

The Commission is proposing to amend Rule 300 of Regulation ATS to define “Government Securities ATS” to mean an alternative trading system, as defined in Rule 300(a), that trades government securities, as defined in section 3(a)(42) of the Exchange Act (15 U.S.C. 78c(a)(42)),

or repurchase and reverse repurchase agreements on government securities.

To meet the definition of a Government Securities ATS, the organization, association, person, group of persons, or system must meet the definition of an alternative trading system under Rule 300(a) of Regulation ATS.

The Commission is also proposing that a Government Securities ATS shall not trade securities other than government securities or repos

and that trading of securities other than government securities or repos would require the separate filing of either a Form ATS or a Form ATS-N, depending on the types of securities traded.

This amendment would not, however, impose new compliance requirements on such ATSs other than complying with Rule 304 and

filing Form ATS-G.

Under the proposal, if a registered broker-dealer or government securities broker or government securities dealer that operates the ATS (“broker-dealer operator”) that currently operates an ATS for government securities and non-government securities such as, for example, corporate bonds, the broker-dealer operator would operate two separate ATSs: (1) A Government Securities ATS that would trade government securities, which would be subject to Rule 304, and file disclosures on proposed Form ATS-G and (2) a non-Government Securities ATS that would trade corporate bonds, which would not be subject to Rule 304, and file disclosures on its existing Form ATS, as amended to remove references to government securities. To provide that the same approach applies to broker-dealers that operate NMS Stock ATSs and non-NMS Stock ATSs, and to clarify requirements applicable to NMS Stock ATSs, the Commission is proposing to amend the definition of “NMS Stock ATS” to state that an NMS Stock ATS shall not trade securities other than NMS stocks.

Today, securities other than NMS stocks are not traded in any NMS Stock ATS and the proposed amendment to the definition of NMS Stock ATS would have no impact on any existing ATS nor on the requirements applicable to existing NMS Stock ATSs.

The definition of government security in section 3(a)(42) of the Exchange Act encompasses “any put, call, straddle, option, or privilege” on any government security listed in subsections (A)-(C) of the definition, other than any put, call, straddle, option or privilege that is traded on one or more national securities exchanges, or for which quotations are disseminated through an automated quotation system operated by a registered securities association. 15 U.S.C. 78c(a)(42)(D).

See

proposed Rule 300(l).

17 CFR 242.300(a).

See

Regulation ATS Adopting Release,

supra

note 35, at 70851-52.

See

proposed Rule 300(l).

An ATS that does not trade NMS stocks or government securities, as proposed, must file Form ATS.

Broker-dealers that operate Government Securities ATSs that are currently subject to Regulation ATS already must have established written safeguards and written procedures to protect subscribers' confidential trading information, pursuant to Rule 301(b)(10), and already must make and keep records pursuant to Rule 301(b)(8) that are tailored to the types of securities the ATS trades and the subscribers that trade those securities on the ATS. The Commission believes the proposal is broadly consistent with the manner in which broker-dealers that operate NMS Stock ATSs and non-NMS Stock ATSs currently comply with Regulation ATS. For further discussion,

see infra

Section II.E.

See

proposed Rule 300(k).

Broker-dealer operators of NMS Stock ATSs are currently required to file a Form ATS-N for NMS Stock ATS operations and a separate Form ATS for any non-NMS Stock ATS operations.

See

current Rule 301(b)(2)(viii). This would not change under this proposal.

The Commission is also proposing to amend Rule 300 of Regulation ATS to define the terms “Covered ATS” and “Covered Form.”

The proposed terms would be used throughout Rule 304 because Government Securities ATSs, in addition to NMS Stock ATSs, would be subject to Rule 304 of Regulation ATS.

“Covered ATS” would mean an NMS Stock ATS or Government Securities ATS and “Covered Form” would mean a filing on Form ATS-N or Form ATS-G, as applicable. To facilitate the orderly transition to the heightened requirements for Government Securities ATSs that are currently operating, the Commission is defining such ATSs as “Legacy Government Securities ATSs.”

The Commission believes these proposed definitions are non-substantive and enhance the readability of the rule text.

See

proposed Rule 300(m)-(n).

See infra

Section II.F-H.

See

proposed Rule 300(o). Legacy Government Securities ATSs would include all Government Securities ATSs operating as of [the date 120 calendar days after the date of publication of the final rule in the

Federal Register

] (“Compliance Date”), including both (1) Currently Exempted Government Securities ATSs and (2) Government Securities ATSs operating pursuant to a Form ATS on file with Commission as of the Compliance Date.

The Commission is also proposing to add definitions of “U.S. Treasury Security” and “Agency Security” for purposes of Regulation ATS.

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

In addition, the Commission is proposing to use these definitions in the proposed amendment to Exchange Act Rule 3a1-1(b)(3) to provide the scope of securities for which the Commission could remove the exemption from national securities exchange if certain volume thresholds are met.

100

See

proposed Rule 300(p)-(q).

See infra

Section II.D. The proposed definitions are similar to those in FINRA's rules.

See

FINRA Rule 6710(l) and FINRA Rule 6710(p).

100

See supra

Section II.A.

Request for Comment

2. Should the Commission adopt a more limited or expansive definition of Government Securities ATS than the definition that is being proposed?

3. Should the Commission cite to the section 3(a)(42) (15 U.S.C. 78c(a)(42)) definition of government securities for purposes of defining Government Securities ATS? Should the securities encompassed by the definition (

e.g.,

certain options on government securities) be considered “government securities” for purposes of this regulation?

4. Should the Commission modify the proposed definitions of U.S. Treasury Securities and Agency Securities in any way?

5. The proposed amendments to the definitions of NMS Stock ATS and Government Securities ATS are not designed to limit a broker-dealer operator for an NMS Stock ATS or Government Securities ATS with respect to other types of securities that the broker-dealer operator may wish to trade in an ATS that is subject to Rule 301(b)(2) of Regulation ATS or how the broker-dealer operator may elect to structure the operations of its ATS businesses. Would the proposed amendments to the definitions of NMS Stock ATS and Government Securities ATS impose any operational or other burdens on the broker-dealer operator, other than those related to filing Form ATS, Form ATS-R, Form ATS-G or Form ATS-N, as applicable?

C. Proposed Elimination of the Exemption for ATSs That Limit Securities Activities to Government Securities and Repos

The Commission is proposing amendments to Regulation ATS that would require a Currently Exempted Government Securities ATS that seeks to operate pursuant to the exemption from the definition of an “exchange” under Exchange Act Rule 3a1-1(a)(2), and thus not be required to be registered as a national securities exchange, to comply with Regulation ATS. A Currently Exempted Government Securities ATS that opts to comply with Regulation ATS would then be subject to the conditions to the exemption from exchange registration that are designed to provide its subscribers with investor protections and enable Commission oversight, including the surveillance and examination of ATSs, and to help assure fair and orderly markets.

101

The Commission is also proposing to subject Currently Exempted Government Securities ATSs to the enhanced public transparency requirements of Rule 304 and Form ATS-G.

101

See

Regulation ATS Adopting Release,

supra

note 35, at 70878.

See also

Regulation ATS Adopting Release,

supra

note 35, Section IV.A.2.f.

121

See

Regulation ATS Adopting Release,

supra

note 35, at 70877.

• Make and keep certain records specified in Rule 302

122

and preserve records specified in Rule 303,

123

pursuant to Rule 301(b)(8).

124

The recordkeeping requirements would require the Currently Exempted Government Securities ATSs to create a meaningful audit trail and allow the Commission to examine whether the ATS is in compliance with federal securities laws.

125

122

Rule 302 requires all ATSs to make and keep current certain records, including: A record of subscribers to the ATS; daily summaries of trading in the ATS; and time-sequenced records of order information in the ATS.

