SEC Proposes to Expand Regulations ATS and SCI to Cover Government Securities Markets | Practical Law

SEC Proposes to Expand Regulations ATS and SCI to Cover Government Securities Markets | Practical Law

The SEC has proposed to extend Regulations ATS and SCI to apply to US treasuries and other government securities alternative trading systems (ATSs).

SEC Proposes to Expand Regulations ATS and SCI to Cover Government Securities Markets

by Practical Law Corporate & Securities
Published on 30 Sep 2020USA (National/Federal)
The SEC has proposed to extend Regulations ATS and SCI to apply to US treasuries and other government securities alternative trading systems (ATSs).
On September 28, 2020, the SEC issued a proposed rule to extend Regulations ATS and SCI to cover US government securities markets. Regulation ATS provides alternative trading systems (ATSs) that meet the definition of an "exchange" under federal securities laws with an exemption from registration as a national securities exchange under the Exchange Act, if such ATSs comply with certain conditions. However, under current rules, ATSs that trade only in US government securities and register as broker-dealers or are banks (Government Securities ATSs) are exempt from both registration as an exchange and compliance with Regulation ATS.
The SEC's proposed rule would:
  • Eliminate the exemption from compliance with Regulation ATS for Government Securities ATSs.
  • Amend Regulation ATS to:
    • add new Form ATS-G; and
    • apply the fair access rule under Regulation ATS to Government Securities ATSs.
  • Expand Regulation SCI to cover Government Securities ATSs.
  • Amend Exchange Act Rule 3a1-1(b) to add to the existing class of securities:
  • Make additional amendments to modernize Regulation ATS.
Comments on the proposed rule will be due 60 days following publication in the Federal Register. In addition to the proposed rule amendments, the SEC also issued a concept release seeking comment on the regulatory framework for electronic platforms trading corporate debt and municipal securities.

Eliminating the Government Securities ATS Exemption

The SEC's proposed rule would eliminate the exemption under Rule 301(a)(4) of Regulation ATS for Government Securities ATSs. As a result, such ATSs would have to either register as a national securities exchange or comply with the conditions for Regulation ATS's exemption from registration provided under Rules 300 through 304 of Regulation ATS.
The SEC is also amending Rule 301(b)(1) of Regulation ATS to allow an ATS to register as either a broker-dealer under Section 15 of the Exchange Act or a government securities broker or government securities dealer under Section 15C(a)(1)(A). Such registration requires membership in a self-regulatory organization (SRO), such as FINRA.

Form ATS-G

Under the SEC's proposed rules, Government Securities ATSs would be required to publicly file new Form ATS-G to disclose information about:
  • The broker-dealer, or government securities broker or dealer, operating its ATS, including identifying information and ownership.
  • The ATS-related activities of the broker-dealer operator and its affiliates.
  • Its manner of operations.
The proposed rules include a process for the SEC to review Form ATS-G filings, which is the same process for the filing and review of Form ATS-N, with a modification allowing for the SEC to extend the review period for both Forms ATS-G and ATS-N. Each Government Securities ATS would also be required to post on its website the most recently disseminated Form ATS-G.
The SEC's proposed amendments also provide a process for the orderly transition to the heightened requirements for Government Securities ATSs currently operating, which are nearly identical to existing rules that were applied to NMS Stock ATSs operating during the SEC review period for Form ATS-N.

Fair Access Rule

The SEC's proposed rule would also amend Regulation ATS to apply its fair access rule under Rule 301(b)(5) to Government Securities ATSs that, during at least four of the preceding six calendar months, had:
  • With respect to US Treasury securities, as defined in the proposed rule, 5% 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.
  • With respect to agency securities, 5% or more of the average daily dollar volume traded in the US as provided by the self-regulatory organization (SRO) to which such transactions are reported.
The inclusion of US Treasury and agency securities in Regulation ATS's fair access rule would require Government Securities ATSs to establish written standards for granting access to trading systems and apply these standards fairly.

Expanding Regulation SCI

In addition to the amendments to Regulation ATS, the SEC is also proposing to expand the definition of "SCI alternative trading system" to include Government Securities ATSs that meet the same volume thresholds above for the application of Regulation ATSs fair access rule.

Exchange Act Rule 3a1-1(b)

Exchange Act Rule 3a1-1(b) requires ATSs that otherwise are exempt from registering as an exchange under Rule 3a1-1(a) to register as a national securities exchange if:
  • The trading volume thresholds in Rule 3a1-1(b)(1) are met for any class of security, as defined in Rule 3a1-1(b)(3).
  • The SEC determines that such exemption is not necessary or appropriate in the public interest or consistent with the protection of investors.
The SEC's proposed rule would add US Treasury and agency securities to the list of classes of securities covered by Rule 3a1-1(b), and therefore Government Securities ATSs would be required to register as a national securities exchange if the specified volume thresholds are met and the SEC determines the exemption is not necessary or appropriate. The SEC would provide a Government Securities ATS with notice and an opportunity to respond before making such a determination.

Additional Amendments to Modernize Regulation ATS

The SEC is also proposing additional amendments to conform and modernize Regulation ATS, including amendments to:
  • Modernize Forms ATS and ATS-R and require both forms to be filed with the SEC electronically through EDGAR.
  • Eliminate confidential treatment of the types of securities that an ATS trades as disclosed on the ATS's Forms ATS and ATS-R.
  • Update and correct Form ATS-N.
  • Require NMS Stock ATSs to post on their websites the most recently disseminated Form ATS-N, except for any amendment that the Commission has declared ineffective or that has been 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.