Alternative trading systems (ATSs) are trading systems for securities that meet the definition of “exchange” under federal securities laws but are not required to register with the SEC as national securities exchanges so long as the ATSs comply with the conditions to an exemption provided under Regulation ATS. Currently ATSs that trade only US government securities as defined under Section 3(a)(42) of the Exchange Act (government securities) and register as broker-dealers or banks are exempt from exchange registration. They are also not required to comply with Regulation ATS. Also, 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, including the heightened disclosure requirements under Rule 304 and the fair access requirements under Rule 301(b)(5) (the Fair Access Rule). They are also not required to comply with Regulation Systems Compliance and Integrity (Regulation SCI). This lack of oversight may reduce investor protections.

With these proposed rules, all ATSs that trade government securities would be required to comply with Regulation ATS. In addition to applying Regulation ATS to these entities, the proposal would mandate that an ATS with significant market share for US Treasury securities or agency securities must provide fair access to trading on such ATS. Furthermore, the proposal will heighten transparency in the government securities markets by requiring government securities ATSs to file comprehensive public disclosures on new Form ATS-G. Among other things, Form ATS-G is intended to provide data to market participants about potential conflicts of interests arising from trading activity of the ATS’s broker-dealer operator or its affiliates as well as the ATS’s operating methods, including order types, market data offered and used by the ATS, and fees. With Form ATS-G, the SEC can review government securities ATSs and have the ability to investigate issues and potentially declare a government securities ATS’ Form ATS-G ineffective.

More specifically, the proposed amendments cover the following topics.

Application of Regulation ATS to All ATS that Trade Government Securities

The proposed amendments eliminate the rule in Regulation ATS that allows compliance exemptions for an ATS that limits its securities activities to government securities or repurchase and reverse repurchase agreements on government securities that registers as a broker-dealer or a bank. The following conditions of Regulation ATS would then apply to all ATSs that trade in government securities:

Form ATS-G Disclosures

With the changes, a government securities ATS will be required to disclose information publicly about its operational mechanisms and the ATS-related activities of the registered broker-dealer or government securities broker or dealer that operates the ATS (broker-dealer operator) and its affiliates. This will be accomplished through new Form ATS-G. This form is designed to allow market participants to assess conflicts of interest and understand how their orders will interact, match, and execute within the ATS.

A government securities ATS will be required to disclose information about its broker-dealer operator and ownership. In addition, the ATS-related activities of its broker-dealer operator (and said operator’s affiliates) must be disclosed, including:

• the trading activities of the broker-dealer operator and its affiliates on the ATS
• whether subscribers to the ATS can choose not to interact with or participate in the orders and trading interests of the broker-dealer operator and its affiliates
• arrangements between the broker-dealer operator or its affiliates and other trading venues to access the ATS services
• products and services offered by the broker-dealer operator and its affiliates to ATS subscribers
• the activities of service providers to the broker-dealer operator and its affiliates
• written safeguards, procedures, and policies that protect the confidential trading information of subscribers

The government securities ATS must also disclose information about its operational methods and mechanisms, including:

• types of subscribers, the criteria for eligibility for ATS services
• conditions for excluding subscribers from ATS services
• trading services, facilities, and rules of the ATS
• means of entry for orders and trading interest
• connectivity and co-location procedures
• order types, attributes, and size requirements and procedures
• fees
• use of and conditions governing indications of interest
• hours of operations, including opening, reopening, and closing processes
• procedures for trading outside of the ATS’s regular trading hours
• procedures for stopping or suspending trading
• arrangements with any subscriber or the broker-dealer operator to provide liquidity
• segmentation of orders and trading interest and the provision of notice regarding segmentation
• counter-party selection
• display of orders and other trading interest
• functionalities or procedures to facilitate trading on, or source pricing for, the ATS using markets for financial instruments related to government securities
• sources and uses of market data
• procedures regarding trade reporting, clearance, and settlement
• aggregate platform-wide order flow and execution statistics provided by the ATS

The information disclosed on Form ATS-G would be made public when the form submission becomes effective. This also applies to amendments to an effective Form ATS-G. As previously mentioned, the proposed rules would also define a process by which SEC can review Form ATS-G filings and, after notice and opportunity for hearing, declare Form ATS-G filings ineffective. This process is the same as the process for the filing and review of Form ATS-N; however, there is a proposed modification to the circumstances under which the SEC could extend the review period for Form ATS-G and Form ATS-N.

