Firms that use the Alternative Display Facility (ADF) to report over-the-counter trades in NMS stocks for broker-dealer compliance management purposes can choose to have their trades submitted by the ADF to the National Securities Clearing Corporation (NSCC) for clearance and settlement. Designated trades can be locked-in via agreement by both parties to the trade (the Uniform Services Agreement and/or the Qualified Special Representative Agreement). Alternatively, designated trades can be locked-in by the system in accordance with FINRA’s rules and regulations for broker-dealers. Lock-in of trades designated for clearing must occur in one of those two ways.

Section (a) of FINRA Rule 7140 (Trade Report Processing) describes the different ways trades may be locked-in by the system.  Member firms may comply with FINRA’s regulatory requirements by way of the following methods and a broker-dealer’s compliance procedures should document the process by which compliance with the rule and related supervisory controls are established and accomplished:

  1. Trade by Trade Match: both parties to the trade submit transaction data, then the system performs an on-line match.
  2. Trade Acceptance: after the reporting party (broker-dealer) enters its version of the trade into the system, the contra party reviews the submission. The contra party may then choose to accept or to decline the trade. An acceptance results in a locked-in trade, which is sent to the NSCC.
  3. Automatic Lock-In: any trade submitted for Trade Acceptance that remains open (i.e. has not been accepted nor declined) at the end of its entry day is carried over and automatically locked-in by the system. The trade is then submitted to the NSCC at 2:30 p.m. ET on the next business day (T+1).

Beginning October 24, 2016, FINRA will disable the Automatic Lock-In function described in Rule 7140(a)(3) until further notice. Currently, the system does not prevent reporting firms from entering a trade against a contra party that is not an ADF participant. Reporting firms must identify only a contra party that is another ADF participant.

Once the ADF’s Automatic Lock-In functionality has been disabled, if an alleged contra party takes no action on a clearing-eligible trade submitted to the ADF for Trade Acceptance, the trade will be carried over and remain open. The trade will not automatically become locked-in and sent to the NSCC.

Reporting firms submitting trades to the ADF using the Trade Match or Trade Acceptance functions also must identify only a contra party that is another ADF participant, with access to the ADF and the ability to view and act upon the reporting party’s submission. FINRA provides a list of ADF participants on its website.

Firms that wish to become ADF participants must execute the FINRA Participation Agreement (FPA). The FPA includes a provision acknowledging and agreeing to the requirement that contra parties be ADF participants as well. Furthermore, pursuant to the FPA, reporting parties agree that if they – inadvertently or otherwise – submit a trade to the ADF for Trade Match or Trade Acceptance against a contra party that is not an ADF participant, they accept any and all potential liability resulting from such non-ADF participants failing to honor the trade.