See

17 CFR 242.302.

123

Rule 303, and specifically Rule 303(a)(1), requires an ATS to preserve: All records required to be made pursuant to Rule 302; all notices provided to subscribers, including notices addressing hours of operations, system malfunctions, changes to system procedures, and instructions pertaining to access to the ATS; documents made or received in the course of complying with the Capacity, Integrity, and Security Rule in Rule 301(b)(6), if applicable; and, if the ATS is subject to the Fair Access Rule under Rule 301(b)(5), a record of its access standards. Rule 303(a)(2) requires that certain other records must be kept for the life of the ATS and any successor enterprise, including partnership articles or articles of incorporation (as applicable), and copies of reports filed pursuant to Rule 301(b)(2), which includes current Form ATS, and records made pursuant to Rule 301(b)(5). In particular, reports required to be maintained for the life of the ATS or any successor enterprise include initial operation reports, amendments, and cessation of operations reports, filed on Form ATS.

124

See

17 CFR 242.301(b)(8).

See also

Regulation ATS Adopting Release,

supra

note 35, Section IV.A.2.g.

125

See

Regulation ATS Adopting Release,

supra

note 35, at 70878.

• Periodically report certain information about transactions on the ATS and information about certain activities on Form ATS-R within 30 calendar days after the end of each calendar quarter in which the market has operated pursuant to Rule 301(b)(9).

126

The information reported on Form ATS-R by Currently Exempted Government Securities ATSs will permit the Commission to monitor the trading on these ATSs for compliance with the Exchange Act and applicable rules thereunder and enforce the Fair Access Rule.

127

126

See

17 CFR 242.301(b)(9).

See also

infra

Section II.E; Regulation ATS Adopting Release,

supra

note 35, Section IV.A.2.h (Rule 301(b)(9)). Form ATS-R requires the ATS to report, among other things, the aggregate quarterly volume data for specified categories of securities, a list of all securities traded on the ATS during the quarter, and a list of all subscribers that were participants during the quarter. In addition, Form ATS-R requires an ATS that is subject to the fair access obligations under Rule 301(b)(5) of Regulation ATS to report a list of all persons granted, denied, or limited access to the ATS during the period covered by the Form ATS-R and designate for each person: (a) Whether access was granted, denied, or limited; (b) the date the ATS took such action; (c) the effective date of such action; and (d) the nature of any denial or limitation of access. Rule 301(b)(9) requires an ATS to complete and file Form ATS-R within 10 calendar days after ceasing to operate.

See

Form ATS-R.

127

See

Regulation ATS Adopting Release,

supra

note 35, at 70874 and 70878.

• Adopt written safeguards and written procedures to protect confidential trading information and to separate ATS functions from other broker-dealer functions, including principal and customer trading pursuant to Rule 301(b)(10).

128

The Commission believes that applying the requirements of Rule 301(b)(10) to Currently Exempted Government Securities ATSs will help prevent the potential for abuse of subscriber confidential trading information.

129

128

See

17 CFR 242.301(b)(10); NMS Stock ATS Adopting Release,

supra

note 1, Section VI.

129

See

NMS Stock ATS Adopting Release,

supra

note 1, at 38864.

• Not use in its name the word “exchange,” or any derivation of the word “exchange” pursuant to Rule 301(b)(11).

130

The Commission believes that the use of the word “exchange” by an ATS, including a Currently Exempted Government Securities ATS, would be deceptive and could lead investors to believe incorrectly that such ATS is registered as a national securities exchange.

131

130

See

17 CFR 242.301(b)(11); Regulation ATS Adopting Release,

supra

note 35, Section II.C.

131

See

Securities Exchange Act Release No. 39884 (April 17, 1998), 63 FR 23504, 23523 (April 29, 1998) (“Regulation ATS Proposing Release”).

Request for Comment

6. Should the Commission amend Regulation ATS to eliminate the exemption from compliance with Regulation ATS under Rule 301(a)(4)(ii)(A) for all Currently Exempted Government Securities ATS, including those operated by banks?

7. Should the proposed elimination of the exemption from compliance with Regulation ATS only apply to Government Securities ATSs that trade a certain type of government security (

e.g.,

only U.S. Treasury Securities or only Agency Securities)? Should the proposed elimination of the exemption from compliance with Regulation ATS only apply to Government Securities ATSs that trade government securities (and not repos)? If so, for which type of Government Securities ATS should the exemption be eliminated?

8. Should Government Securities ATSs seeking to operate pursuant to the exemption provided by Regulation ATS have the alternative option to satisfy broker-dealer registration with the

Commission pursuant to Section 15C(a)(1)(A)?

9. Should the Commission adopt any alternatives to requiring Government Securities ATSs to register with the Commission as broker-dealers under Section 15 or Section 15C(a)(1)(A)? For example, should the Commission amend Rule 301(b)(1) of Regulation ATS to include an alternative for a bank to register as a government securities broker or dealer pursuant to Section 15C(a)(1)(B), which would not require the bank to become a member of an SRO?

10. Should there be a transition period for Currently Exempted Government Securities ATSs that are currently operated by banks to comply with the proposed amendments to Rule 301(b)(1), including ATSs provided and operated by an affiliate of the bank? If so, how long should the transition period be?

11. Should there be a transition period for Currently Exempted Government Securities ATSs to comply with all or some of the requirements of Regulation ATS? If so, which requirements would require such a transition period, and how long should such transition period be?

12. Should the Commission amend Regulation ATS to remove the exemption from Regulation ATS for ATSs that limit their securities activities to commercial paper? Do market participants use ATSs to trade commercial paper? If so, how is commercial paper traded on an ATS? Should the Commission remove any other exemption from Regulation ATS available under Rule 301?

13. Should the Commission require Currently Exempted Government Securities ATSs to comply with all of the requirements of Regulation ATS applicable to all ATSs that are currently required to comply with Regulation ATS? If not, which requirements should a Currently Exempted Government Securities ATS not be required to comply with and why?

D. Application of Fair Access to Government Securities ATSs

The Commission believes that the proposal to amend Regulation ATS to include U.S. Treasury Securities and Agency Securities as categories of securities under the Fair Access Rule would promote fair and orderly markets given the importance of Government Securities ATSs. When Regulation ATS was adopted, the Commission explained that the fair treatment by ATSs of potential and current subscribers is particularly important when an ATS captures a large percentage of trading volume in a security, because viable alternatives to trading on such a system are limited.

132

The Commission further explained that if an ATS has a significantly large percentage of the volume of trading in a security or type of security, unfairly discriminatory actions can hurt investors lacking access to that ATS.

132

See

Regulation ATS Adopting Release,

supra

note 35, at 70872.

Currently, Rule 301(b)(5) only applies to the trading of NMS stocks, equity securities that are not NMS stocks and for which transactions are reported to an SRO, municipal securities, and corporate debt securities, but not to trading in government securities.

133

An ATS subject to the Fair Access Rule must, among other things, establish written standards for granting access to trading on systems and apply these standards fairly, and is prohibited from unreasonably prohibiting or limiting any person with respect to trading in the stated security when that trading exceeds certain volume thresholds.

134

These requirements are designed to ensure that qualified market participants have fair access to the nation's securities markets.

133

See

17 CFR 242.301(b)(5)(i).

134

See supra

Section I.B.

Government Securities ATSs have become a significant source of orders and trading interest in U.S. Treasury Securities and Agency Securities for investors.

135

Regulation ATS, however, does not provide a mechanism to prevent unfair denials or limitations of access by Government Securities ATSs that trade U.S. Treasury Securities or Agency Securities or regulatory oversight of such denials or limitations of access. The Commission believes that today, the principles undergirding the Fair Access Rule are equally relevant to a Government Securities ATS and amending the Fair Access Rule to include the trading of U.S. Treasury Securities and Agency Securities would help ensure the fair treatment of potential and current subscribers to ATSs that consist of a large percentage of trading volume in these two types of securities.

136

135

See infra

Section X.B.1.

