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18-09 FINRA Updates Designation Criteria to Require Firms Reporting U.S. Treasury Securities to TRACE to Participate in FINRA's Business Continuity/Disaster Recovery Testing

Regulatory Notice
Notice Type

Guidance
Referenced Rules & Notices

FINRA Rule 4380
SEC Rule 1001
SEC Rule 1004
Regulatory Notice 15-43
Suggested Routing

Compliance
Legal
Operations
Systems
Trading
Training
Key Topics

Business Continuity
Disaster Recovery Planning
Regulation SCI
TRACE
U.S. Treasury Securities

Summary

As required by Regulation Systems Compliance and Integrity (Regulation SCI), FINRA, in 2015, adopted Rule 4380 requiring member firm participation in business continuity and disaster recovery (BC/DR) testing.1 The rule authorizes FINRA to designate firms that must participate in FINRA's annual BC/DR test based on established standards, which FINRA published in Regulatory Notice 15-43. Since FINRA published Notice 15-43, it began collecting transaction reports for U.S. Treasury securities. This Notice updates the criteria in Notice 15-43 to include criteria for designating firms that report a significant volume of transactions in U.S. Treasury securities to TRACE for mandatory BC/DR testing participation.

Questions regarding this Notice should be directed to:

•   Ron Miller, Senior Principal Compliance Analyst, Transparency Services, at (212) 858-5178 or ron.miller@finra.org; or
•   Alex Ellenberg, Associate General Counsel, Office of General Counsel, at (202) 728-8152 or alexander.ellenberg@finra.org.

Background and Discussion

Regulation SCI requires that FINRA, as an SCI entity, establish, maintain, and enforce written policies and procedures that address, among other things, "[b]usiness continuity and disaster recovery plans that include maintaining backup and recovery capabilities sufficiently resilient and geographically diverse…."2 In addition, Regulation SCI requires each SCI entity, including FINRA, to designate firms that must participate in the testing of the entity's BC/DR plans.3

To comply with these Regulation SCI requirements, FINRA, in 2015, adopted Rule 4380, which authorizes FINRA to designate member firms according to established criteria that are designed to ensure participation by those firms that FINRA reasonably determines are, taken as a whole, the minimum necessary for the maintenance of fair and orderly markets in the event of the activation of its BC/DR plan.

FINRA then published Regulatory Notice 15-43 to establish the criteria that FINRA uses to designate firms under Rule 4380. Consistent with Notice 15-43, FINRA designates firms for mandatory BC/DR test participation that account for significant activity on FINRA's equity trade reporting facilities (the FINRA/NYSE TRF, the FINRA/Nasdaq TRF and ORF), equity order audit trail system (OATS), equity quotation display and trade reporting facility (ADF), unlisted equity quotation display facility (OTCBB) and fixed income trade reporting system (TRACE).

Since Notice 15-43, FINRA expanded its TRACE system to create a new reporting process for U.S. Treasury securities.4 This Notice updates the criteria from Notice 15-43 to include criteria for designating firms that report a significant volume of transactions in Treasury securities to TRACE for mandatory BC/DR test participation. Specifically:

•   With respect to TRACE for Treasuries, FINRA will designate participants that account for at least 5 percent or more of the average dollar volume over the six-month period immediately preceding designation, provided that the cumulative dollar volume represented by designated firms amounts to at least 50 percent of all dollar volume in Treasury securities reported to TRACE during the applicable six-month period.

The criteria contained in Notice 15-43, including the criteria for designating TRACE participants that account for specified activity in corporate and agency debt securities and securitized products, remain otherwise unchanged. The designation process and test-related guidance in Notice 15-43 also remain unchanged. FINRA expects that the designation and test schedule will be similar this year to last year, with designation occurring in April and the test occurring in October.


1. See Securities Exchange Act Release No. 76360 (November 5, 2015), 80 FR 70043 (November 12, 2015) (Notice of Filing and Immediate Effectiveness of SR-FINRA-2015-046).

2. SEC Rule 1001(a)(2)(v).

3. SEC Rule 1004.

4. See Regulatory Notice 16-39 (October 2016).


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