OATS OTC FAQ

Reportable Securities

1. When the amendments expanding the OATS Rules to include OTC equity securities become effective on February 4, 2008, what securities will be reportable?
On February 4, 2008, all OTC domestic equity securities and certain transactions in foreign equity securities become reportable to OATS. OTC equity securities are defined as: 1) securities not listed on a national securities exchange; and 2) securities listed on one or more regional exchanges but do not qualify for dissemination of transaction reports to the Consolidated Tape. This definition includes: OTCBB securities, Pink Sheet securities, and preferred securities. Orders in foreign equity securities resulting in an execution that is subject to the transaction reporting requirements of NASD Rule 6620 also must be reported to OATS.

The definition does not include: Direct Participation Programs (DPPs), restricted securities as defined by SEC Rule 144(a)(3), PORTAL securities, or TRACE-reportable debt (a security that satisfies the definition of "TRACE-eligible security" in NASD Rule 6210(a)). As a general matter, for trade reporting purposes, convertible bonds that are not listed on a national securities exchange are treated as debt securities; and therefore trades in such securities are reportable to TRACE. Although certain convertible bonds are excluded from the definition of "TRACE-eligible security" (e.g., bonds with a maturity of less than one year), all unlisted convertible bonds (i.e., convertible bonds that are not listed on a national securities exchange) are treated as debt securities for trade reporting purposes and are therefore not subject to OATS reporting requirements. However, over-the-counter transactions in convertible bonds that are listed on Nasdaq should be reported to a FINRA equity trade reporting facility, and orders for such bonds are subject to the recording and reporting requirements in the OATS rules. Orders in foreign equity securities where the resulting execution is not subject to the transaction reporting requirements of FINRA Rule 7220 need not be reported to OATS.

2. Are proprietary orders in OTC equity securities originated in the normal course of market making activity required to be reported to OATS?
No. Proprietary orders originated in the normal course of market making are not reportable to OATS. For OATS reporting purposes, a market maker in an OTC equity security is defined as a FINRA member entering firm quotations into the OTC Bulletin Board Service or any other inter-dealer quotation system that permits quotation updates on a real-time basis. Unsolicited quotes and "name-only" indications do not qualify a firm as a market maker for purposes of determining OATS reporting obligations. All non-market making proprietary orders originated by a member, as well as orders received from another broker/dealer, including another market maker, must be reported to OATS.

3. My firm received an order for an OTC equity security on January 31, 2008. The order was not executed until February 4, 2008. Am I required to report the execution to OATS, even though the order was not reported when it was received on January 31, 2008?
No. Pursuant to FINRA's OATS Rules, orders in OTC equity securities must be reported to OATS beginning February 4, 2008. Orders received or originated prior to February 4, 2008, are not required to be reported to OATS. In addition, order events occurring on or after February 4, 2008 relating to orders for OTC equity securities received or originated prior to February 4, 2008, are not required to be reported to OATS. Firms should note that subsequent events (Desk, Route, Execution, Cancel/Replace or Cancel Reports) related to orders not previously reported to OATS (i.e., orders for OTC equity securities received or originated prior to February 4, 2008) will be rejected by OATS. Rejections that occur as a result of submissions of order reports related to orders in OTC equity securities received before February 4, 2008 are not required to be repaired. Firms should note, however, that these rejections will appear in the daily OATS Statistics posted to the OATS web site.

Foreign Equity Securities Traded in the US

1. My firm receives orders in OTC equity securities that are listed on foreign exchanges. My firm routes these orders to the respective foreign exchange for execution. Are these orders required to be reported to OATS?
Orders in foreign equity securities are required to be reported only in those instances where the resulting execution is subject to the transaction reporting requirements in FINRA Rule 7220. The requirements of FINRA Rule 7220 do not apply to transactions in foreign equity securities provided that: 1) the transaction is executed on and reported to a foreign securities exchange; or 2) the transaction is executed over the counter in a foreign country and is reported to the regulator of securities markets of that country.

