The Securities and Exchange Commission (SEC) proposes to amend Regulation Systems Compliance and Integrity (Reg SCI) to update and expand the regulatory oversight of the core technology of the U.S. securities markets.1 The SEC proposes to expand the definition of "SCI entity" to include registered broker-dealers exceeding an asset or transaction activity threshold, additional clearing agencies exempted from registration and security-based swap data repositories (SBSDRs). The SEC also requests comment on whether significant-volume alternative trading systems (ATSs) and/or broker-dealers using electronic or automated systems for trading of corporate debt securities or municipal securities should be subject to Reg SCI. In response to the evolution of technology and trading in the U.S. securities markets, the SEC also proposes to update certain provisions in Reg SCI relating to (1) systems classification and lifecycle management, (2) third-party/vendor management, (3) cybersecurity, (4) SCI reviews, and (5) the role of current SCI industry standards. The SEC requests comments on the proposal by June 13, 2023.
I. Definition of SCI Entity
Currently, SCI entities are the SCI SROs, SCI ATSs, plan processors, certain exempt clearing agencies and SCI competing consolidators.2 The SEC proposes to expand the definition of SCI entity to include broker-dealers exceeding an asset or transaction activity threshold, additional clearing agencies exempted from registration and SBSDRs.3 The SEC also requests comment on whether to include in the definition of SCI entity significant-volume ATSs and/or broker-dealers using electronic or automated systems for trading corporate debt securities or municipal securities.
A. SCI Broker-Dealers
The SEC proposes to revise the definition of an SCI entity in Reg SCI to include SCI brokerdealers. The SEC proposes to define "SCI broker-dealer" to mean a broker or dealer registered with the SEC pursuant to Section 15(b) of the Exchange Act that meets or exceeds (i) a total assets threshold or (ii) one or more transaction activity thresholds.4 The SEC states that the propo.sed thresholds are designed to identify a limited number of firms that by virtue of their total assets or level of transaction activity over a period of time and on a consistent basis play a significant role in the orderly functioning of US securities markets. The SEC states that the thresholds are further designed to identify firms that if adversely affected by a technology event, could disrupt or impede orderly and efficient market operations more broadly.
1. Proposed Total Assets Threshold
Under the SEC's proposal, a broker-dealer would be an SCI broker-dealer if in at least two of the four preceding calendar quarters—ending March 31, June 30, September 30, and December 31—it reported to the SEC on Form X-17A-5, FOCUS Report Part II, Item 940, total assets in an amount that equals 5 percent or more of the total assets of all security brokers and dealers.5 The firm's total assets filed on FOCUS reports would be divided by the broader measure of total assets for all security brokers and dealers calculated and made publicly available by the Federal Reserve Board (or any subsequent provider of the information) for the associated preceding calendar quarter.6 Based on data from recent quarters, the SEC estimates that five entities would exceed the proposed threshold (with the fifth-ranked firm in each quarter reporting total assets in excess of $300 billion, and all firms ranging from approximately 7 percent to 14 percent of the total assets reported by the Federal Reserve Board for the previous quarter).
2. Proposed Transaction Activity Threshold
The SEC also proposes to define "SCI broker-dealer" to include a broker-dealer that during at least four of the preceding six calendar months:
- with respect to transactions in NMS stocks, transacted average daily dollar volume in an amount that equals 10 percent or more of the average daily dollar volume reported by or pursuant to applicable effective transaction reporting plans, provided, however, that for purposes of calculating its activity in transactions effected otherwise than on a national securities exchange or on an ATS, the broker-dealer shall exclude transactions for which it was not the executing party; or
- with respect to transactions in exchange-listed options contracts, transacted average daily dollar volume in an amount that equals 10 percent or more of the average daily dollar volume reported by an applicable effective national market system plan; or
- with respect to transactions in U.S. Treasury Securities, transacted average daily dollar volume in an amount that equals 10 percent or more of the total average daily dollar volume made available by the self-regulatory organizations to which such transactions are reported; or
- with respect to transactions in Agency Securities, transacted average daily dollar volume in an amount that equals 10 percent or more of the total average daily dollar volume made available by the self-regulatory organizations to which such transactions are reported.7
The SEC proposes to add definitions of "U.S. Treasury Security" and "Agency Security" to Reg SCI to clarify how the transaction activity threshold for these asset classes would operate. A U.S. Treasury Security would mean "a security issued by the U.S. Department of the Treasury."8 Agency Security would mean "a debt security issued or guaranteed by a U.S. executive agency, as defined in 5 U.S.C. 105, or government-sponsored enterprise, as defined in 2 U.S.C. 622(8)."9
The SEC estimates that 17 entities would satisfy one or more of the proposed transaction activity thresholds (the same five entities identified by the proposed total assets threshold plus 12 additional entities).
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Footnotes
1. Securities Exchange Act Rel. No. 97143 (Mar. 15, 2023), 88 Fed. Reg. 23146 (Apr. 14, 2023).
2. Definition of "SCI entity" in Rule 1000 of Reg SCI.
3. Proposed definition of "SCI entity" in Rule 1000 of Reg SCI.
4. An SCI broker-dealer would be required to comply with the requirements of Reg SCI six months after the SCI broker-dealer satisfied either threshold for the first time. Proposed paragraph (3) of the definition of "SCI broker-dealer" in Rule 1000 of Reg SCI.
5. Proposed paragraph (1) of the definition of "SCI broker-dealer" in Rule 1000 of Reg SCI.
6. This figure has been calculated by the Federal Reserve Board and made available on the Federal Reserve Economic Data website for years.
7. Proposed paragraph (2) of the definition of "SCI broker-dealer" in Rule 1000 of Reg SCI.
8. Proposed definition of "U.S. Treasury Security" in Rule 1000 of Reg SCI.
9. Proposed definition of "Agency Security" in Rule 1000 of Reg SCI.
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