Distinctions Among the Reporting Facilities

Four facilities run on rules that look identical until you read them side by side. The differences that matter are who must join, who else may reach the system, and what each participant promises to keep doing.

Where Is Participation Mandatory, and Where Is It Not?

Participation in the system is mandatory for any member that has an obligation to report an over the counter transaction to FINRA at the Alternative Display Facility (ADF), at the FINRA/Nasdaq Trade Reporting Facility (TRF) and at the OTC Reporting Facility (ORF). That participation shall include the reconciliation of all over the counter clearing agency eligible transactions.

The ADF, FINRA/Nasdaq TRF and ORF all add a carve-out: mandatory participation applies unless the member has an alternative electronic mechanism pursuant to FINRA rules for reporting and clearing such transaction.

The FINRA/NYSE TRF has no mandatory participation paragraph; its rule says that only members of FINRA in good standing may participate, which limits who may join rather than requiring anyone to.

Exam Tip: Gotchas

• The alternative mechanism must cover both reporting and clearing under FINRA rules. This exception applies at the Alternative Display Facility, FINRA/Nasdaq facility and OTC Reporting Facility; an unrelated electronic system does not satisfy it.
• The FINRA/NYSE facility is permissive on participation. Its opening paragraph limits participation to members of FINRA in good standing rather than compelling anyone to join.

What Are the Five Conditions Every Participant Must Meet?

All four facilities condition participation on initial and continuing compliance with five requirements:

1. Execution of, and continuing compliance with, a Participant Application Agreement.
2. Membership in, or maintenance of an effective clearing arrangement with a member or participant of, a clearing agency registered under the Securities Exchange Act.
3. Compliance with all applicable rules and operating procedures of FINRA and the SEC.
4. Maintenance of the physical security of the equipment located on the participant's premises, to prevent unauthorized entry of information into the system.
5. Acceptance and settlement of each trade the system identifies as effected by that participant, or, if settlement is made through a clearing member, guarantee of that acceptance and settlement by the clearing member on the regularly scheduled settlement date.

The ADF version of the second condition writes "a member of" a registered clearing agency; the other three write "a participant of".

Exam Tip: Gotchas

• The five conditions are continuing, not one-time. A participant that satisfied all five at admission and later lets one lapse is out of compliance, because the rule conditions participation on initial and continuing compliance.
• The fifth condition offers a route, not a discharge. Settling through a clearing member is permitted only where that clearing member guarantees acceptance and settlement on the regularly scheduled settlement date.

How Do the Clearing Broker Conditions Differ?

Participation as a Clearing Broker rests on its own five conditions, and two of them are not parallel to the participant list above:

• The membership condition is membership in a clearing agency registered under the Securities Exchange Act, with no clearing-arrangement alternative.
• The settlement condition is acceptance and settlement of each trade the system identifies as effected by itself or any of its correspondents on the regularly scheduled settlement date, with no clearing-member guarantee alternative.
• The other three conditions, the Participant Application Agreement, compliance with FINRA and SEC rules and operating procedures, and physical security of equipment, read the same as the participant list.

A system clearing broker that at any time fails to maintain a clearing arrangement shall be removed from the system until such time as a clearing arrangement is reestablished, and notice of that arrangement, with an amended Participant Application Agreement, is filed (with FINRA at three facilities, and "as applicable" at the FINRA/NYSE facility).

Exam Tip: Gotchas

• A clearing broker cannot substitute a clearing arrangement for membership. The participant list allows membership in or an effective clearing arrangement with a member or participant of a registered clearing agency; the clearing broker list allows only membership.
• A clearing broker's settlement promise reaches its correspondents. It covers each trade the system identifies as effected by itself or any of its correspondents, so a correspondent's trade is the clearing broker's obligation.

Who Else Can Reach the System?

The FINRA/Nasdaq TRF and the ORF admit non-members; the ADF and the FINRA/NYSE TRF do not.

Upon compliance with the conditions specified in the rule's next subparagraph, access to and participation in the system shall be granted to two Non-Member Clearing Organizations.

Exam Tip: Gotchas

• The non-member route exists at only two of the four facilities. Neither the Alternative Display Facility nor the FINRA/NYSE facility carries any counterpart to it.

What Standing Duties Does a Participant Carry?

