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New FINRA Rule Has Firms Facing Mandatory Business Continuity and DR Tests

By Matthew Donahue, CBCP | Thursday, December 3rd, 2015

The Financial Industry Regulatory Authority (FINRA) recently issued a notice that it has filed a rule that became effective on November 30, 2015.  This rule, known as Rule 4380, grants FINRA the authority to designate member firms to participate in FINRA’s annual Business Continuity/ DR Testing under Regulation System Compliance and Integrity (SCI). 

Background
Regulation SCI was adopted by the Securities and Exchange Commission (SEC) in November of 2014 which detailed out specific requirements of FINRA to “establish, maintain, and enforce written policies and procedures that address, among other things, business continuity and disaster recovery." And as part of that FINRA must designate firms to participate in of its BC/DR Plans. The SEC adoption of SCI can be tied to experiences such as Superstorm Sandy which caused the securities market to close for two days. 
 
FINRA Notification Process and Designation Criteria
FINRA will privately notify firms that meet the standards for designation. This will happen at least 90 day prior to the testing date. For the most part the designation criteria is based on volume of activity over a specified time period. For the most this equates to about 5-9 firms designated per system.  

Member Facing Systems

Established Criteria

FINRA NYSE/ Nasdaq TRFs

Participants that account for at least 5 percent or more of the total number of trades reported to the TRF over the six-month period immediately preceding designation, provided that the cumulative trade volume represented by designated firms amounts to at least 50 percent of all trade volume reported to the TRF during the applicable six-month period.

ORF

Participants that account for at least 5 percent or more of the total number of trades reported to ORF over the six-month period immediately preceding designation, provided that the cumulative trade volume represented by designated firms amounts to at least 50 percent of all trade volume reported to ORF during the applicable six-month period.

TRACE

Participants that account for at least 5 percent or more of the average dollar volume in either: (1) corporate and agency debt securities, or (2) Securitized Products, 10 over the six-month period immediately preceding designation, provided that the cumulative dollar volume represented by designated firms amounts to at least 50 percent of all dollar volume reported to TRACE during the applicable six month period.

OATS

Firms that account for at least 5 percent or more of OATS Reportable Order Event records (ROEs) over the six-month period immediately preceding the designation, provided that the cumulative activity represented by designated firms amounts to at least 50 percent of all ROEs reported to OATS during the applicable six-month period.

ADF

Firms that account for at least 5 percent or more of OATS Reportable Order Event records (ROEs) over the six-month period immediately preceding the designation, provided that the cumulative activity represented by designated firms amounts to at least 50 percent of all ROEs reported to OATS during the applicable six-month period.

OTCBB

Participants that account for at least 20 positions in OTCBB symbols per day on the OTCBB during the applicable six month period, provided that the cumulative quoting represented by designated firms amounts to at least 50 percent of all quoting on the OTCBB during the applicable six-month period.

Results of the FINRA Test

Following the test firms that were designated to participate will be required to complete and submit specific testing requirements within a certain time frames designated by FINRA. Examples of requirements detailed within the notice include “bringing up their (firms) systems on the designated testing day and processing test scripts to simulate trading activity. Designated firms may also be required to satisfy related reporting requirements, for example, reporting the firm’s testing results.”

FINRA will collect the test results and evaluate them. Outcomes from the evaluation could potentially lead to changes or modifications FINRA’S BC/DR plan.

Optional Participation
For any market participants, firms, third party providers who were not designated by the criteria or subject to rule 4380 wish to participate voluntary can reach out to FINRA Product Management at (866) 899-2107 or Market Operations at (866) 776-0800 for consideration.

FINRA DR REsources
 

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