Securities Regulation Daily SEC proposes to end Reg ATS exemption for government securities ATSs
Monday, September 28, 2020

SEC proposes to end Reg ATS exemption for government securities ATSs

By Anne Sherry, J.D.

Proposed amendments would eliminate the Regulation ATS exemption for alternative trading systems that trade U.S. government securities and apply Regulation Systems Compliance and Integrity to certain ATSs.

The SEC proposed to extend its regulations governing alternative trading systems to apply to ATSs that trade U.S. government securities. The amendments would eliminate the current exemption for ATSs that are registered broker-dealers (or exempt banks) that trade only government securities and would require them to report on a new Form ATS-G. The revisions would also subject certain ATSs to additional Regulation ATS requirements as well as to Regulation Systems Compliance and Integrity. The SEC also seeks public comment via a concept release on the framework for electronic platforms that trade corporate debt and municipal securities (Release No. 34-90019, September 28, 2020).

Amendments. Regulation ATS governs trading venues that fit the definition of "exchange" but opt to instead register as broker-dealers. Currently, ATSs that are registered as broker-dealers (or are exempt banks) and trade only U.S. government securities are not subject to the requirements of Regulation ATS. ATSs that also trade non-government debt securities are exempt from certain requirements of Regulation ATS and from Regulation SCI. In remarks last year, SEC Commissioner Elad Roisman explained that the regulation was adopted 20 years prior, when the agency felt that multiple layers of regulatory oversight in the Treasury market obviated the need for an extra dose of SEC regulation.

Now, however, the SEC has, in consultation with Treasury, decided to extend the regulations to government securities ATSs and to certain ATSs that trade both in government securities and in other securities. The agency’s release describes the heightened importance of government securities to the U.S. and global economies, and in turn the importance of ATSs to government securities trading. The SEC notes that the average daily trading volume in government securities was about $835 billion over the second half of 2019—roughly 95 percent of all fixed income trading in the U.S. SEC Chairman Jay Clayton said the new requirements would enhance transparency and systems integrity by extending Regulations ATS and SCI to government securities ATSs.

Under the proposal, government securities ATSs would be required to adopt written safeguards and procedures to protect confidential subscriber information. They would be subject to SEC oversight, including surveillance and examination. ATSs with significant market share for Treasury or agency securities would be required to provide fair access to trading. Via new Form ATS-G, government securities ATSs would disclose their manner of operations and information about their broker-dealer operator, its affiliates, and the ATS-related activities of those entities so that investors can identify potential conflicts of interest. The SEC would review the filings and could, after notice and the opportunity for a hearing, declare a Form ATS-G ineffective.

The SEC also proposes to amend Regulation SCI to include ATSs that meet certain trading volume thresholds. Those ATSs would then be required to have policies and procedures to ensure the security of their automated systems, including regular reviews and testing to identify vulnerabilities. The rule contemplates using FINRA TRACE transaction data in determining the threshold for Regulation SCI’s application as well as the application of the fair access rule under Regulation ATS.

Concept release. Within the rule release, the SEC also included a concept release on electronic trading in the corporate bond and municipal securities markets. The catalyst for this concept release was a recommendation from the Fixed Income Market Structure Advisory Committee that the SEC, FINRA, and MSRB form a joint working group to review the regulatory framework governing fixed income electronic trading platforms. On the FIMSAC’s recommendation, the SEC is seeking comment on whether the current regulatory framework best promotes the growth of fair and efficient markets for investors. The concept release also asks more detailed questions about the definition of "exchange" and its implications on regulation, as well as the registration requirements for trading platforms.

Roisman’s statement. Having earlier called on the Commission to extend Regulation ATS to government securities ATSs, Commissioner Roisman said he supports the measure and believes the amendments would increase transparency and enhance the integrity and resiliency of the automated markets for government securities. He also noted FIMSAC’s concerns that the lack of a unifying regulatory framework could lead to fragmentation and unfair competition and said he hopes for "a fruitful conversation" through comments on the concept release.

Comments are due 60 days from publication in the Federal Register.

This is Release No. 34-90019.

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