SEC proposes to apply Reg ATS to electronic fixed income markets including repo

The Securities and Exchange Commission today announced a proposal to enhance the operational transparency, system integrity, and regulatory oversight for alternative trading systems (ATSs) that trade government securities as well as repurchase and reverse repurchase agreements on government securities (Government Securities ATSs) and issued a concept release soliciting public comment on the regulatory framework for electronic platforms that trade corporate debt and municipal securities.

“Today’s proposal is another fine example of the commitment of the Commission and the SEC staff to ensuring that the implementation of our time-tested regulatory framework keeps pace with market developments,” said Chairman Jay Clayton.  “Government Securities ATSs have become important to the functioning of our U.S. Treasury markets and this proposal, which benefited from input from the Treasury Department, would extend our transparency- and systems integrity-enhancing rules—Regulations ATS and SCI—to those markets.  I specifically want to thank Treasury staff and the many past and present senior Treasury officials for their insightful input and support for this effort.  The related concept release, which grew out of a recommendation by the SEC’s Fixed Income Market Structure Advisory Committee, will also enhance our understanding of the fixed income electronic trading space, including informing future modernization efforts.”

The U.S. government securities markets are among the most liquid and significant securities markets in the world.  Government securities, including U.S. Treasury securities and agency securities, make up more than half of the outstanding debt issuances in the U.S. bond market and play a critical role in the U.S. and global economies.  Over the last six months of 2019, the average daily trading volume in government securities was approximately $835 billion.

Over the years, ATSs have become increasingly important to government securities trading.  Under the proposal, all Government Securities ATSs would be required to comply with Regulation ATS.  The proposal would apply the investor protections Regulation ATS provides to such entities, such as the requirement to adopt written safeguards and written procedures to protect confidential subscriber information, and enable Commission oversight, including surveillance and examination, of these ATSs.  The proposal would also require an ATS with significant market share for U.S. Treasury securities or agency securities to provide fair access to trading on such ATS.

The proposal is also designed to increase transparency in the government securities markets by requiring Government Securities ATSs to file comprehensive public disclosures on new Form ATS-G.  Among other things, Form ATS-G would inform market participants about potential conflicts of interests arising from trading activity of the ATS’s broker-dealer operator or its affiliates, and the ATS’s manner of operations, such as order types, use of market data offered and used by the ATS, and fees.  The Commission would review Form ATS-G filings and have the ability to, after notice and opportunity for hearing, declare a Government Securities ATS’s Form ATS-G ineffective.

The Commission is also proposing to amend Regulation SCI to apply its provisions to ATSs that meet certain trading volume thresholds in U.S. Treasury securities or agency securities.  Regulation SCI requires SCI entities to have policies and procedures that are reasonably designed to ensure that their automated systems have adequate levels of security, including regular reviews and testing of systems to identify vulnerabilities.  The proposed amendments are intended to help to address technological vulnerabilities, and improve the Commission’s oversight of the core technology of key entities in the markets for government securities.

In addition, the Commission is issuing a concept release arising out of the recent work of the Fixed Income Market Structure Advisory Committee.  The concept release focuses on the regulatory framework for electronic platforms that trade corporate debt and municipal securities, and the Commission is soliciting public comment to obtain information about fixed income electronic trading platforms, including their operations, services, fees, market data, and participants.

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