Tape, Non-Tape and Clearing-Only Reports, and Trades That Are Not Reported

Not every submission reaches the tape, and not every trade produces a submission. This lesson sorts the three report types, then works through the two lists of transactions that are excluded from publication.

What Are Tape, Non-Tape and Clearing-Only Reports?

A tape report is the last sale report published to the tape. The other two forms never reach it:

• A non-tape, non-clearing report records information the tape does not need and clearing does not require, such as identifying another member as a party.
• A clearing-only report carries a transaction into clearing.

In the reporting rules' riskless principal and identification paragraphs, both non-tape forms do the same two jobs: they carry the offsetting leg of a riskless principal transaction, and they identify other members as parties to a transaction.

Exam Tip: Gotchas

• A non-tape report is still a regulatory report. Its absence from the tape says nothing about whether a rule required it to be submitted.

How Is a Riskless Principal Transaction Reported?

A "riskless" principal transaction is one in which a member, after having received an order to buy a security, purchases the security as principal at the same price to satisfy the order to buy; or, after having received an order to sell, sells the security as principal at the same price to satisfy the order to sell.

Such a transaction shall be reported as one transaction in the same manner as an agency transaction, excluding the mark-up or mark-down, commission-equivalent, or other fee.

Alternatively, a member may report it with two submissions:

1. The member with the obligation to report the transaction must submit a last sale report for the initial leg of the transaction.
2. Then, regardless of whether a member has a reporting obligation, the firm must submit for the offsetting, "riskless" portion either a clearing-only report with a capacity indicator of "riskless principal", if a clearing report is necessary to clear the transaction, or a non-tape, non-clearing report with that same capacity indicator, if a clearing report is not necessary.

The three national market system rules open that second step with the words "Where the initial leg of the transaction has been reported to FINRA". The OTC Reporting Facility (ORF) rule opens it with "Regardless of whether a member has a reporting obligation" and carries no such opener.

Those same three rules add an exchange sentence the ORF rule does not carry. Where a member purchases or sells the security on an exchange to satisfy a customer's order, the trade will be reported by the exchange.

The member may, however, submit a clearing-only or a non-tape, non-clearing report for the riskless leg where the initial leg has been reported on or through an exchange. Any such report shall comply with all applicable requirements for trade reports set out in that reporting rule.

Exam Tip: Gotchas

• The single-report route excludes the member's compensation. Reporting the riskless principal trade as one agency-style transaction means excluding the mark-up or mark-down, commission-equivalent, or other fee from the price.
• The offsetting leg is owed even by a firm with no reporting obligation. The second step applies regardless of whether that firm carries the obligation, and the choice between the two report types turns on whether a clearing report is necessary.
• The exchange leg is permissive on the member's side. The exchange reports the initial leg, and the member may submit a clearing-only or non-tape, non-clearing report for the riskless leg.

When Must a Report Identify Another Member?

Any member that has a reporting obligation and is acting in a riskless principal or agency capacity on behalf of one or more other members shall submit one or more non-tape reports, either non-tape, clearing-only or non-tape, non-clearing, identifying those other members as a party to the transaction.

That duty applies only where the other members are not identified on the initial trade report submitted to FINRA, or on the offsetting-leg report submitted under the riskless principal exception.

Nothing in that paragraph shall negate or modify the riskless principal transaction reporting requirements.

Exam Tip: Gotchas

• The identification duty needs both facts: the reporting obligation and acting for other members. A firm acting for others without that obligation owes no identifying report under this paragraph, and the duty does not pass to the member that holds the obligation.
• Identification already made is not repeated. The duty is conditioned on the other members not appearing on the initial report or on the offsetting-leg report.

When May a Non-Tape Report Follow an Unreported Trade?

Members shall not submit any non-tape report, whether a non-tape, non-clearing report or a clearing-only report, including but not limited to reports of step-outs and reversals, associated with a previously executed trade that was not reported to the system.

The single exception is a report submitted to reflect the offsetting riskless portion of a riskless principal transaction.

Where such a report is permitted, two duties attach:

• The report must identify the facility or market where the associated trade was reported, as specified by FINRA.
• For any such report, members must retain and produce, upon request, documentation relating to the associated trades.

