[ by Howard Haykin ]

FINRA proposes to amend FINRA trade reporting rules to require that members report OTC transactions in NMS stocks and OTC Equity Securities, and cancellations of such transactions, to FINRA as soon as practicable - but no later than 10 seconds, following execution (or cancellation, as applicable).   FINRA proposes to implement the changes, if approved by the SEC, between 120 and 180 days after the date of such approval.

30-Second Window for Reporting.   Members are required to report OTC transactions in NMS stocks and OTC Equity Securities executed during regular session hours, within 30 seconds of execution.  Same goes for cancellations of a trade - they too must be reported within 30 seconds of the time of cancellation if the trade is both executed and canceled on the same day during normal market hours.  Notwithstanding the 30 timeframe, FINRA members are advised to report transactions as soon as practicable, and not to withhold trade reports - e.g., by programming their systems to delay reporting until the last permissible second.

10-Second Window for Reporting, as Proposed.    FINRA now proposes to reduce the maximum time allowed for reporting executed OTC trades in NMS stocks and OTC Equity Securities from no more than 30 seconds to no later than 10 seconds.  Same would go for reporting trade cancellations.  Transactions not reported within 10 seconds would be marked late - unless expressly subject to a different reporting requirement or excluded from the trade reporting rules altogether.

While FINRA says it does not intend to take action against member firms for isolated instances of late reporting.  However, FINRA will continue to look for pattern and practices of unexcused late trade reporting before taking action against a member.  Under Rules 6181 and 6623, unexcused late reporting occurs when there are “repeated reports of executions submitted after the required time period without reasonable justification or exceptional circumstances.” The rules also provide that “[e]xceptional circumstances will be determined on a case-by-case basis and may include instances of system failure by a member or service bureau, or unusual market conditions, such as extreme volatility in a security, or in the market as a whole.”

Proposed Adoption of Supplementary Material.   FINRA also proposes to adopt Supplementary Material so as to clarify the requirement that members report trades and trade cancellations “as soon as practicable.”  That would require members to adopt policies and procedures reasonably designed to comply with this requirement - this would include implementing systems that commence the trade reporting process without delay upon execution (or cancellation, as applicable).

Members with reasonably designed policies, procedures and systems in place, generally will not be viewed as violating the “as soon as practicable” requirement when delays are due to external factors, where it's not practicable for the member to provide for such contingencies in its policies, procedures and systems. 

As proposed, the Supplementary Material expressly prohibits members from purposely withholding trade reports - e.g., by programming their systems to delay reporting until the last permissible second.

FINRA further notes that members that demonstrate a pattern and practice of unexcused late reporting  - i.e., reporting beyond 10 seconds after execution - may be charged with rule violations, even if they have policies and procedures that contemplate commencing the trade reporting process without delay.

Additional Thoughts From FINRA.   First, FINRA believes that very few members would be unable to comply with the proposed rule change today, and so a reduction to 10 seconds should not be viewed as onerous.

FINRA originally considered requiring members to report transactions “immediately,” but no later than 10 seconds, following execution. However, while that objective is something FINRA anticipates implementing some time in the future, industry advisory committees recommending against using the term "immediately" at this point in time.  In making that recommendation, the Committees indicated the need for:

• a sufficient implementation period so that members can make any necessary systems changes - i.e., where FINRA proposes the 120 - 180 day implementation period;

• revision of the standard from “immediately” to “as soon as practicable” and a request to provide additional clarity on the interpretation and application of the “as soon as practicable” requirement  - which FINRA provided as part of the proposed Supplementary Material; and,

• additional guidance for situations where delays could result from queuing of data into the FINRA Facilities (given that the vast majority of trades today are reported within 10 seconds - which FINRA does not believe is necessary because the proposed change will not likely cause any such queuing issues.

• guidance on how the rule would apply to late reporting during periods of market stress - e.g., high volatility days such as the Russell index rebalancing, where compliance rates could be impacted.  FINRA notes that extraordinary market volatility is taken into consideration currently, and would continue to be considered under the proposed reporting time frame, in determining whether exceptional circumstances exist to excuse late trade reporting.  

For further details, go to:  [FINRA Rule Filing 13-13, 2/1/13].