As applicable, a government securities ATS would be required to file amendments, including material amendments, to its Form ATS-G. Material amendments must be filed 30 calendar days prior to the implementation of the change. These amendments will become public upon the expiration of the 30 calendar day SEC review period with a summary of the amendment available for public viewing upon the amendment’s filing. Government securities ATSs would also be required to post the most recently disseminated Form ATS-G on their websites. This requirement does not apply to amendments that the SEC has declared ineffective or that have been withdrawn.

Fair Access Rule

The SEC has also proposed to amend Regulation ATS to apply the Fair Access Rule (Rule 301(b)(5)) to government securities ATSs. These proposed changes are intended to provide for the equitable treatment of potential and current subscribers to government securities ATSs that have a large percentage of trading volume in government securities.

In order for this rule to be applied, these government securities ATS must, during at least four of the preceding six calendar months, have had:

• with respect to US Treasury securities, five percent or more of the average weekly dollar volume traded in the US as provided by the self-regulatory organization (SRO) to which such transactions are reported, or
• with respect to Agency Securities, five percent or more of the average daily dollar volume traded in the US as provided by the SRO to which such transactions are reported

Proposed Regulation SCI Amendments for Government Securities ATSs

The amendments to Regulation SCI are intended to address the technological vulnerabilities and improve the SEC’s oversight of the core technology of key entities in the markets for government securities. The definition of “SCI alternative trading system” will be expanded so that it includes government securities ATSs that, during at least four of the preceding six calendar months, had:

• with respect to US Treasury securities, five percent or more of the average weekly dollar volume traded in the US as provided by the SRO to which such transactions are reported , or
• with respect to Agency Securities, five percent or more of the average daily dollar volume traded in the US as provided by the SRO to which such transactions are reported

Government securities ATSs that meets these proposed definitions of an “SCI alternative trading system” would fall within the definition of “SCI entity” and would thus be subject to the requirements of Regulation SCI.

Regulation ATS Amendments for NMS Stock ATSs and ATSs that Trade Other Securities

Regulation ATS would be amended to:

• require that Form ATS and Form ATS-R be filed with the SEC electronically through EDGAR and modernize both forms
• eliminate confidential treatment of the types of securities that an ATS trades as disclosed on the ATS’s Form ATS and Form ATS-R
• update and correct Form ATS-N
• require NMS Stock ATSs to post on their websites the most recently disseminated Form ATS-N excluding any amendment that has been declared ineffective or withdrawn
• remove the exclusion from compliance with the Fair Access Rule and Rule 301(b)(6) under Regulation ATS for an ATS that matches non-displayed customer orders using prices disseminated by an effective transaction reporting plan.

Structured Data Requirements

The SEC is proposing mandating that Form ATS-G be submitted in XML, but it is considering Inline XBRL as an alternative format. These structured data format considerations are also being investigated in relation to Forms ATS and ATS-R. In addition, the SEC is considering a requirement that Form ATS-N be submitted in Inline XBRL. The SEC is seeking comment on these proposals in addition to the rule changes as outlined above. 

The public comment period for these amendments will begin following publication on SEC.gov and remain open for 60 days after publication in the Federal Register. You can submit comments using the form available on the SEC’s website or by e-mailing rule-comments@sec.gov with the proposed rules’ reference number in the subject line. You can also use the Federal Rulemaking Portal to submit comments or send your comments by mail to Secretary, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549-1090. In all cases, be sure to reference File Number S7-12-20. 

Sources:

SEC Proposes Rules to Extend Regulations ATS and SCI to Treasuries and Other Government Securities Markets (sec.gov)

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 (sec.gov)