136

Under the proposal, the Fair Access Rule would not apply to Government Securities ATSs that trade repos, including repos on U.S. Treasury Securities and Agency Securities. Based on information available to the Commission, the Commission does not believe that ATSs today capture a significant market share for trading repos or that these markets are as liquid as the markets for securities currently covered by the Fair Access Rule. The Commission also notes FINRA does not require ATSs to report transactions for repos. The Commission is requesting comment on its preliminary assessment and on whether the Commission should amend Regulation ATS to require Government Securities ATSs that trade repos, including repos on U.S. Treasury Securities and Agency Securities, to be subject to the requirements of the Fair Access Rule.

Under the proposed amendments to Rule 301(b)(5), a Government Securities ATS would be subject to the Fair Access Rule if during at least four of the preceding six calendar months, the Government Securities ATS had, (1) with respect to U.S. Treasury Securities, five percent or more of the average weekly dollar volume traded in the United States as provided by the self-regulatory organization to which such transactions are reported, and (2) with respect to Agency Securities, five percent or more of the average daily dollar volume traded in the United States as provided by the self-regulatory organization to which such transactions are reported.

137

Dollar volume is measured in par value, where par value is the face value or nominal value of a bond. The Commission notes that TRACE Security Activity Report and TRACE Fact Book report volume in the same unit, “par value volume” or “par value traded.”

See

FINRA Rule 7730(g)(7).

See also

FINRA, TRACE Fact Book,

available at https://www.finra.org/filing-reporting/trace/trace-fact-book.

The Commission is proposing five percent volume thresholds for subjecting a Government Securities ATS to the Fair Access Rule. Specifically, a Government Securities ATS would be subject to the Fair Access Rule for its trading of U.S. Treasury Securities if its volume surpasses the five percent threshold for U.S. Treasury Securities. Similarly, a Government Securities ATS would be subject to the Fair Access Rule for its trading in Agency Securities if its volume surpasses the five percent threshold for Agency Securities.

138

When the Commission adopted Rule 301(b)(5), the Fair Access Rule threshold was 20 percent of the average daily trading volume.

139

Currently, the Fair Access Rule applies on a security-by-security basis for NMS stocks and equity securities that are not NMS stocks, and on a category basis for corporate bonds and municipal securities. The original volume threshold was reduced to five percent for all categories of securities when the Commission adopted Regulation NMS, and the Commission proposes to apply

five percent volume thresholds for the trading of U.S. Treasury Securities and Agency Securities.

140

138

As such, a Government Securities ATS with high trading volume in U.S. Treasury Securities and low trading volume in Agency Securities might only be subject to the Fair Access Rule for U.S. Treasury Securities. Likewise, a Government Securities ATS with high Agency Securities trading volume and low U.S. Treasury Securities trading volume might only be subject to the Fair Access Rule for Agency Securities. A Government Securities ATS that surpasses each of the two thresholds would be subject to the Fair Access Rule for U.S. Treasury Securities and Agency Securities.

139

See

Regulation ATS Adopting Release,

supra

note 35, at 70873.

140

See

Securities and Exchange Act Release No. 51808 (June 9, 2005) 70 FR 37496, 37550 (June 29, 2005) (File No. S7-10-04).

The proposed thresholds include only such securities for which transactions are reported to an SRO. FINRA publishes weekly aggregate data on U.S. Treasury Securities based on the mandatory transaction reports of its members to TRACE, and disseminates transactions data about Agency Securities immediately upon receipt of a transaction report.

141

Because weekly dollar volume data about transactions in U.S. Treasury Securities and daily dollar volume data about transactions in Agency Securities are publicly available via TRACE, Government Securities ATSs will be able to readily calculate whether they meet the applicable thresholds.

141

See supra

notes 50-51.

The Commission believes that separate volume thresholds for U.S. Treasury Securities and Agency Securities would advance the investor protection goals of the Fair Access Rule. U.S. Treasury Securities and Agency Securities make up the vast amount of government securities traded on ATSs today, and also constitute different sources of potential orders and trading interest for market participants.

142

The proposed volume thresholds would help ensure that the Fair Access Rule applies to the category of security for which an ATS has significant trading volume. If a Government Securities ATS has significant trading volume in U.S. Treasury Securities but not Agency Securities, for example, the proposed rule would help ensure that investors are provided fair access to the ATS's services with respect to U.S. Treasury Securities, even if the ATS's combined trading volume in both U.S. Treasury Securities and Agency Securities would not exceed a five percent volume threshold. The Commission believes that it would be unnecessary and overly burdensome to require a Government Securities ATS to comply with the Fair Access Rule for a category of government security for which that ATS does not have significant volume. Additionally, given that U.S. Treasury Securities and Agency Securities are types of debt securities, the Commission believes that it is appropriate to determine these five percent volume thresholds on a category basis because doing so would be consistent with the Fair Access Rule's application to other categories of fixed income securities (

i.e.,

corporate bonds and municipal securities).

142

See infra

Section X.B.1.

See also supra

Section I.A.

The Commission believes that the proposed five percent volume threshold test is consistent with the Commission's current threshold for identifying significant markets for purposes of the Fair Access Rule and is appropriate for determining whether a Government Securities ATS should be subject to the Fair Access Rule for trading in the categories of U.S. Treasury Securities and Agency Securities. Currently, the Commission estimates that three ATSs trading U.S. Treasury Securities and one ATS trading Agency Securities would be subject to the Fair Access Rule under the proposed five percent volume thresholds.

143

The ATS with the largest market volume in U.S. Treasury Securities has approximately 24 percent of market volume, while the second and third largest are both slightly above five percent market share. The one ATS that would exceed the proposed threshold for Agency Securities accounts for roughly 13 percent of volume in Agency Securities. If the Commission were to propose a four percent volume threshold, the number of ATSs that would be subject to the Fair Access Rule for U.S. Treasury Securities and Agency Securities would not change, but if the Commission proposed a three percent volume threshold test, the Commission estimates a total of four ATSs would be subject to the Fair Access Rule for U.S. Treasury Securities and the number of ATSs subject to the Fair Access Rule for Agency Securities would remain at one.

144

143

See infra

Table X.1.

144

See id.

If the proposed volume thresholds were 10 percent, however, only one ATS trading U.S. Treasury Securities and one ATS trading Agency Securities would be subject to the Fair Access Rule.

145

The Commission believes that the proposed five percent volume thresholds—in addition to being consistent with the current volume threshold for categories of debt securities under the Fair Access Rule—are appropriately designed to capture those ATSs that are significant liquidity venues for U.S. Treasury Securities or Agency Securities. That said, as further specified below, the Commission is requesting comment on whether these proposed volume thresholds should be set higher or lower for ATSs trading government securities.

145

See id.

The proposed fair access volume threshold for U.S. Treasury Securities would have a different data benchmark than that for Agency Securities. The former would be based on average weekly dollar volume traded, and the latter would be based on average daily volume traded. This proposed difference is because FINRA only provides weekly aggregated transaction information on U.S. Treasury Securities but provides individual trade reports for Agency Securities transactions. Currently, FINRA neither provides individual trade reports nor aggregate daily volume data for U.S. Treasury Securities transactions to TRACE subscribers (or to the public). Thus, Government Securities ATSs will only have weekly-volume data upon which to make fair access determinations for U.S. Treasury Securities. FINRA, however, provides individual trade reports for all Agency Securities transactions to TRACE subscribers, and therefore,

146

Government Securities ATSs will be able determine the average daily trading volume for a given month by aggregating these trade reports. Accordingly, the Commission proposes an average daily volume threshold for Agency Securities, which is consistent with the current volume thresholds in 301(b)(5).

147

146

The Commission believes that the vast majority—and likely, all—broker-dealer operators of Government Securities ATSs that trade Agency Securities currently subscribe to TRACE. The Commission is, however, requesting public comment on the extent to which Government Securities ATSs (both Currently Exempted Government Securities ATSs and those subject to current Regulation ATS) have access to TRACE trade reports for Agency Securities.