Four standing duties run at all four facilities:

• Self-clearing firms. A participant that is a self-clearing firm shall be obligated to accept and clear each trade the system identifies as having been effected by that participant.
• Clearing brokers. System clearing brokers shall accept and clear, as a party to the transaction, each trade the system identifies as effected by itself or any of its correspondent executing brokers.
• Identifying the clearing broker. A participant that is an introducing broker or a correspondent executing broker shall identify its clearing broker when it becomes a participant, and notify the facility's operations office (FINRA Market Operations at the ADF, the System Operation Center elsewhere) if its clearing broker is to be changed.
• Self-reporting. Each participant shall be obligated to inform FINRA of non-compliance with any of the participation requirements set forth above.

A clearing broker may cease to act as principal for a correspondent executing broker at any time, provided that notification has been given to, received and acknowledged by the facility's office, and affirmative action has been completed by that office to remove the clearing broker from the system for that correspondent executing broker.

Its obligation to accept and clear trades for its correspondents shall not cease prior to the completion of all of those steps.

The office differs by facility. It is FINRA Market Operations at the ADF and the System Operation Center at the other three.

Changing a clearing broker will necessitate execution of a revised Participant Application Agreement at three facilities. The FINRA/NYSE TRF writes that it may necessitate one.

Exam Tip: Gotchas

• The self-reporting duty runs at all four facilities. It applies even at the FINRA/NYSE facility, where participation itself is not mandatory, so an eligible participant still owes FINRA notice of its own non-compliance.
• Removal for a lost clearing arrangement reaches every participant. The duty is not limited to clearing brokers, and at the Alternative Display Facility the removed firm is also precluded from participating until the arrangement is restored.

Which Testing Requirement Belongs to the ADF Alone?

Except as set out below, participants that intend to use the ADF for trade reporting only and connect to the ADF via a Financial Information eXchange (FIX) line must participate in annual connectivity and capacity/stress testing. The other three facilities carry no counterpart.

Two carve-outs sit under it:

• A participant is not required to take part in connectivity testing if it reports at least 100 trades per month to the ADF.
• A participant is not required to take part in capacity/stress testing unless its ADF activity levels, or its capacity projections based on its current usage of a Trade Reporting Facility, have increased by more than 20% from the previous year.

Exam Tip: Gotchas

• The two carve-outs run in opposite directions. Connectivity testing is excused by a volume floor of at least 100 trades per month, while capacity testing is triggered by growth of more than 20% from the previous year.
• The capacity trigger can be pulled by activity at a different facility. It counts capacity projections based on the participant's current usage of a Trade Reporting Facility, not only its Alternative Display Facility volume.

Who Are the Parties, and What Must a Participant Obtain Before Input?

Each reporting facility repeats the participant test in its own definitions. A Trade Reporting Facility Participant is any member in good standing that uses the FINRA/Nasdaq facility, or any member of FINRA in good standing that uses the FINRA/NYSE facility, and an OTC Reporting Facility Participant is any member of FINRA in good standing that uses the ORF.

A Reportable System Transaction is a transaction in the facility's securities that is eligible to be submitted using the system under FINRA rules, and the ADF definition also reaches transactions that are required to be submitted. At all four facilities the term also includes transactions for less than one round lot.

Before any input, all participants, including those that have trade report information submitted by any third party, must obtain a unique identifying market participant identifier (MPID) and use that identifier for trade reporting and audit trail purposes. The ADF rule has it obtained from FINRA, the FINRA/Nasdaq and OTC facilities from the system, and the FINRA/NYSE facility from FINRA Operations.

Exam Tip: Gotchas

• The rulebook prints two spell-outs for the same identifier. The participation rules and the multiple MPID rule for Trade Reporting Facility participants write Market Participant Symbol, while the multiple MPID rule for ADF participants writes Market Participant Identifier.
• A third-party submitter does not excuse the identifier. Participants whose trade reports are submitted by any third party still have to obtain their own identifier before input begins.

What Should You Check on Exam Day?

• Confirm which facility the scenario names before answering a participation question; only the FINRA/NYSE facility lacks a mandatory participation paragraph.
• Check whether the question is about a participant or a clearing broker; the clearing broker's list drops both the clearing-arrangement alternative and the guarantee alternative.
• Confirm any non-member access question involves the FINRA/Nasdaq or OTC facility.
• Confirm a connectivity or capacity testing scenario is at the Alternative Display Facility, over a Financial Information eXchange line, for trade reporting only.
• Read a clearing broker's exit from a correspondent through all its steps; the obligation ends only when the removal is complete.