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Alternative Trading Systems (ATS) | Hedge Fund Law Blog

Digital asset platforms ATS registration overview

Digital asset platforms situated in the USA that facilitate buying and selling and digital asset trade (thought-about as securities) are usually in compliance with securities legislation that requires the registration of such platforms. national inventory change (“NSE”) or are usually not topic to NSE registration. One exception to registration with NSE permits corporations to interact in platform business if such a company is registered in its place trading system (ATS). This requirement was emphasized for the first time within the DAO report revealed in July 2017 at the SEC. We anticipate many digital asset platforms which are presently facilitating commerce to continue to think about whether or not they need to be registered as NSE or ATS, and lots of have already began

Definition and Registration of ATS

The statutory definition of ATS is: [19659002] any organization, association, individual, group of persons or system:

(1) This types, maintains or offers a marketplace or facility for amassing and promoting securities or otherwise for securities in accordance with part 240.3b-16 of this Chapter usually within the tasks carried out by the inventory change; and

(2) This does not:

(i) impose rules on the conduct of other subscribers than those of subscribers engaged in such a corporation, affiliation, individual, group of individuals or system; or

(ii) non-trading discipline

Because many digital asset platforms or exchanges are technically coated by the ATS definition, these platforms have to be correctly registered within the SEC. By registering as an ATS system, the platform should do the following:

  1. Registration (or buy) of a vendor
  2. File format ATS
  3. Comply with rule ATS

1. Registration as an Intermediary Distributor

Registration as an Middleman Supplier (“BD”) is a prerequisite for ATS. The corporate can solely ship the shape ATS to the SEC after it has acquired approval from the Monetary Regulatory Authority ("FINRA") for its middleman supplier software (or after buying the broker vendor). For platforms registered as an intermediary reseller, the excessive degree have to be:

  • Submit Type BD
  • Comply with all applicable nationwide necessities; and
  • Making certain that each one of its "affiliates" (BD representatives) have met the applicable qualification necessities

The brand new BD registration course of is well-worn and relatively simple. Corporations that apply for BD must submit on-line by way of the BD type and then submit a new membership software (NMA) to FINRA. The NMA requires the corporate to describe in detail its business and compliance insurance policies and controls. The corporate will even have a private new member interview and show how ATS know-how works for FINRA employees. As part of the BD process, the company should turn out to be a member of at the least one self-regulatory group ("SRO"), which is more likely to be FINRA, and turns into a member of the Securities Investor Protection Division (SIPC)

isn’t an ATS, the corporate should submit a everlasting membership software (Type CMA) to FINRA. For De Novo BD registered teams, the corporate ought to describe the elements of its enterprise to which the ATS perform belongs. As with the brand new BD, the prevailing BD must present FINRA personnel how ATS know-how works.

2. File Format ATS

When an organization is registered as a BD and has mentioned the ATS platform with FINRA (FINRA satisfaction), the company must notify the SEC that it is appearing as an ATS. Type ATS is the official SEC notification and have to be submitted at the very least 20 days before the corporate begins operations.

Type ATS is generic and requires info resembling:

  • Certain Identification Info (ie, full identify, firm identify, tackle, CRD quantity, and so forth.)
  • Firm creation documents as an attachment
  • Description of the kind of customers within the setting (ie broker-dealer, facility or retail) and attainable differences within the availability of providers
  • Record of securities (digital belongings / securities thought-about as securities) which might be admitted to trading
  • Description of ATS actions
  • Description of sure ATS working procedures (i.e. ordering, occasion acquisition, reporting events, compliance, and so on.)

It is very important word that the shape ATS is a notification software where the SEC doesn’t affirm to the ATS the submitting mode until the shape is incomplete. As soon as the shape ATS has been sent to the SEC, it is listed on the SEC website, which exhibits the complete identify of the platform, the identify (s) on which the business is run, and the town and status of the ATS. The form ATS reviews are often not revealed and stored confidential. Such studies are only out there to SEC employees, authorities securities authorities and all SROs beneath investigation

3. Continuous compliance

Quite a few compliance obligations apply to the ATS system. A number of the special ATS obligations are:

  • File Type ATS-R (which presents a abstract of ATS transactions quarterly) inside 30 calendar days of the top of every quarter.
  • Changing the ATS type at the least 20 calendar days
  • Updating the ATS type inside 30 calendar days of the top of every quarter to right incorrect or unreported info.
  • Examine and examine its amenities, techniques, and report and collaborate to research, examine, or investigate SEC or SRO subscribers as members.