147

See supra

notes 138-140.

Lastly, the Commission is proposing that a Government Securities ATS would only be required to comply with the Fair Access Rule only if it has met at least one of the applicable volume thresholds during at least four of the preceding six calendar months.

148

This is the same time period for evaluating the applicability of the Fair Access Rule to ATSs that trade U.S. Treasury Securities or Agency Securities that is currently applied to ATSs that trade NMS stocks, equity securities that are not NMS stocks and for which transactions are reported to an SRO, municipal securities, and corporate debt securities. Because of the similarity of Government Securities ATSs to the other ATSs, the Commission believes that the range of time is an appropriate

period to evaluate the trading volume of an ATS and strikes an appropriate balance; the threshold will not be triggered by atypical periods of increased trading or a few occurrences of very large trades, but will be timely triggered after an ATS attains a significant role in the market.

148

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

Request for Comment

14. Should any other type of government securities be included as a category of securities under Rule 301(b)(5)? Should the Commission apply Rule 301(b)(5) to all Government Securities ATSs? What would be the costs and benefits associated with such a requirement?

15. Should the proposed five percent fair access threshold for U.S. Treasury Securities be applied to all types of U.S. Treasury Securities or only to a subset(s) of U.S. Treasury Securities? For example, should the five percent fair access threshold be applied to transaction volume in only on-the-run U.S. Treasury Securities? Should the five percent fair access threshold should be applied to all Agency Securities or only to a subset(s) of Agency Securities?

16. Should the proposed five percent fair access threshold for U.S. Treasury Securities be set higher or lower than five percent? If so, what should that percentage threshold should be? Should there be no threshold? Please support your views. Is the five percent threshold an appropriate threshold to capture ATSs that are significant markets for trading in U.S. Treasury Securities or Agency Securities? Would the five percent threshold capture ATSs that are not significant markets for U.S. Treasury Securities and Agency Securities? If there should be a percent threshold for a subset of U.S. Treasury Securities, for example on-the-run U.S. Treasury Securities or off-the-run U.S. Treasury Securities, what should that threshold should be?

17. Would the proposed four out of six month period be an appropriate period to measure the volume thresholds for U.S. Treasury Securities, Agency Securities, or both? If not, what period of time would be appropriate?

18. Would it be appropriate to use five percent of average weekly dollar volume traded in the United States as a fair access threshold for U.S. Treasury Securities?

19. If the average weekly dollar volumes were to include transactions for U.S Treasury Securities by non-FINRA members, which currently are not reported to, or collected by, the SRO that makes public average weekly dollar volume statistics, should the fair access threshold change? If so, what should be the appropriate threshold?

20. Would it be appropriate to use five percent of average daily dollar volume traded in the United States as a fair access threshold for Agency Securities? Do ATSs that trade Agency Securities currently subscribe to TRACE and, therefore, receive TRACE trade reports for Agency Securities? If not, what percentage of these ATSs do not currently subscribe to TRACE?

21. Should the requirements under the Fair Access Rule be amended specifically for Government Securities ATS? If so, how?

22. Should the proposed five percent fair access threshold for U.S. Treasury Securities be applied on a security-by-security basis?

23. Should the proposed fair access volume threshold measurement for Government Securities ATSs, and current fair access threshold measurements applicable to ATSs that trade NMS stock, OTC equity securities, corporate bonds, and municipal securities, take into account whether the ATSs are under common control share the same technology platform? A broker-dealer may be the registered broker-dealer for multiple types of ATSs that trade different types of securities (

e.g.,

an NMS Stock ATS and a non-NMS Stock ATS) or a broker-dealer may also be the registered broker-dealer for multiple ATSs that trade the same type of securities but are separate and distinct from each other (

e.g.,

a broker-dealer registered for, and operates, two NMS Stock ATSs that each maintains a separate book of orders that are governed by distinct priority and order interaction rules). In both instances, each of the ATSs operated by the broker-dealer operator is separate from each other and must independently comply with Regulation ATS. Should two or more ATSs under common control and operated by the same broker-dealer be viewed as a single ATS required to aggregate volume of transactions for purposes of determining whether the fair access threshold has been satisfied? If yes, what factors should be considered when determining the fair access threshold test for multiple ATSs operated by the same broker-dealer, and why?

E. Filing Requirements for Broker-Dealers That Operate ATSs That Trade Government Securities and Non-Government Securities

The Commission is proposing to revise Rule 301(b)(2)(viii)

149

of Regulation ATS to provide that a Legacy Government Securities ATS that is operating pursuant to a Form ATS as of the Compliance Date will continue to be subject to the Rule 301(b)(2) requirements to file a Form ATS. However, once the ATS files a Form ATS-G, it will no longer be subject to Rule 301(b)(2)(i) through (vii) and will instead be subject to the reporting requirements under Rule 304, which provides the rules for filing of Form ATS-G. The Commission is also proposing to provide that as of the Compliance Date, an entity seeking to operate as a Government Securities ATS will not be subject to the requirements of Rule 301(b)(2)(i) through (vii) and will instead be required to file reports under Rule 304. In addition, the Commission is proposing rules to make clear that a Currently Exempted Government Securities ATS would be subject to Rule 304 and would not be subject to Rule 301(b)(2)(i) through (viii). Other than changes to refer to Government Securities ATSs, the relevant compliance dates, and the treatment of Currently Exempted Government Securities ATSs, these rules are identical to the existing rules that were applied to Legacy NMS Stock ATSs operating during the Commission review period for Form ATS-N and would avoid Government Securities ATSs from being subject to potentially duplicative requirements in Rule 304 and Rule 301(b)(2).

149

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

The Commission is proposing to amend Rule 301(b)(2)(viii) to make clear that NMS Stock ATSs and Government Securities ATSs are required to file reports pursuant to § 242.304 and ATSs that are not NMS Stock ATSs or Government Securities ATSs are subject to Rule 301(b)(2). A broker-dealer may be the registered broker-dealer for multiple types of ATSs that trade different types of securities (

e.g.,

NMS Stock ATS and non-NMS Stock ATS) or a broker-dealer may be the registered broker-dealer for multiple ATSs that trade the same type of securities but are separate and distinct from each other (

e.g.,

a broker-dealer registered for, and

operates, two NMS Stock ATSs, each of which maintains a separate book of orders that is governed by distinct priority and order interaction rules for one type of security). In both instances, each of the ATSs is separate from the other and must independently comply with Regulation ATS.

150

The Commission is proposing to add to Rule 301(b)(2)(viii) to provide that an NMS Stock ATS or a Government Securities ATS that is operated by a broker-dealer that is the registered broker-dealer for more than one ATS must independently comply with Regulation ATS, including the filing requirements of Rule 304. The Commission believes that the proposed language makes clear that the proposal would not require compliance with the heightened transparency requirements of Regulation ATS for ATSs that are not NMS Stock ATSs or Government Securities ATSs. Under the proposal, a broker-dealer operator, for example, for an ATS that noticed on its initial operation report on Form ATS that the ATS trades government securities and corporate debt securities would be the broker-dealer operator for two types of ATSs that would be separate from each other with regard to trading these securities and independently comply with Regulation ATS. These two types of ATSs would be (1) a Government Securities ATS that would file a Form ATS-G with respect to government securities and (2) a non-Government Securities ATS that would file a Form ATS with respect to corporate debt.

151

In addition, each of the two ATSs would be required to comply with the conditions to Regulation ATS, including, among other things, each adopting written safeguards and written procedures to protect subscriber confidential trading information for the ATS pursuant to Rule 301(b)(10) and each making and keeping records for the ATS pursuant to Rule 301(b)(8).

152

150

See

Rule 3a1-1(a)(2) (providing that an organization, association, or group of persons shall be exempt from the definition of “exchange” if it is in compliance with Regulation ATS) and Rule 301(a) (providing that an ATS shall comply with the requirements of Rule 301(b)).

