Trade Reporting Participation Requirements
FINRA Rule 7120 establishes the conditions a FINRA member must satisfy to participate in the Alternative Display Facility, and, like Rule 7110 covered elsewhere in this dictionary, its current streamlined structure reflects a meaningful simplification from a considerably more fragmented predecessor. Understanding both what the rule requires today and how it reached its current form gives a fuller picture of how the ADF's participation framework actually operates.
From Three Parallel Frameworks to One
Rule 7120 traces back to NASD Rule 6120A, which governed participation in what was then called the TRACS trade comparison feature. That original rule maintained entirely separate, parallel sets of participation conditions for three distinct categories of ADF participant: TRACS Market Makers, TRACS ECNs, and TRACS Order Entry Firms, each with its own application agreement requirement, its own commencement-of-participation process requiring the firm to contact the TRACS Operations Center, its own self-clearing firm obligations, and its own consequence for failing to maintain a clearing arrangement. For TRACS Market Makers specifically, that consequence carried an additional layer: if NASD determined a Market Maker's failure to maintain a clearing arrangement was voluntary, the resulting withdrawal of quotations would itself be treated as voluntary and unexcused under a separate rule governing quotation withdrawal.
FINRA eliminated this triplicated structure through SR-FINRA-2013-053, the same filing discussed in the Rule 7110 entry elsewhere in this dictionary, effective February 3, 2014. FINRA's own justification was direct: the requirements applicable to a TRACS Market Maker, a TRACS ECN, and a TRACS Order Entry Firm had become largely duplicative of one another, with the sole meaningful distinction being the Market Maker-specific voluntary-withdrawal consequence tied to quotation obligations. Rather than maintaining three nearly identical sets of participation rules, FINRA consolidated them into a single, uniform framework applying the same conditions to every Participant regardless of the specific role that firm plays, relocating the narrow Market Maker-specific quotation withdrawal consequence to a separate, dedicated provision rather than keeping it embedded within triplicated participation language.
The Core Participation Requirements Today
Participation in the ADF is mandatory for any FINRA member with an obligation to report an over-the-counter transaction to FINRA, unless that member has an alternative electronic mechanism under FINRA rules for reporting and clearing the transaction; this mandatory participation extends to the reconciliation of all over-the-counter clearing-agency-eligible transactions. Beyond this baseline mandatory participation trigger, ongoing participation is conditioned on a Participant's initial and continuing compliance with five specific requirements: execution of, and continuing compliance with, a Participant Application Agreement; membership in, or maintenance of an effective clearing arrangement with a member of, a clearing agency registered under the Exchange Act; compliance with all applicable FINRA and SEC rules and operating procedures; maintenance of the physical security of equipment on the Participant's premises to prevent unauthorized entry of information into the System; and acceptance and settlement of each trade the System identifies as having been effected by that Participant or its correspondents on the regularly scheduled settlement date. Each Participant is separately obligated to inform FINRA of any non-compliance with these requirements, an ongoing disclosure duty that exists independently of the underlying compliance obligations themselves.
Upon execution and FINRA's receipt of the Participant Application Agreement, a Participant may commence input and validation of trade information in ADF-eligible securities, accessing the service through computer interface or another FINRA-designated method during FINRA-specified hours of operation. Before submitting trade information, every Participant, including those whose trade report information is submitted to FINRA by a third party, must obtain a unique identifying Market Participant Symbol from FINRA and use that identifier consistently for trade reporting purposes. Participants commence actual participation by first contacting FINRA Market Operations to verify authorization to submit trade data for ADF-eligible securities, and a self-clearing Participant bears the obligation to accept and clear each trade the System identifies as having been effected by that firm.
Clearing Broker and Correspondent Relationships
Rule 7120 addresses the specific mechanics governing clearing brokers and their correspondent relationships in some detail. System clearing brokers are obligated to accept and clear, as a party to the transaction, each trade the System identifies as having been effected by themselves or any of their correspondent executing brokers. A clearing broker may cease acting as principal for a correspondent executing broker at any time, provided notification has been given to, received by, and acknowledged by FINRA Market Operations, and provided affirmative action has actually been completed to remove that clearing broker from the System for the specific correspondent in question; critically, the clearing broker's obligation to accept and clear trades for its correspondent does not terminate until every one of these steps has actually been completed, meaning a clearing broker cannot unilaterally treat its obligation as ended simply by sending a notification and assuming the relationship has concluded before FINRA has actually processed that removal.