2. In the event my firm receives an order under the US symbol of a foreign equity security ( the security also trades in the US) and the order is executed on the foreign market the following day, does the firm have an OATS reporting obligation?
Yes. If an order is received in the US symbol and the market of execution is not known by the end of the OATS Business day on which the order was received, the order must be reported to OATS. For example, if your firm receives an order in a foreign listed equity security also trading in the US and the order is not executed before the time the firm is required to report to OATS, then the firm should submit the New Order Report to OATS. If the order is later executed in a foreign market, then the firm would submit a route report indicating that the order was sent to a foreign broker-dealer or market, as applicable.

3. My firm receives orders in foreign equity securities that are also traded over the counter in the US. In some instances, an order is broken up and executed across multiple markets, both foreign and domestic. What are the firm's OATS reporting obligations?
Orders received for foreign equity securities traded in the US must be reported if any resulting executions are subject to the requirements of FINRA Rule 7220. In this example, since part of the order is executed over the counter in the US and therefore subject to the requirements of FINRA Rule 7220, the firm would have an obligation to record and report a New Order Report reflecting the receipt of the order, a Route Report for each component sent abroad and an Execution Report for each component executed in the US.

4. My firm is an order-entry firm. We receive an order in a foreign equity security traded in the US. We route the order to another broker-dealer who then executes the order in the US. Do we have an obligation to report this transaction to OATS?
Yes. Since the resulting execution of the order was subject to the transaction reporting requirements of FINRA Rule 7220 both the order-entry firm and the firm ultimately executing the order have an OATS reporting obligation.

Foreign Equity Securities

1. On Monday, my firm received and executed an order in a foreign equity security without a US symbol for which we had a trade reporting obligation. We requested the symbol but did not receive it until Wednesday. What are the firm's OATS reporting obligations?
Firms receiving orders in foreign equity securities without a US symbol for which they have a trade reporting obligation must: 1) promptly request a symbol; and 2) comply with the OATS recording requirements under FINRA Rule 7440. Once a symbol becomes available the firm must report the trade to FINRA pursuant to FINRA Rule 7220 and report all applicable information to OATS in accordance with FINRA Rule 7450. Data submitted to OATS with an Order Received Date prior to the symbol issuance date will not be marked late. Firms may, however, be asked to demonstrate that a symbol was promptly requested upon execution of the trade.

2. My firm receives orders in foreign equity securities that are also listed on Nasdaq. If my firm routes these orders to the foreign exchange for handling and execution, are these orders required to be reported to OATS even if they are executed on and reported to the foreign exchange?
Yes. The exception from OATS reporting for foreign equity securities is only for those foreign equity securities that meet the definition of OTC equity security in the OATS rules. If a security is listed on Nasdaq, it does not meet the definition of OTC equity security. Under the OATS rules, orders for equity securities listed on Nasdaq must be reported to OATS, regardless of where the order is executed.

3. My firm receives directed orders from customers for foreign equity securities that are also traded over the counter in the United States and meet the definition of OTC equity security in the OATS rules. If a customer instructs the firm to execute the order in a particular foreign market, the order cannot be executed, in whole or in part, in the United States. Would my firm be required to report the receipt of this type of directed order if the order is not executed by the end of the OATS business day?
If the terms of the directed order require the firm to execute the order in a foreign market and the firm knows that the order will be executed and reported in the foreign market, the firm would not be required to submit a new order report for that order. For more information, you may wish to consult an interpretive letter that FINRA has published on this topic.

4. My firm receives orders for foreign equity securities that my firm executes on a riskless principal basis. The initial leg of the trade is executed and reported in a foreign market. My firm then reports the offsetting leg of the riskless principal transaction with my customer to the OTC Reporting Facility (ORF) for clearing and/or regulatory purposes. Is my firm required to report the customer order and execution to OATS?
No. Because the offsetting portion of the riskless principal trade is not required to be reported to the ORF pursuant to FINRA Rule 7220, but is only voluntary, the customer order and execution are not required to be reported to OATS. An OATS reporting obligation exists only in those instances where the execution of the customer order in a foreign equity security results in a trade reporting obligation under FINRA Rule 7220. For example, a firm accepts an order in a foreign equity security and promises a Guaranteed Volume Weighted Average Price (GVWAP) to the customer. The firm then trades in a foreign market to satisfy the customer's order. After obtaining the shares in the foreign market, the firm executes the customer's order in the United States at the GVWAP, which differs from the price at which the firm originally obtained the shares. In this scenario, the customer order and execution would be required to be reported to the ORF pursuant to FINRA Rule 7220and would be OATS reportable.