151

Under the proposed rules, a broker-dealer operator for an ATS that currently trades government securities and corporate bonds, for example, would file a Form ATS-G to disclose its government securities activities for the Government Securities ATS. The broker-dealer operator would disclose the corporate bond activities of its existing ATS by filing with the Commission a material amendment to its Form ATS pursuant to Rule 301(b)(2)(ii) of Regulation ATS to remove information regarding government securities activities.

See

Regulation ATS Adopting Release,

supra

note 35, at 70864 (discussing circumstances under which an ATS would file a material amendment to Form ATS pursuant to Rule 301(b)(2), which, among other things, includes changes to the operating platform, the types of securities traded, or types of subscribers).

152

See supra

note 92 and accompanying text.

The Commission also is proposing to amend Rule 301(b)(9) of Regulation ATS.

153

This rule requires an ATS to report transaction volume in various types of securities, including government securities and repos, on Form ATS-R on a quarterly basis and within 10 calendar days after it ceases operation.

154

As discussed above, the Commission is proposing to define “Government Securities ATS” and to clarify the definition of “NMS Stock ATS” to make clear that a Government Securities ATS cannot trade securities other than government securities or repos and that an NMS Stock ATS cannot trade securities other than NMS stocks.

155

For example, a Government Securities ATS operated by a broker-dealer that is also the registered broker-dealer for a non-Government Securities ATS would be separate from the non-Government Securities ATS and would be required to file a Form ATS-R for the Government Securities ATS. The broker-dealer would be required to file a separate Form ATS-R for the non-Government Securities ATS. The Commission is proposing to amend Rule 301(b)(9) by removing language stating that an ATS must “separately file” a Form ATS-R for transactions in NMS stocks and for transactions in securities other than NMS stocks to simplify the text and convey that each ATS, whether operated by a broker-dealer that operates multiple types of ATS, must file a Form ATS-R. This is consistent with the current Form ATS-R filing process for a broker-dealer that operates an NMS Stock ATS and non-NMS Stock ATS.

156

153

See

17 CFR 242.301(b)(9).

154

The information filed on Form ATS-R permits the Commission to monitor trading on an ATS.

See

Regulation ATS Adopting Release,

supra

note 35, at 70878.

155

See supra

note 94 and accompanying text.

156

See

NMS Stock ATS Adopting Release,

supra

note 1, Section III.B.5.

Request for Comment

24. Should an NMS Stock ATS or Government Securities ATS that is operated by a broker-dealer that is a registered broker-dealer for more than one ATS be subject to Rule 304 independently from any other ATS for which its broker-dealer is registered?

25. Should a broker-dealer that is the registered broker-dealer for more than one ATS be required to file separate Forms ATS-R for each of the ATSs it operates?

F. Enhanced Filing Requirements for Government Securities ATSs

The Commission is proposing a process for the Commission to review disclosures on Form ATS-G and declare a Form ATS-G ineffective if the Commission finds, after notice and opportunity for hearing, that such action is necessary and appropriate in the public interest and the protection of investors. The proposed effectiveness process is not merit based and is the same effectiveness process that is currently applicable to NMS Stock ATSs. The effectiveness process is designed to facilitate the Commission's oversight of Government Securities ATSs, as the process has facilitated the review of NMS Stock ATSs, and address, for example, material deficiencies with respect to the accuracy, currency, and completeness of disclosures on Form ATS-G.

The Commission is proposing to amend Rule 304(a) to require that a Covered ATS, which will include a Government Securities ATS, must comply with Rules 300 through 304 of Regulation ATS as applicable to be exempt pursuant to Rule 3a1-1(a)(2).

157

As proposed, all Government Securities ATSs would be required to comply with Rule 304, as amended, to, among other things, file Form ATS-G with the Commission. The Commission is proposing to apply to Government Securities ATSs the existing provisions of current Rule 304(a) for the filing and Commission review of an initial Covered Form, which will include Form ATS-G,

158

with a modification to the circumstances under which the Commission can extend the review period for an initial Covered Form.

159

The Commission believes this process is appropriate for the same reasons stated in the NMS Stock ATS Adopting Release.

160

The Commission believes that this review process will facilitate the Commission's oversight of Government Securities ATSs and help ensure that information is disclosed in a complete and comprehensible manner. The differences between Form ATS-G and Form ATS-N would not warrant a different review and effectiveness process and the Commission is proposing to apply the same provisions

that are applicable to NMS Stock ATSs to Government Securities ATSs, which include the following:

157

As proposed, references to “NMS Stock ATSs” throughout Rule 304 would be changed to refer to “Covered ATSs,” which would encompass Government Securities ATSs.

See supra

Section II.B.

158

See infra

notes 161-167 and accompanying text.

159

See infra

notes 168-170 and accompanying text.

160

See

NMS Stock ATS Adopting Release,

supra

note 1, Section IV, at 38782.

• No exemption is available to a Government Securities ATS pursuant to Exchange Act Rule 3a1-1(a)(2) unless the Government Securities ATS files with the Commission an initial Form ATS-G,

161

and the initial Form ATS-G is effective.

162

161

The Commission staff may reject a Form ATS-G filing that is defective because, for example, it is missing sections or missing responses to any sub-questions, or does not comply with the electronic filing requirements. This is a separate process from the determination to declare a Form ATS-G ineffective.

See

NMS Stock ATS Adopting Release,

supra

note 1, at 38791.

162

See

Rule 304(a)(1)(i). Because NMS Stock ATSs must file a Form ATS-N and Government Securities ATSs must file a Form ATS-G, the Commission is proposing a change to current Rule 304(a)(1)(i) to state that no exemption is available to a Covered ATS pursuant to § 240.3a1-1(a)(2) unless the Covered ATS files with the Commission an “applicable” initial Covered Form.

• To permit the Commission, by order, to declare ineffective an initial Form ATS-G no later than 120 calendar days from the date of filing with the Commission, or, if applicable, the end of the extended Commission review period.

163

During the Commission review period, the Government Securities ATS shall amend its initial Form ATS-G by filing updating amendments and correcting amendments, as applicable.

164

163

See

proposed Rule 304(a)(1)(ii). As proposed, the Commission may extend the initial Form ATS-G review period for: (1) An additional 90 calendar days, if the Commission determines that a longer period is appropriate, in which case the Commission will notify the Government Securities ATS in writing within the initial 120-calendar day review period and will briefly describe the reason for the determination for which additional time for review is required; or (2) any extended review period to which a duly authorized representative of the Government Securities ATS agrees in writing.

See infra

note 169.

164

As proposed, to make material changes to its initial Form ATS-G during the Commission review period, the Government Securities ATS shall withdraw its filed initial Form ATS-G and may refile an initial Form ATS-G pursuant to Rule 304(a)(1).

See

Rule 304(a)(1)(ii)(B).

• An initial Form ATS-G, as amended, will become effective, unless declared ineffective, upon the earlier of: (1) The completion of review by the Commission and publication pursuant to Rule 304(b)(2)(i); or (2) the expiration of the Commission review period, or, if applicable, the end of the extended review period.

165

See

proposed Rule 304(a)(1)(iii)(A).

• The Commission will, by order, declare an initial Form ATS-G ineffective if it finds, after notice and opportunity for hearing, that such action is necessary or appropriate in the public interest, and is consistent with the protection of investors.

166

If the Commission declares an initial Form ATS-G ineffective, the Government Securities ATS shall be prohibited from operating as a Government Securities ATS pursuant to Exchange Act Rule 3a1-1(a)(2). An initial Form ATS-G declared ineffective does not prevent the Government Securities ATS from subsequently filing a new Form ATS-G.

167

166

Like the review process for Form ATS-N, the Commission's review of Form ATS-G would not be merit-based; instead it would focus on the completeness and comprehensibility of the disclosures.

