On October 7, the Financial Industry Regulatory Authority issued a Trade Reporting Notice regarding its Alternative Display Facility (ADF). In particular, member firms that use the ADF to report over-the-counter trades in national market system stocks can elect to have their trades submitted by the ADF to the National Securities Clearing Corporation (NSCC) for clearance and settlement. However, to make this election, such trades must either be locked in prior to submission via agreement by both parties to the trade, or may be locked in by the system in accordance with FINRA rules.

FINRA Rule 7140(a) describes being locked in by the ADF in accordance with FINRA rules. For “Trade by Trade Match,” both parties to the trade submit transaction data and the system performs an on-line match. For “Trade Acceptance,” after the reporting party enters its version of the trade into the system, the other party reviews the submission and either accepts or declines the trade. An acceptance results in a locked-in trade that is sent to NSCC. Reporting firms submitting trades to the ADF using the Trade Match or Trade Acceptance functionality need to identify another ADF participant with access to the ADF and the ability to view and take action with respect to the reporting party’s submission. To become an ADF participant, member firms must execute the FINRA Participation Agreement (FPA). Pursuant to the FPA, reporting parties agree that if they submit a trade to the ADF for Trade Match or Trade Acceptance against a party that is not an ADF participant, they accept any and all potential liability resulting from the failure of such non-ADF participant to honor the trade. A list of ADF participants is provided on FINRA’s website.

The ADF system does not prevent the entry of a trade against a party that is not an ADF participant, and as such, FINRA also announced the disablement of the automatic lock-in functionality on the ADF as of October 24, 2016. If an alleged contra party takes no action on a clearing-eligible trade submitted to the ADF for Trade Acceptance, the trade will be carried over and remain open.

To see the notice, click here.