Different BD, FINRA and different tips, laws and obligations are:

  • misplaced and stolen securities program
  • Maintenance and reporting of stakeholder info
  • Certain instructions to be used in electrical engineering
  • Maintenance
  • Compliance with the Overseas Belongings Management Company (OFAC) Packages
  • Making Quarterly and Annual Monetary Statements to the SEC

If the ATS does not meet the above necessities, it might be topic to extreme penalties. In addition, it is very important word that the securities of the registered ATS platform might embrace a lot of holding durations which have to be carried out to ensure that the ATS system to stay in drive.

Timing of Registration

It isn’t clear how the ATS software shall be accepted for a long time, because it largely is determined by the extent to which the activity is concerned. Typically, a discussion board designed for personal placement trading (in a closed system for accredited buyers) is more likely to take 6-12 months to be absolutely licensed after the submission of the shape NMA. Technically, FINRA has to look and deal with a considerably complete NMA within 180 calendar days of receiving it

Appreciable Issues

Quite a few points must be thought-about for the ATS software

  1. Primary Devices – Securities of the newest digital belongings are unregistered securities originally provided for exemption from registration. Primarily, these are limited securities and dealers or resellers of such securities are undoubtedly violating US regulation on securities (for extra on background, see Limited Securities and Distribution Buildings). In such a case, we aren’t positive how FINRA will take a look at a platform that facilitates the buying and selling of limited instruments. We now have seen many key readers over the past 6-12 months who have determined to supply their brands / securities in accordance with the registration exemptions, including via the SAFT. To the extent that the digital asset platform solely travels via characters (or signs that go through the S-1 IPO course of that we expect will occur within the subsequent 12 months), we consider that such a discussion board might in all probability be
  2. Discussion with FINRA Trading System – We now have indirectly discussed with FINRA concerning the revision of the ATS platforms. Most ATS platforms have been created to allow buying and selling in conventional institutional securities. It’s unclear whether or not FINRA has the expertise or technical understanding (at present) of dealing with digital commodities and relevant trading platforms.
  3. IRS Reporting Requirements – In 2014, the IRS revealed a digital foreign money for the announcement. Since then, the IRS has changed sure consumer reporting requirements. It’s unclear whether or not the IRS will add such consumer reporting requirements to ATS platforms.
  4. FinCEN Cash Providers Corporations Requirements – Department of Finance Crime Implementation Community of the Ministry of Finance (“FinCEN”) In March 2013, revealed tips for individuals dealing with digital currencies. FinCEN said that an individual who does business in digital foreign money change in real foreign money, funds or other digital currencies ("swap") is registered for the registration of "MSB". Though it’s unclear whether ATS might be categorised as MSB, FinCEN has taken motion towards digital foreign money trade that didn’t register with the office.
  5. Money Laundering and Information of Buyer Wants In line with the Banking Secrets and techniques Act, there have to be cash laundering (“AML”) and Know Your Buyer (“KYC”). AML procedures are indispensable for detecting and reporting suspicious actions which will seek advice from cash laundering and terrorist financing. KYC's procedures are identification verification measures to make sure that the consumer is actually claiming to be fraud-proof. As well as, every state has its personal rules and laws for ATS platforms inside the state. Before you begin using ATS, you need to investigate what guidelines and laws the state has set.


Following the DAO report, SEC officials have made a lot of current feedback on digital commodities and trading venues that show that the cryptocurrency business needs to shortly embark on a means of integration into the normal securities regulatory setting. We consider that the ATS construction will develop into the dominant structure of digital asset change in the future. We also consider that, over the subsequent 12 to 24 months, when regulators complement totally different issues, the process will turn into extra streamlined and worse. A number of cryptocurrency-related boards have already started the process of turning into ATS.


Bart Mallon is a founding companion of Cole-Frieman & Mallon LLP. Cole-Frieman & Mallon LLP has helped to structure a number of the first digital currency-based hedge funds and routinely works on digital asset issues. Contact Mr. Mallon immediately at 415-868-5345 when you have any questions on this publish.