5. My firm receives orders in OTC equity securities that are listed on foreign exchanges. Because of time zone differences, sometimes the foreign market to which my firm has determined to route the order for execution has already closed before the end of the current OATS Business Day. Therefore, the order cannot be executed until the following day after the foreign exchange has opened for trading. Since the order is not executed before the time the firm is required to report information to OATS on the day the order is received, must the order be reported to OATS even though, absent unusual circumstances, it will be executed on and reported to a foreign market?
No. If an order is received in a foreign symbol or the equivalent US symbol and the firm has decided to send the order to a foreign market for execution, the order is not OATS reportable. For example, if a firm receives an order in a foreign-listed equity security that also trades in the US, and has decided to send the order to a foreign market for execution, but the order can not be executed before the end of the current OATS Business Day because the foreign market is closed, the order would not be OATS reportable. If, for any reason, the order is not ultimately executed on the foreign market, the firm would be required to submit all OATS reportable events related to that order with the original time of order receipt. OATS will mark these events late. Firms that display a pattern or practice of reporting orders late may be subject to formal review for potential violations of the OATS Rules.

OTC Link

1. My firm receives messages concerning potential trades via OTC Link. What are the firm's OATS reporting responsibilities with respect to OTC Link messages?
As a general matter, based on FINRA's current understanding of OTC Link functionality FINRA considers the use of OTC Link as the equivalent of a negotiation over the telephone for purposes of OATS reporting. As such, negotiations are not reportable events; however, once the terms of a trade are agreed to, the new order and execution are reportable, with the time the parties agreed to those terms as the order receipt time and the execution time. 

The specific reporting requirements for OTC Link messages that result in an execution are as follows:

Receipt of an OTC Link Message

A firm is required to report all executions that are a result of the firm receiving  an OTC Link message, regardless of whether the OTC Link message is sent by a market maker or a non-market maker broker/dealer. As noted above, both the new order and execution are reportable once the terms of a trade are agreed to, with the time the parties agreed to those terms as the order receipt time and the execution time. This also applies if multiple messages go back and forth between the receiving firm and the sending firm before an execution results. The OATS execution report must be linked to the related trade report submitted to the FINRA OTC Reporting Facility (ORF).

Sending an OTC Link Message

If a firm receives or originates an order that is subsequently executed as a result of the firm sending an outgoing OTC Link message to another firm, the firm would record and report a new order to reflect the origination or receipt of the order from its customer and an execution report to reflect the execution resulting from the OTC Link message. However, if a market maker originates an order in the normal course of market making and subsequently executes the order by sending an OTC Link message to another firm, no OATS reporting obligation would exist for the market maker sending the OTC Link message since orders originated in the normal course of market making are excluded from the OATS reporting requirements.

Example:

Firm A receives an order from a customer for 1,000 shares. The firm then sends an OTC Link Message to Firm B for 500 shares. Firm A and B agree to execute 500 shares. Firm A then calls Firm C on the phone and they agree to execute the remaining 500 shares.

OATS Reporting

Firm A

NW for 1,000 shares
EX for 500 shares (linked to the related trade report submitted to the ORF)
EX for 500 shares (linked to the related trade report submitted to the ORF)

Note: The outgoing OTC Link message for 500 shares and the telephone call to Firm C are not considered routes for OATS purposes.

Firm B

NW for 500 shares
EX for 500 shares (linked to the related trade reported submitted to the ORF)

Firm C

NW for 500 shares
EX for 500 shares (linked to the related trade report submitted to the ORF)

2. Firms may receive  OTC Link messages that are for a larger share quantity than what is ultimately executed. For example, an incoming message is received for 5,000 shares. The receiving firm, however, chooses to execute only 1,000 shares. How should the receiving firm report this to OATS?
The receiving firm would be required to record and report the receipt of an order for 1,000 shares and execution for 1,000 shares. Both the order receipt time and the execution time should reflect the time the terms of the trade were agreed to.