See

NMS Stock ATS Adopting Release,

supra

note 1, at 38790. In the NMS Stock ATS Adopting Release, the Commission discussed the circumstances under which the Commission would declare a Form ATS-N amendment ineffective. Such circumstances would also apply to the Commission's review of an amendment to Form ATS-G filed by a Government Securities ATS. For example, the Commission believes it would be necessary or appropriate in the public interest, and consistent with the protection of investors, to declare ineffective a Form ATS-G if, for example, the Commission finds, after notice and opportunity for hearing, the Form ATS-G was filed by an entity that does not meet the definition of a Government Securities ATS; one or more disclosures reveal non-compliance with federal securities laws, or the rules or regulations thereunder, including Regulation ATS; or one or more disclosures on Form ATS-G are materially deficient with respect to their completeness or comprehensibility. For further discussion,

see id.

at Section IV.B.2.

167

See

Rule 304(a)(1)(iii)(B).

The Commission is proposing to amend Rule 304(a)(1)(ii)(A)(1), which currently provides that the Commission may extend the initial Form ATS-N review period for an additional 90 calendar days if the Form ATS-N is unusually lengthy or raises novel or complex issues that require additional time for review.

168

The Commission is extending the rule to Form ATS-G, and furthermore, the Commission believes that it is appropriate to extend the Commission review period for a Covered Form if it finds that an extension is appropriate.

169

For example, if an ATS's disclosures on an initial Form ATS-G are difficult to understand or appear to be incomplete, the Commission may need additional time to discuss the disclosures with the ATS to ascertain whether to declare the Form ATS-G ineffective, even if the form is not unusually lengthy or does not raise novel or complex issues. Rather than moving to declare an initial Form ATS-G ineffective because of material deficiencies with respect to completeness and comprehensibility, the Commission could extend the review period to allow the filer to resolve the deficiencies. The Commission is therefore proposing that the Commission may extend the initial Covered Form review period by an additional 90 calendar days if it determines a longer period is appropriate. The proposed standard is the same standard for extending the Commission review period for SRO rule filings under Section 19 of the Exchange Act.

170

As under current Rule 304(a)(1)(ii)(A)(1), in such case, the Commission will notify the Covered ATS in writing within the initial 120-calendar day review period and will briefly describe the reason for the determination for which additional time for review is required.

168

See

Rule 304(a)(1)(ii)(A)(1). As proposed, the Commission may also extend the initial Covered Form review period for any extended review period to which a duly authorized representative of the Covered Form agrees in writing.

See

Rule 304(a)(1)(ii)(A)(2).

169

In the Commission's experience reviewing Forms ATS-N, the Commission review period was extended (either by the Commission or by the agreement of a duly authorized representative of the ATS) for 31 of the 35 Forms ATS-N that the Commission has reviewed and published. In its review of each Form ATS-N, the Commission staff engaged in extensive conversations with the NMS Stock ATS with regard to the NMS Stock ATS's disclosures on its initial Form ATS-N.

170

See

15 U.S.C. 78s(b)(2).

The Commission is also proposing that Legacy Government Securities ATSs that have a Form ATS on file with the Commission as of the Compliance Date be subject to identical rules (other than changes to terminology) during the transition from operating pursuant to a Form ATS to operating pursuant to a Form ATS-G as those that were applied to Legacy NMS Stock ATSs during the Commission's review period. In addition, to allow a Currently Exempted Government Securities ATS to continue to operate without disruption while its initial Form ATS-G is under Commission review, the Commission is proposing to amend Rule 304(a)(1)(i) to provide that a Currently Exempted Government Securities ATS may continue to operate pursuant to Regulation ATS until its initial Form ATS-G becomes effective. The Commission believes that all Legacy Government Securities ATSs—whether they are operating pursuant to a Form ATS or whether they have operated as a Currently Exempted Government Securities ATS—should be permitted to continue to operate during the Commission review period. The Commission is therefore proposing that Legacy Government Securities ATSs can operate pursuant to Form ATS-G on a provisional basis during the Commission review period. A Government Securities ATS would file with the Commission an initial Form ATS-G no earlier than the Compliance Date

171

and no later than the date 150

calendar days after the date of publication of the final rule in the

Federal Register

. An initial Form ATS-G filed by a Legacy Government Securities ATS would supersede and replace a previously filed Form ATS of the Legacy Government Securities ATS. A Legacy Government Securities ATS that fails to comply with the requirements of Regulation ATS by filing Form ATS-G by the 150th calendar day and continues operating as a Government Securities ATS would no longer qualify for the exemption provided under Rule 3a1-1(a)(2), and thus, risks operating as an unregistered exchange in violation of Section 5 of the Exchange Act. If a Legacy Government Securities ATS that has a Form ATS on file with the Commission to trade, for example, government securities and corporate bonds fails to file a Form ATS-G by the 150th calendar day, the ATS must either file a cessation of operations report on Form ATS or file a material amendment on Form ATS to remove information related to government securities.

171

See supra

note 97.

For the same reasons discussed above,

172

the Commission is proposing to amend Rule 304(a)(1)(iv)(B) to provide that the Commission can extend the initial Form ATS-G review period by an additional 120 calendar days if it determines that a longer period is appropriate, even if the form is not unusually lengthy or does not raise novel or complex issues.

172

See supra

notes 168-170 and accompanying text.

Other than the proposed changes to the circumstances under which the Commission may extend the Commission review period, the Commission is also proposing that the process for the Commission review and ineffectiveness determination for an initial Form ATS-G filed by a Legacy Government Securities ATS would be the same as the process for an initial Form ATS-N filed by a Legacy NMS Stock ATS.

173

Given the intended uses of proposed Form ATS-G to allow the Commission to monitor developments and carry out its oversight functions over Government Securities ATSs and to enable market participants to make more informed decisions about how their orders will be handled by the ATSs, the Commission believes that it is important for a Government Securities ATS to maintain an accurate, current, and complete Form ATS-G.

174

Providing the Commission with the opportunity to review Form ATS-G disclosures would help ensure that information is disclosed in a complete and comprehensible manner.

175

173

See

Rule 304(a)(1)(iv)(B), which, as proposed, will provide that the Commission may, by order, as provided in Rule 304(a)(1)(iii), declare an initial Form ATS-G filed by a Legacy Government Securities ATS ineffective no later than 120 calendar days from the date of filing with the Commission, or, if applicable, the end of the extended review period. As proposed, the Commission may extend the initial Form ATS-G review period for a Legacy Government Securities ATS for: (1) An additional 120 calendar days if the Commission determines that a longer period is appropriate, in which case the Commission will notify the Legacy Government Securities ATS in writing within the initial 120-calendar day review period and will briefly describe the reason for the determination for which additional time for review is required; or (2) any extended review period to which a duly-authorized representative of the Legacy Government Securities ATS agrees in writing.

See supra

note 172.

174

See

NMS Stock ATS Proposing Release,

supra

note 62, at 81025 (discussing the proposed process for amendments to, and Commission review of, Form ATS-N).

175

See

NMS Stock ATS Adopting Release,

supra

note 1, Section IV.A.3.

As the intended uses of Form ATS-G and Form ATS-N disclosures are similar, the Commission is proposing the same filing requirements that are currently applicable to Form ATS-N amendments filed by NMS Stock ATSs to Form ATS-G amendments filed by Government Securities ATSs. A Government Securities ATS would be required to amend Form ATS-G:

• At least 30 calendar days prior to the date of implementation of a material change to the operations of the Government Securities ATS or to the activities of the broker-dealer operator or its affiliates that are subject to disclosure on the Form ATS-G, other than changes related to order display or fair access, which will be contingent amendments reported pursuant to Rule 304(a)(2)(i)(D).

