October 3, 2022

Volume XII, Number 276


October 03, 2022

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FINRA: Corporate Bond Pennying & Security Futures Risk

FINRA Requests Comment on the Practice of Pennying in the Corporate Bond Market

On August 17, the Financial Industry Regulatory Authority (FINRA) issued Regulatory Notice 20-29 to request comment on the practice of internalizing customer trades in the corporate bond market after obtaining auction responses, commonly known as “pennying.” The Securities and Exchange Commission’s Fixed Income Market Structure Advisory Committee (FIMSAC) defined “pennying” as a practice where a dealer initiates a bid or offer-wanted auction process on behalf of a customer, reviews the auction responses, and then executes the customer order itself at a price that either matches or slightly improves the best-priced auction response. FIMSAC stated that pennying may appear to benefit a customer but may harm overall auction competitiveness over time.

FINRA reviewed corporate bond auctions conducted by retail firms on electronic trading platforms and found that firms internalized executions at varying rates after initiating auctions, and that these internalized executions offered varying amounts of price improvement. Consistent with a recommendation from FIMSAC and a similar request for comment published by the Municipal Securities Rulemaking Board, FINRA is soliciting comment on when such executions reflect a practice of pennying, how pennying impacts market quality and whether further regulatory action would be appropriate.

FINRA encourages all interested parties to comment on the proposal. Comments must be received by October 16. The Notice is available here.

FINRA Releases an Updated Security Futures Risk Disclosure Statement

On August 14, the Financial Industry Regulatory Authority (FINRA) issued Regulatory Notice 20-28 that included an updated Security Futures Risk Disclosure Statement (the “2020 Statement”). The uniform Security Futures Risk Disclosure Statement (the “Statement”) was jointly developed by FINRA, the National Futures Association (NFA) and several other self-regulatory organizations. The Statement is composed of nine sections and discusses the characteristics and risks of standardized security futures contracts traded on regulated US exchanges.

The 2020 Statement updates: (1) the introductory section of the Statement to reflect that exchanges may now list security futures on certain debt securities; (2) Section 2.7 of the Statement to reflect a shift to the S&P 500 as the benchmark against which to assess serious market volatility and a decrease in the threshold percentage declines that trigger a trading halt to 7, 13 and 20 percent; and (3) Section 8.2 of the Statement to reflect the current terms of CFTC Regulation 41.25 and Rule 17.02(b)(2) that increase the default position limits, modify the criteria for setting a higher position limit and position accountability level, and adjust the time during which position limits must be in effect and the time by which firms must submit Form 102 to the CFTC and the exchange on which the reportable position exists.

FINRA also issued a supplement (the “2020 Supplement”) that reflects the disclosure updates described above. The implementation date of the 2020 Statement and 2020 Supplement is September 14. Firms may elect to use the 2020 Statement and 2020 Supplement prior to the implementation date.

The 2020 Statement and 2020 Supplement are available here. The Notice is available here.

©2022 Katten Muchin Rosenman LLPNational Law Review, Volume X, Number 234

About this Author

Susan Light, Katten Law Firm, Finance Law Attorney, New York

Susan Light focuses her practice on financial services regulatory matters. She counsels broker-dealers, hedge funds, investment banks and financial services clients on enforcement issues involving the Securities and Exchange Commission (SEC), Financial Industry Regulatory Authority (FINRA), other self-regulatory organizations (SROs) and state and federal regulatory authorities. She has particular experience related to sales practice issues, financial and operational issues, anti-money laundering, crowdfunding, cybersecurity, and cryptocurrencies.

Michael T. Foley, Katten, Lawyer, Finance, FINRA, Chicago
Special Counsel

Michael Foley represents broker-dealers, investment advisers and other financial services industry participants with respect to a broad spectrum of legal and regulatory matters arising under the federal securities laws.

Michael has nearly 20 years of experience in private practice and in-house at both a large, full-service broker-dealer and at an online discount broker-dealer, advising broker-dealers and other financial institutions regarding compliance with the federal securities and commodities laws, and with the regulations of the US Securities and Exchange...


Adam Haft is an associate in the Financial Services practice.

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