3. In the ordinary course of market making activities, Market Maker A sends an OTC Link message to Market Maker B to trade 5,000 shares and Market Maker B counters sending an OTC Link message back to trade 10,000 shares, which Market Maker A agrees to execute. What are the OATS reporting obligations for each market maker? 
Because Market Maker A originated the order in the ordinary course of market making activities and sent an OTC Link message to Market Maker B, Market Maker A has no OATS reporting obligations in this scenario. Market Maker B, however, as the firm receiving the OTC Link message, would have OATS reporting obligations for the execution that resulted from the negotiations. The share quantity of the new order and execution required to be reported by Market Maker B will be determined by the execution quantity that is agreed to in the final message. Therefore, in the above example the OATS reporting obligations would be as follows:

Market Maker A (sender of original message)

No reporting obligation because the original order was originated in the ordinary course of Market Maker A's market making activities.

Market Maker B (recipient of original message)

NW for 10,000 shares (receipt time is the time of execution)
EX for 10,000 shares (linked to the related trade report submitted to the ORF)

In another example, if, in the ordinary course of market making activities, Market Maker A sends an order to Market Maker B for 10,000 shares, Market Maker B then counters back at 7,500 and finally Market Maker A agrees to an execution for 6,000 shares, the OATS reporting obligations would be as follows:

Market Maker A (sender of original message)

No reporting obligation because the original order was originated in the ordinary course of Market Maker A's market making activities.

Market Maker B (recipient of original message)

NW for 6,000 shares (receipt time is the same as the execution time)
EX for 6,000 shares (linked to the related trade report submitted to the ORF)

4. If, during the ordinary course of market making activities, Market Maker B sends Market Maker A an OTC Link message for 5,000 shares and Market Maker A agrees to execute 2,000 shares of the order at 10:00 and an additional 1,000 shares from the same OTC Link message at 10:01, what are the OATS reporting obligations?
The OATS reporting obligations in the above scenario would be as follows:

Market Maker A

NW for 2,000 shares (receipt time of 10:00)
EX for 2,000 shares (linked to the related trade report submitted to the ORF)

NW for 1,000 shares (receipt time of 10:01)
EX for 1,000 shares (linked to the related trade report submitted to the ORF)

Market Maker B

No reporting obligation because the original order was originated in the ordinary course of Market Maker B's market making activities.

5. Would the same guidance as provided above for OTC Link messages also apply to trades negotiated over the telephone? 
Yes. OATS reporting obligations are the same for both trades agreed to as a result of an OTC Link message and trades agreed to over the telephone. 

6. My firm receives incoming messages over OTC Link that result in an execution. When reporting the Combined Order/Execution Report to OATS, what Order Origination Code, Account Type Code and Buy/Sell code  should my firm use? In other words, should the new order in OATS be reported from my firm's perspective or from the perspective of the firm that sent the OTC Link message?
Firms receiving an incoming OTC Link message that ultimately results in an execution should populate the Order Origination Code with a "W" and populate the Negotiated Trade Flag with a "Y" to indicate the order was originated as the result of a negotiation initiated by another member. The Account Type Code and Buy/Sell code should however be populated from your firm's perspective. For example, if the firm is a market maker, the Account Type Code should be populated with an "O" (Market Making) and if the firm received an OTC Link message to sell that it executed by buying stock, the firm would populate the Buy/Sell Code with "Buy" (Buy).

7. If my firm chooses to report market making activity and I send an OTC Link message to another firm that ultimately results in an execution, how should I report origination of the order and resulting OTC Link execution?
If your firm voluntarily elects to report orders originated in the normal course of market making and negotiates a trade with another firm, your firm should report a New Order and Execution Report (or Combined Order/Execution Report) when all terms and conditions of the trade have been agreed upon. The New Order should contain an Order Origination Code of "F", a Negotiated Trade Flag of "Y" and the Account Type Code and Buy/Sell Code should be reported from your firm's perspective.

Issue Symbol List

1. Will there be a list of OTC securities that are reportable to OATS?
Yes. The symbol directory available on www.otcbb.com will be updated to include an "OATS Reportable Flag" to reflect those OTC listed equity securities that are OATS reportable. The symbol directory will be available in an FTP downloadable format and will be updated daily.