176

See

Rule 304(a)(2)(i)(A). Scenarios that are particularly likely to implicate a material change include: (1) A broker-dealer operator or its affiliates beginning to trade on the Government Securities ATS; (2) a change to the broker-dealer operator's policies and procedures governing the written safeguards and written procedures to protect the confidential trading information of subscribers pursuant to Rule 301(b)(10)(i) of Regulation ATS; (3) a change to the types of participants on the Government Securities ATS; (4) the introduction or removal of a new order type on the Government Securities ATS; (5) a change to the order interaction and priority procedures; (6) a change to the segmentation of orders and participants; (7) a change to the manner in which the Government Securities ATS displays orders or trading interest; and (8) a change of a service provider to the operations of the Government Securities ATS that has access to subscribers' confidential trading information. This list is not intended to be exhaustive, and does not mean to imply that other changes to the operations of a Government Securities ATS or the activities of the broker-dealer operator or its affiliates could not constitute material changes. Further, the Government Securities ATS should generally consider whether the cumulative effect of a series of changes to the operations of the Government Securities ATS or the activities of the broker-dealer operator or its affiliates with regard to the Government Securities ATS is material. In addition, in determining whether a change is material, an ATS generally should consider whether such change would affect: (1) The competitive dynamics among ATS subscribers; (2) the execution quality or performance of the orders of any subscriber or category of subscribers; (3) the fees that any subscriber or category of subscribers would pay to access and/or use the ATS; (4) the nature or composition of counter-parties with which any subscriber or category of subscribers interact; and (5) the relative speed of access or execution of any subscriber or group of subscribers. For further discussion,

see

NMS Stock ATS Adopting Release,

supra

note 1, Section IV.B.1.a.

• No later than 30 calendar days after the end of each calendar quarter to correct information that has become inaccurate or incomplete for any reason and was not required to be reported to the Commission as a material amendment, correcting amendment, or contingent amendment.

177

See

Rule 304(a)(2)(i)(B).

• Promptly to correct information in any previous disclosure on the Form ATS-G, after discovery that any information previously filed on a Form ATS-G was materially inaccurate or incomplete when filed.

178

See

Rule 304(a)(2)(i)(C). For a discussion of when an ATS should file a correcting amendment,

see

NMS Stock ATS Adopting Release,

supra

note 1, at 38806.

• No later than seven calendar days after information required to be disclosed in Part III, Item 24 on Form ATS-G, which addresses fair access, has become inaccurate or incomplete. Because the order display and execution access rule under Rule 301(b)(3) does not apply to Government Securities ATSs, Form ATS-G does not include a requirement to disclose information pertaining to order display and execution access. Accordingly, Rule 304(a)(2)(i)(D) will only apply to the fair access disclosure on Form ATS-G.

179

The Commission is proposing to revise Rule 304 to replace references to “Order Display and Fair Access Amendments” with “Contingent Amendments.” The term “Contingent Amendment” would apply to the relevant amendments under Rule 304(a)(2)(i)(D) to both Form ATS-N and Form ATS-G.

Like amendments to Form ATS-N, the Commission will, by order, declare ineffective any Form ATS-G amendment filed pursuant to Rule 304(a)(2)(i)(A) through (D), no later than 30 calendar days from filing with the Commission, if it finds that such action is necessary or appropriate in the public interest and is consistent with the protection of investors.

180

See

Rule 304(a)(2)(ii).

The Commission is further proposing to apply current Rule 304(a)(3) to require a Government Securities ATS to notice its cessation of operations on a Form ATS-G at least 10 business days prior to the date it will cease to operate

as a Government Securities ATS and to cause the Form ATS-G to become ineffective on the date designated by the Government Securities ATS. In addition, the Commission is proposing to apply Rule 304(a)(4) to Government Securities ATSs, which would provide that the Commission will, by order, if it finds, after notice and opportunity for hearing, that such action is necessary or appropriate in the public interest and is consistent with the protection of investors, suspend for a period not exceeding twelve months,

181

limit, or revoke the exemption for a Covered ATS pursuant to Rule 3a1-1(a)(2).

182

Rule 304(a)(4)(ii) would provide that if the exemption for a Government Securities ATS is suspended or revoked pursuant to Rule 304(a)(4)(i), the Government Securities ATS would be prohibited from operating pursuant to the Rule 3a1-1(a)(2) exemption.

183

If the exemption for a Government Securities ATS is limited pursuant to Rule 304(a)(4)(i), the Government Securities ATS shall be prohibited from operating in a manner otherwise inconsistent with the terms and conditions of the Commission order.

181

The proposed limitation on the time frame for suspension is consistent with federal securities law provisions pursuant to which the Commission may suspend the activities or registration of a regulated entity.

See, e.g.,

Exchange Act Section 15(b)(4) (15 U.S.C. 78o(b)(4)) and 15B(c)(2) (15 U.S.C. 78o-4(c)(2)).

See

NMS Stock ATS Proposing Release,

supra

note 62, at 81031 n.322.

182

See

proposed Rule 304(a)(4)(i).

183

See

Rule 304(a)(4). In making a determination as to whether suspension, limitation, or revocation of a Government Securities ATS's exemption is necessary or appropriate in the public interest, and is consistent with the protection of investors, the Commission would, for example, take into account whether the entity no longer meets the definition of Government Securities ATS under Rule 300(l), does not comply with the conditions to the exemption (in that it fails to comply with any part of Regulation ATS, including Rule 304), or otherwise violates any provision of federal securities laws. For further discussion of such examples as applied to NMS Stock ATSs,

see

NMS Stock ATS Proposing Release,

supra

note 62, at 81032.

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

184

Pursuant to the Commission's current information sharing practices with the Department of the Treasury, the Commission expects to provide the Department of the Treasury with prompt notice in certain cases, such as when the Commission is requiring registration for certain large volume Government Securities ATSs under Rule 3a1-1(b), declaring a Form ATS-G ineffective under Rule 304(a)(1)(iii)(b), or suspending, limiting, or revoking the exemption of a Government Securities ATS under Rule 304(a)(4).

Request for Comment

26. Should Government Securities ATSs be required to file proposed Form ATS-G instead of Form ATS?

27. Should Form ATS, or parts thereof, for ATSs that effect transactions in government securities or repos and securities other than government securities or repos be made available to the public? Is current Form ATS sufficient to elicit information for the public about the operations of Government Securities ATSs?

28. Do commenters believe that broker-dealers that effect transactions in government securities or repos generally, or U.S. Treasury Securities or Agency Securities, specifically, might choose to modify their business models so that they would not be required to comply with enhanced regulatory or operational transparency requirements for Government Securities ATSs?

29. Should Government Securities ATSs be subject to Rule 304(a), in whole or in part?

30. Should Rule 304(a) be amended to provide that an initial Covered Form be made effective by Commission order or any other means instead of upon publication by the Commission?

31. Should Rule 304(a) only apply to Government Securities ATSs that trade a certain type of government security (

e.g.,

U.S. Treasury Securities, Agency Securities)? If so, to which type of Government Securities ATS should Rule 304 apply (

e.g.,

Government Securities ATSs that trade U.S. Treasury Securities or Government Securities ATSs that trade Agency Securities)?

32. Should the Commission require a Currently Exempted Government Securities ATS to file Form ATS-G and comply with the requirements of Rule 304 to qualify for the exemption from the definition of exchange?

33. Would the proposal to require a Currently Exempted Government Securities ATS to file Form ATS-G by the date 150 calendar days after the date of publication of the final rule in the

Federal Register

provide the ATS sufficient time to transition to compliance with Regulation ATS and the proposed requirements under Rule 304? Would the proposal to require a Legacy Government Securities ATS to file a Form ATS-G by the date 150 calendar days after the date of publication of the final rule in the

Federal Register

provide the ATS sufficient time to transition to compliance with Rule 304?

34. Should the Commission be permitted to extend the initial Covered Form review period if it finds that it is appropriate to extend such review period?

35. Should a Legacy Government Securities ATS be allowed to continue operations during the Commission's review of its initial Form ATS-G? Should the Commission make a Legacy Government Securities ATS's Form ATS-G publicly available upon filing?

