And Then Some: Request for Information Regarding National Securities Exchanges and Alternative Trading Systems Trading Crypto Assets

The Division of Trading and Markets today issued a set of Frequently Asked Questions with a particular focus on trading and settlement issues, including how trading platforms can facilitate pairs trading (e.g., where one of the crypto assets is a security and the other a crypto asset that is not a security). The statement provides what I hope will be helpful guidance for national securities exchanges ("NSEs") and alternative trading systems ("ATSs") regarding various rule provisions in connection with such activity and signals that the staff is ready to work with market participants who want to facilitate pairs trading on regulated platforms.

Trading platforms and market participants need to be able to operate under the certainty of clear market structure rules that facilitate fair and orderly markets without imposing unnecessary burdens. Earlier this year, I published a long list of questions designed to assist the Crypto Task Force in its work on crypto regulatory policy. Our work is not at an end, and neither are my questions. The latest set of questions pertains primarily to ATSs that trade crypto asset securities or trade securities against crypto assets that are not securities ("crypto ATSs"), though I am also interested in how our rules applicable to NSEs should be modified to facilitate crypto asset trading. The SEC adopted Regulation ATS in 1998. In the intervening nearly three decades, ATSs have played an important role in the securities trading landscape. ATSs are subject to a lighter regulatory framework than NSEs and do not have the same regulatory privileges that exchanges have. The questions below pertain to the work of the Crypto Task Force and thus focus on NSEs and ATSs that have a nexus with crypto. Nevertheless, I welcome more general feedback about ways in which we could improve the regulatory landscape for NSEs and ATSs more generally.

1. How can the Commission encourage innovation and lower barriers to entry for trading platforms that seek to trade crypto asset securities and trading pairs involving crypto assets? How do Regulation NMS and Regulation ATS present challenges for firms seeking to innovate with crypto assets and blockchain technology? What aspects of NSE and ATS regulation, if any, impose costs that do not justify the benefits? How can the Commission revise Regulation NMS and Regulation ATS to better protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation?
2. When should a crypto ATS that is affiliated with an NSE be considered a facility of such exchange?
3. What NMS plan amendments may be necessary to accommodate security and non-security crypto asset pairs trading on NSEs?
4. Should the Commission propose a new Form ATS that is tailored to the trading of crypto asset securities and trading pairs on a crypto ATS? If so, what information should that form require crypto ATSs to disclose? Should the Commission revise or repeal provisions of Regulation ATS, Form ATS, Form ATS-N, or other forms or rules?
5. Today, Form ATS is filed on a non-public basis and is not subject to Commission approval. Should that approach be followed for crypto ATSs? Or should disclosures about trading in crypto asset securities be made public or be subject to a Commission review, approval, and effectiveness process? How can the Commission lower the costs of starting and running a crypto ATS in a manner that is consistent with investor protection and market integrity?
6. Are there specific crypto ATS public disclosures that would protect investors or enhance capital formation? For example, should the Commission propose amendments to Form ATS to require disclosures about conflicts of interest related to operators of a crypto ATS? Does private ordering already address platform disclosure?
7. An ATS must file quarterly reports about its securities trading activity on Form ATS-R, which is confidential. In light of open-source data and public blockchains, should the Commission repeal the requirement to file Form ATS-R for crypto ATSs? Should the Commission propose amendments to Form ATS-R specifically for crypto asset securities or trading pairs?
8. How can blockchain-based records help provide insight to the Commission about crypto asset securities transactions? What, if any, types of records should platforms that trade crypto asset securities be required to make and preserve? Are there any records required to be preserved by Rule 302 of Regulation ATS that would not be feasible or practicable to maintain for a crypto ATS?
9. Should the Commission propose amendments to Regulation ATS to prescribe a specific methodology or methodologies for conversion of non-USD assets to USD for purposes of compliance with Regulation ATS? If so, what should the methodology or methodologies be?
10. Rule 301(b)(10) of Regulation ATS requires an ATS to establish adequate written safeguards and written procedures to protect confidential subscriber trading information. Should the Commission propose amending Rule 301(b)(10) or provide guidance regarding protection of confidential trading information regarding crypto asset securities or trading pairs? If so, what should the amendments or guidance address?
11. ATSs that trade crypto asset securities that are NMS stocks would be subject to Rule 304 of Regulation ATS, which requires an NMS Stock ATS to file public disclosures on Form ATS-N. Should the Commission propose amending or repealing Rule 304 or Form ATS-N or provide guidance regarding the applicability of the disclosure requirements on Form ATS-N to an ATS that trades NMS stock crypto asset securities or trading pairs?
12. An NMS Stock ATS must comply with certain order display and execution access obligations under Rules 301(b)(3) and (b)(4) of Regulation ATS if the ATS displays subscriber orders in an NMS stock to any person (other than an employee of the ATS) and meets certain volume requirements. Should these rules be changed or repealed in light of crypto market developments or other developments?
13. What other issues or obstacles should the Commission consider with respect to trading of crypto asset securities that are NMS stocks on ATSs and NSEs?
14. Rule 15c3-5 under the Exchange Act requires that broker-dealers with access to trading directly on an exchange or ATS, including those providing sponsored or direct market access to customers or other persons, implement a system of risk management controls and supervisory procedures reasonably designed to manage the financial, regulatory, and other risks of this business activity. Is this rule duplicative of other requirements imposed on ATSs? Should the Commission propose repealing or amending Rule 15c3-5 or provide any guidance regarding the applicability of the rule to a crypto ATS?
15. ATSs that meet certain volume thresholds for trading NMS stocks and non-NMS stock equity securities that are reported to an SRO may be subject to systems compliance and integrity requirements under Regulation SCI. Has Regulation SCI served its intended purposes? Do its costs justify its benefits? Should the Commission propose repealing or amending Regulation SCI or provide guidance regarding the applicability of the rule to a crypto ATS?
16. How can the Commission protect the ability of individuals to develop and deploy software and transact directly (or indirectly through autonomous software intermediation) with other persons without unwarranted regulatory barriers?