SEC Proposes to Expand Scope of Regulation ATS
Commentary by Steven Lofchie
The SEC proposed to (i) expand the definition of "exchange" under SEA Rule 3b-16 to include systems that only display "trading interest" (as opposed to "orders"), including by use of "communication protocols"; and (ii) remove the exemption that Regulation ATS currently provides to systems that trade only government securities. Both of these changes will materially expand the number of institutions that must comply with Reg ATS by (i) lowering the bar as to what constitutes an Alternative Trading System and (ii) removing the exemption from Reg ATS registration for systems that trade government securities. In addition, systems that become an automated trading system may not also become subject to Regulation SCI ("Systems and Compliance Integrity").
SEC Chair Gary Gensler supported the proposed amendments, saying that "they would help promote resiliency and greater access in the Treasury market." He noted the importance of revising the SEC rules to reflect exchanges that are "increasingly electronified." He also stated that this proposal would bring Treasury trading platforms with significant volume under Reg SCI, and would also "require these platforms to comply with the Fair Access Rule."
SEC Commissioner Caroline A. Crenshaw also supported the proposal, saying that it would advance "fair competition" among similar markets. She noted that, by bringing CPS under the regulatory framework, it would (i) "help ensure that there is a level playing field for entities performing similar functions," (ii) provide "investor protections" and (iii) "comply with fair and orderly market provisions under the Fair Access Rule." She emphasized that the extension of "transparency requirements to ATSs that trade government securities" will provide more clarity as to their operations, which should allow "investors to compare different venues" and choose one that aligns with their "trading objectives."
SEC Commissioner Hester M. Peirce disapproved of the amendments. She noted that the "unrealistic time constraint" of a 30-day comment period will undermine careful deliberation about the proposal's "possible effects." She also stressed that the amendment regarding the definition of "exchange" expands too far, to the extent that it "would apply to any trading venue," and "could deter innovation and dissuade" new market participants.
Commentary
Proposing major rule changes and allowing only a 30-day comment period is simply inappropriate. This is an entirely separate question from whether the rule is good or bad. Market participants should be entitled to a reasonable amount of time to review a major rule change, consider its implications, gather together as a group, exchange ideas and reactions, and comment. There is no emergency here, just as there is no emergency in the stock lending market. Part of the regulatory process is having real respect for public comment and giving adequate time for that comment. The fact that the SEC provides for the minimum comment period permitted under the relevant statute does not mean that the SEC is providing a sufficient time for comment.
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