36. Are there any aspects of Rule 304(a)(2) relating to the filing and review of amendments that should be modified specifically for Form ATS-G amendments filed by Government Securities ATSs?

37. What changes or types of changes to an ATS's operations or the activities of the broker-dealer operator or its affiliates do commenters believe are particularly likely to be material as so to require a material amendment to Form ATS-G?

38. Currently, and as proposed, Rule 304(a)(2) does not provide for the Commission to extend the length of the Commission review period for amendments to a Covered Form.

185

The Commission has 30 days to review the amendment, engage in discussion with the ATS, and, if necessary or appropriate in the public interest, and consistent with the protection of investors, declare the amendment ineffective. If, however, after the end of the Commission review period for an amendment, the Commission finds that, in light of such amendment, it is necessary or appropriate in the public interest and consistent with the protection of investors, the Commission may, after notice and opportunity for hearing, suspend, limit, or revoke a Covered ATS's exemption from the definition of “exchange” pursuant to Rule 3a1-1(a)(2). Should the Commission amend Rule 304(a)(2) to allow the Commission to extend the length of the Commission review period for amendments to a Covered Form? If so, under what circumstances should the Commission be permitted to extend the length of the Commission review period for a Covered Form amendment and how long should an extension be (

e.g.,

15, 30, 45 calendar days)?

185

Based on the Commission's review of Form ATS-N filings, the Commission has observed that material amendments are often complex and the Commission staff has frequently engaged in extensive dialogue with the ATS regarding such disclosures. To date, the Commission has not declared a Form ATS-N amendment ineffective.

39. Should the Commission consider any other factors in determining whether a Form ATS-G filed by a Government Securities ATS should become effective or ineffective? If so, what are they and why?

40. Is the process for the Commission to suspend, limit, or revoke an NMS Stock ATS's exemption from the definition of “exchange” to Government Securities ATSs necessary or appropriate to protect investors?

G. Public Disclosure of Form ATS-G and Related Commission Orders

The Commission is also proposing to make public certain Form ATS-G reports filed by Government Securities ATSs by applying existing Rule 304(b) to Covered Forms, which would include Form ATS-G.

186

Commission orders related to the effectiveness of Form ATS-G would also be publicly posted on the Commission's website. Applying existing Rule 304(b) to Government Securities ATSs would mandate greater public disclosure of the operations of these ATSs through the publication of Form ATS-G and related filings available on the Commission's website.

187

Accordingly, the Commission is proposing the following:

186

See

proposed revisions to Rule 304(b)(1) (providing that every Form ATS-G filed pursuant to Rule 304 shall constitute a “report” within the meaning of Sections 11A, 17(a), 18(a), and 32(a) and any other applicable provisions of the Exchange Act).

187

See infra

Section III.

• Similar to Form ATS-N, every Form ATS-G filed pursuant to Rule 304 shall constitute a “report” within the meaning of Sections 11A, 17(a), 18(a), and 32(a) and any other applicable provisions of the Exchange Act.

188

See

Rule 304(b)(1).

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

189

See

Rule 301(b)(2).

The Commission is proposing to apply Rule 304(b)(3) to require each Government Securities ATS that has a website to post a direct URL hyperlink to the Commission's website that contains the documents enumerated in Rule 304(b)(2), which include the Government Securities ATS's Form ATS-G filings.

In addition, to promote further transparency, the Commission is proposing to amend Rule 304(b)(3) to require each Covered ATS to post on its website the most recently disseminated Covered Form (excluding Part IV, which is non-public information) within one business day after publication on the Commission's website, except for any amendment that the Commission has declared ineffective or that has been withdrawn. The most recently disseminated Covered Form shall be maintained on the Covered ATS's website until: (a) The Covered ATS ceases operations; or (b) the exemption of the Covered ATS is revoked or suspended, in which cases the Covered ATS shall remove the Covered Form from its website within one business day of such cessation, revocation or suspension, as applicable.

190

A Covered ATS that has submitted a Covered Form or amendment thereto that is under Commission review prior to dissemination could monitor the Commission's website to ensure that the ATS's website reflects the most current version of the form.

191

190

If the broker-dealer operator has not created a website specific for the ATS, the broker-dealer operator would place the Covered Form, the hyperlink to the Commission's website, and any other information related to the Covered Form (

e.g.,

aggregate platform-wide data or direct/indirect ownership information) on the broker-dealer operator's website in a conspicuous place for the public to view.

191

The Commission believes that Covered ATSs could reasonably anticipate when an initial Covered Form and amendments thereto would be disseminated. Filers receive an automated notice when a filing is accepted by EDGAR. Once accepted, amendments to a Covered Form (other than material amendments) would be disseminated. Material amendments would be made public following the expiration of the 30-calendar day Commission review period. Although an initial Covered Form may be disseminated at any time within the 120-calendar day Commission review period or any extension thereof, the Commission expects to engage in dialogue with the Covered ATS during such review period so that the ATS could reasonably anticipate when its initial Covered Form would be disseminated.

Request for Comment

41. Should the requirements of Rule 304(b) apply to Form ATS-G reports filed by Government Securities ATSs, in whole or in part? Should the Commission modify Rule 304(b) in any way for all Covered ATSs?

42. Rule 304(b)(2) currently provides that the Commission make Form ATS-N filings available on its website. The Commission disseminates Form ATS-N and amendments thereto through the Commission's Electronic Data Gathering, Analysis, and Retrieval system (“EDGAR”). Should Rule 304(b) be amended so that only filers of a Covered Form make filings public, rather than the Commission (by EDGAR or by any other form of filing)?

43. Should Rule 304(b) be amended to require Covered ATSs to post the Covered Form on their websites? Should Covered ATSs be required to post the Covered Form on their websites in addition to or instead of posting a hyperlink to the Commission website?

44. Should Rule 304(b) only apply to Government Securities ATSs that trade a type of government securities (

e.g.,

U.S. Treasury Securities, Agency Securities)? If so, to which type of Government Securities ATS should Rule 304 apply?

45. Are there any other requirements that should apply to making public a Form ATS-G report filed by a Government Securities ATS? Please support your arguments, and if so, please list and explain such procedures in detail.

46. Should Rule 304(b) apply to Form ATS-G reports filed by a Currently Exempted Government Securities ATS? If not, which aspects of Rule 304(b) should not apply and why?

H. Form ATS-G Requirements

The Commission is proposing to apply existing Rule 304(c) to Covered ATSs, which would include Government Securities ATSs. As proposed, Rule 304(c) would require Government Securities ATSs to file a Form ATS-G in accordance with the instructions therein. Other than references to Government Securities ATSs and Form ATS-G and the relevant compliance dates, the proposed instructions to Form ATS-G are identical to the instructions to Form ATS-N. They require, among other things, that a Government Securities ATS provide all the information required by Form ATS-G, including responses to each Item, as applicable, and the Exhibits, and disclose information that is accurate, current, and complete.

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Given that the Commission expects market participants will use Form ATS-G to decide where to send their orders for execution, the Commission believes that it is important that Form ATS-G filings comply with the instructions and that the information provided on Form ATS-G is accurate, current, and complete. The Commission is also proposing that Form ATS-G, like Form ATS-N,

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be filed electronically in a structured format through EDGAR.

194

192

See

Instructions to proposed Form ATS-G.

193

See

NMS Stock ATS Adopting Release,

supra

note 1, Section VII.

194

See infra

Section IV.

The Commission is proposing to apply Rule 304(c)(2) to Government Securities ATSs, which would provide that any report required under Rule 304 shall be filed on a Form ATS-G, and include all information as prescribed in the Form ATS-G and the instructions to the Form ATS-G. Rule 304(c)(2) would provide that a Form ATS-G be executed at, or prior to, the time the Form ATS-G is filed and shall be retained by the Government Securities ATS in accordance with Rules 302 and 303, and the instructions in the Form ATS-G. In the Regulation ATS Adopting Release, the Commission stated that the requirements to make and preserve records set forth

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