SEC exploring alternative trading system regulation

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The Securities and Exchange Commission is asking for comments on whether the current regulatory structure for alternative trading systems needs to be changed in light of criticisms that the current regime is inconsistent.

On Monday, the SEC requested comment on a concept release that closely follows 2018 recommendations from the SEC’s Fixed Income Market Structure Advisory Committee. If rule changes result, it would most affect alternative trading platforms and broker-dealers.

“Similar to the government securities markets, in recent years electronic trading has become much more prevalent in the markets for corporate bonds and municipal securities,” SEC Commissioner Elad Roisman said in a statement. “However, as the FIMSAC highlighted, there currently is not a unifying regulatory framework for all types of the electronic trading platforms used in these markets. As such, the FIMSAC believed that this could complicate efforts to improve the efficiency and resiliency of these markets and could lead to further fragmentation and unfair competition.”

The concept release focuses on the regulatory framework for electronic platforms trading corporate debt and municipal securities. The SEC is not recommending any changes, but anticipates comments will inform future rulemaking.

In 2018, FIMSAC said some platforms are regulated as ATSs, or regulated as broker-dealers and others that operate on the same or similar models are not regulated at all.

Regulation ATS drove those regulatory differences, FIMSAC said. Regulation ATS established a regulatory framework for alternative trading systems in 1998. To comply, an ATS must register as a broker-dealer and file an initial operation report with the SEC. In 2018, the SEC voted on amendments to Regulation ATS to improve transparency, such as requiring certain ATSs to file detailed public disclosures.

“The definition of an ATS in Regulation ATS, as well as significant aspects of the Regulation ATS ruleset, largely reflect the trading practices of the equity markets and not necessarily those of the fixed income markets,” FIMSAC wrote.

For example, electronic Request for Quote platforms for corporate and municipal bonds are excluded from Regulation ATS based on the characteristics of the RFQ trading protocol, FIMSAC wrote.

FIMSAC told the SEC that Rule ATS has different categories of registrants, which resulted in differences in the ways platforms are regulated that aren’t justified, said Michael Decker, senior vice president of policy and research at Bond Dealers of America.

Riskless and nonriskless principla platforms should be regulated the same way, said Michael Decker, senior vice president of policy and research at Bond Dealers of America.

“Regardless of how the platforms are organized, they serve the same function in the market,” Decker said. “From a user perspective, you can’t see a difference between the riskless principal platform and the non-risksless principal platforms. So they ought to be regulated roughly, in the same way, was what the FIMSAC was suggesting, and now the SEC is posing that question to the market.”

BDA plans to comment on the concept release.

"Yesterday's SEC release will provide an opportunity for stakeholders to weigh in on the regulation of fixed income trading platforms, which has remained largely unchanged since 1998, BDA said in a statement. "It is appropriate for the commission to review regulations periodically to ensure they are still relevant and efficient, and we are eager to read yesterday's release in detail. We look forward to commenting on both the proposed rule changes related to government securities and the concept release related to corporate and municipal bonds."

The Securities Industry and Financial Markets Association also plans to comment.

“SIFMA agrees that electronic trading continues to grow in fixed income markets and is an important area of focus for our members and regulators,” said Leslie Norwood, a managing director, associate general counsel, and head of municipals at SIFMA. “There are, of course, important differences among the various fixed income markets, and between fixed income and equity markets. We are reviewing the proposal with our members and expect to comment during the comment period.”

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