Also where permitted, if both parties are submitting a clearing-only report to effectuate a step-out, the member transferring out of the position must report a "step-out" and the member receiving the position must report a "step-in".

Exam Tip: Gotchas

• The step-out and reversal examples are illustrative, not exhaustive. The prohibition reaches any non-tape report tied to an unreported trade, including but not limited to those two.
• A permitted non-tape report carries a documentation obligation. Members must retain and produce, on request, documentation relating to the associated trades.

What Can a Clearing-Only, Non-Regulatory Report Do?

A member may submit a "clearing-only, non-regulatory report" solely for purposes of clearing a transaction, in exactly two situations:

• For a previously executed trade for which a tape report has already been submitted to the system.
• For the offsetting portion of a riskless principal or agency transaction for which a non-tape, non-clearing report has already been submitted.

Such a report cannot be used to satisfy any regulatory reporting requirement under FINRA rules that may apply to the transaction, such as identifying other members in an agency or riskless principal transaction. Submitting one constitutes certification by the member that it has satisfied all applicable regulatory reporting requirements relating to the transaction through the submission of other reports (tape or non-tape, non-clearing).

Two mechanics follow:

• Members that submit one must use the unique indicator specified by FINRA to denote that the report is submitted solely for clearing purposes and not to satisfy any regulatory reporting requirement. That indicator is itself a required data element in each facility's trade report input rule.
• Except where otherwise expressly provided under FINRA rules, the information in a clearing-only, non-regulatory report must be consistent with the information in any other report submitted for the same transaction.

Exam Tip: Gotchas

• Submitting the report is an admission, not a substitute. It certifies that the regulatory reporting was already done by other reports, so a member with nothing else on file has certified something untrue.
• The consistency duty has an escape clause on its face. It applies except where FINRA rules expressly provide otherwise, so it is not an absolute matching requirement.

Can Executions at the Same Price Be Combined?

The answer depends on the facility and on the purpose of the combined report.

The prohibition reads that individual executions of orders in a security at the same price may not be aggregated, for transaction reporting purposes, into a single transaction report.

Where clearing aggregation is permitted, the rule adds a proviso: a Reporting Party may not withhold reporting a trade in anticipation of aggregating the transaction with other transactions.

Exam Tip: Gotchas

• Clearing aggregation needs two matching facts, not one. The executions must be at the same price and with the identical contra party.
• The proviso forbids delay, not aggregation. A firm that holds a report back so it can be bundled has breached the proviso even if the eventual bundle is permitted.

Which Transactions Are Not Reported to the Facility?

The Alternative Display Facility (ADF) and both Trade Reporting Facilities each list seven transaction types that shall not be reported to the facility:

1. Transactions that are part of a primary distribution by an issuer, of a registered secondary distribution other than "shelf distributions", or of an unregistered secondary distribution.
2. Transactions made in reliance on the Securities Act private offering exemption for transactions by an issuer not involving any public offering.
3. Transactions reported on or through an exchange.
4. The acquisition of securities by a member as principal in anticipation of making an immediate exchange distribution or exchange offering on an exchange.
5. Purchases of securities off the floor of an exchange pursuant to a tender offer.
6. Transfers made under an asset purchase agreement subject to the jurisdiction and approval of a court of competent jurisdiction in insolvency matters, provided that the purchase price under the agreement is not based on, and cannot be adjusted to reflect, current market prices of the securities on or following the agreement's effective date.
7. The transfer of equity securities for the sole purpose of creating or redeeming an instrument that evidences ownership of or otherwise tracks the underlying securities transferred, for example an American Depositary Receipt or an exchange-traded fund.

For the first item, "distribution" takes its meaning from Regulation M's definitions: an offering of securities, whether or not subject to registration under the Securities Act, distinguished from ordinary trading transactions by the magnitude of the offering and the presence of special selling efforts and selling methods.

The OTC Reporting Facility list carries five, dropping the exchange distribution item and the tender offer item.

A member that would otherwise have the reporting obligation and relies on the unregistered secondary distribution branch owes FINRA notice, plus, for each unreported transaction, the security name and symbol, execution date, execution time, number of shares, trade price and parties to the trade.

