SEC Issues No Action Letter to FINRA Regarding ATSs and Digital Asset Trading

The Securities and Exchange Commission (SEC), Division of Trading and Markets, issued a no-action letter to FINRA yesterday afternoon that impacts certain trading platforms that serve as markets for digital assets that are securities.

FINRA is a self-regulatory entity that coordinates with the SEC regarding broker-dealers and thus plays a vital role in the US securities industry. An ATS platform must hold a broker-dealer license to operate.

An ATS or “Alternative Trading System” is similar to a regulated exchange in the fact it can be utilized to trade securities.  Multiple Fintech focused firms have pursued ATS approval to enable the trading of securities, including digital securities – a good example is tZERO.

The statement by the SEC addresses digital assets that are securities and the actual trading and settlement process.

The letter states that several broker-dealers seeking to operate an ATS that trades digital asset securities prefer a process as follows:

  • Step 1 – the buyer and seller send their respective orders to the ATS, notify their respective custodians of their respective orders submitted to the ATS, and instruct their respective custodians to settle transactions in accordance with the terms of their orders when the ATS notifies the custodians of a match on the ATS;
  • Step 2 – the ATS matches the orders; and
  • Step 3 – the ATS notifies the buyer and seller and their respective custodians of the matched trade and the custodians carry out the conditional instructions.

This differs from the Four-Step Process of:

  • Step 1 – the buyer and seller send their respective orders to the ATS;
  • Step 2 – the ATS matches the orders;
  • Step 3 – the ATS notifies the buyer and seller of the matched trade; and
  • Step 4 – the buyer and seller settle the transaction bilaterally, either directly with each other or by instructing their respective custodians to settle the transaction on their behalf.

The ATSs in question have told the SEC that the four-step process “increases operational and settlement risks.”

The no-action letter states that a broker-dealer operating an ATS that trades digital asset securities and uses the Three-Step Process will not be the target of an enforcement action if it adheres to a set of requirements as defined by the no-action letter. This position solely addresses an ATS trading digital asset securities.

A no-action letter is not an indication of rulemaking and may be changed at any time in the future but by publishing a no-action letter, in effect, the SEC is green-lighting the Three-Step Process for platforms operating an ATS that trade digital securities.


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