• That notice and information must be provided no later than three business days following trade date, in such form as FINRA specifies.
• If the trade executions occur over multiple days, initial notice and available information are due no later than three business days following the first trade date, and final notice and information no later than three business days following the last trade date.
• The member must retain records sufficient to document the basis for relying on the exception, including but not limited to the basis for determining that the Regulation M definition of "distribution" is satisfied, as well as evidence of compliance with the applicable notification requirements under the Regulation M notice rule, which the unit on IPOs, secondary offerings and safe harbor covers.

Exam Tip: Gotchas

• A shelf distribution is outside the registered-distribution exclusion. The rule excludes a registered secondary distribution other than a shelf distribution, so a shelf print is reported like any other.
• Court approval alone is not enough. The transfer must be made under an asset purchase agreement subject to the jurisdiction and approval of a court of competent jurisdiction in insolvency matters, and the purchase price must not be based on, and cannot be adjusted to reflect, current market prices on or following the agreement's effective date.

Which Transactions Are Reported for Fees but Not for Publication?

A second, shorter list in the same paragraph is not a total exclusion. Three transaction types shall not be reported for publication purposes but shall be reported for regulatory transaction fee assessment purposes:

1. Transactions where the buyer and seller have agreed to trade at a price substantially unrelated to the current market for the security. The three national market system rules add the example of enabling the seller to make a gift; the OTC Reporting Facility states the test without that example.
2. Purchases or sales of securities effected upon the exercise of an option pursuant to its terms, or the exercise of any other right to acquire securities at a pre-established consideration unrelated to the current market.
3. Transfers of proprietary securities positions where the transfer is effected in connection with a merger or direct or indirect acquisition and is not in furtherance of a trading or investment strategy.

For that third item, members must provide FINRA at least three business days advance written notice of their intent to use the exception, including the basis for their determination that the transfer meets its terms.

Each facility's trade report input rule sets the clock and repeats the list in its own words:

• The transactions must be submitted to the system by 6:30 p.m. Eastern Time at the Alternative Display Facility, or by 8:00 p.m. Eastern Time at both Trade Reporting Facilities and the OTC Reporting Facility, or by the end of the system reporting session in effect at that time.
• They may be entered as clearing or non-clearing.
• The input rules' first item adds an element the reporting rules do not: the price is substantially unrelated to the current market and consideration is given, which the rules label away-from-the-market sales.
• The input rules' second item is narrower, reaching transactions effected pursuant to the exercise of an over-the-counter option, without the reporting rules' branch for any other right to acquire securities at a pre-established consideration.
• For the merger transfer, members must report such transfers on the same day as the ultimate transfer of the positions on their books and records, unless later reporting is warranted under specific circumstances.

Exam Tip: Gotchas

• A trade that never reaches the tape is not necessarily unreported. These three types are reported for regulatory transaction fee assessment, on the facility's own evening deadline.
• The two versions of this list do not match. The input rules add the consideration element to away-from-the-market sales and narrow the option branch to an over-the-counter option.

How Is a Foreign Equity Security Handled?

A foreign equity security is any OTC equity security issued by a corporation or other entity incorporated or organized under the laws of any foreign country.

Transactions in foreign equity securities shall be reported to the OTC Reporting Facility unless:

• The transaction is executed on and reported to a foreign securities exchange; or
• The transaction is executed over the counter in a foreign country and is reported to the regulator of securities markets for that country.

Exam Tip: Gotchas

• Both escapes require an actual report abroad. Executing in a foreign country is not enough on its own; the trade must also be reported to that foreign exchange or to that country's securities markets regulator.

What Should You Check on Exam Day?

• Confirm which report the question is about: a tape report reaches the tape, a clearing-only report reaches clearing, and a non-tape, non-clearing report reaches neither.
• Check that a clearing-only, non-regulatory report follows a tape report or a non-tape, non-clearing report already submitted for that transaction.
• Count the exclusion list by facility: seven types at the three national market system facilities, five at the OTC Reporting Facility.
• Confirm an unregistered secondary distribution scenario delivers notice and the listed trade details (security name and symbol, execution date and time, number of shares, trade price and parties) within three business days of trade date.
• Read an aggregation question for both facts, the same price and the identical contra party, and for the purpose, clearing only.