If at any time a Participant, whether acting as the Reporting Party or as the contra party, fails to maintain a clearing arrangement, that Participant is removed from the System entirely and precluded from further ADF participation until a clearing arrangement is reestablished and notice of that new arrangement, accompanied by an amended Participant Application Agreement, is filed with FINRA. This removal-until-cured structure applies uniformly today, having replaced the more fragmented, participant-type-specific removal provisions that existed under the pre-2014 TRACS-era framework.
The 2016 Trade-Reporting-Only Testing Requirement
A significant substantive addition to Rule 7120 came in 2016, addressing a category of ADF use that had grown considerably beyond what the facility's original design anticipated: firms using the ADF exclusively for trade reporting, without any accompanying quoting activity. FINRA adopted this requirement effective September 12, 2016, under SR-FINRA-2016-031, described in Securities Exchange Act Release No. 78609, 81 FR 57964, and detailed in Regulatory Notice 16-33. Under Rule 7120(b)(2)(E), firms that elect to use the ADF for trade reporting purposes only, and that connect via a Financial Information eXchange, or FIX, connection, must participate in annual connectivity and capacity/stress testing.
FINRA built two distinct, independently operating exceptions into this testing obligation. Firms are excused from the annual connectivity testing requirement specifically if they report at least 100 trades per month to the ADF, on the theory that a firm actively and regularly using its connection has already demonstrated that connection's functional reliability through ordinary use. Separately, firms are excused from the annual capacity/stress testing requirement unless their actual ADF activity, or FINRA's own capacity projections based on that firm's usage of a Trade Reporting Facility, increases by more than 20 percent from one year to the next. FINRA has been explicit that these two exceptions operate independently of one another: a firm could, for example, remain subject to connectivity testing because it reports fewer than 100 trades per month to the ADF, while simultaneously being excused from capacity/stress testing because its TRF-based volume projection has not grown by more than 20 percent, or vice versa. Firms required to participate in this annual testing are not separately charged fees for it, though a firm requesting additional testing beyond the required annual cycle is subject to testing fees under Rule 7530.
This requirement traces directly to FINRA's broader 2016 guidance instructing firms that routinely report OTC trades in NMS stocks to only one FINRA trade reporting facility to establish and maintain connectivity to a second facility, specifically so they can continue supporting OTC trading as an executing broker if their primary facility experiences a widespread systems disruption. The ADF's role as this kind of secondary, contingency reporting venue, discussed further in the Rule 7110 and Rule 7500 entries elsewhere in this dictionary, is precisely what generated the need for this dedicated testing requirement; a facility firms rely on primarily for disaster-recovery purposes needs periodic testing to confirm it will actually function correctly if and when it is genuinely needed.
Distinguishing Trade Reporting Participation From Quoting Participation
Candidates and practitioners should keep Rule 7120's trade reporting participation requirements conceptually separate from the distinct registration, certification, and deposit requirements applicable specifically to ADF quoting participants, which are addressed under different rules entirely, including Rules 6271 and 6272, and which carry their own capacity fees and penalties under Rule 7580. Rule 7120 governs the baseline conditions for using the ADF's trade reporting function at all, a function every Participant needs regardless of whether that Participant also engages in active quoting, while the quoting-specific rules impose an additional, separate layer of requirements only relevant to the small population of firms that actually display quotations on the ADF, a population that, as discussed in the Rule 7110 entry, has effectively shrunk to zero active participants in current practice.
A Worked Example of the Testing Exception Interaction
Consider a small broker-dealer that maintains ADF connectivity purely as a contingency reporting path, reporting an average of 60 trades per month to the facility, well below the 100-trade threshold that would excuse it from connectivity testing. Because this firm falls under that threshold, it remains subject to annual connectivity testing regardless of anything else about its trading pattern. Suppose this same firm's underlying TRF-based volume, the activity FINRA uses to project the firm's ADF capacity needs, grew by only 8 percent over the preceding year, well under the 20 percent growth threshold that would trigger capacity/stress testing. Under Rule 7120's independently operating exceptions, this firm is required to complete annual connectivity testing, given its low ADF trade count, but is excused from capacity/stress testing, given its modest year-over-year growth.
Now consider a second firm with the opposite profile: one reporting 150 trades per month to the ADF, comfortably above the 100-trade connectivity testing exception, but whose underlying TRF volume grew by 35 percent over the preceding year. This firm is excused from connectivity testing given its higher ADF trade count, but is required to complete capacity/stress testing given its substantial year-over-year growth. These two firms end up subject to opposite halves of the same overall testing framework, illustrating precisely why compliance staff need to evaluate each exception independently against the firm's own actual data, rather than assuming a single overall determination, "we do or don't need annual testing," adequately captures what the rule actually requires. A firm's own internal tracking should therefore maintain separate, dedicated monitoring for each of the two distinct thresholds, rather than collapsing them into a single combined metric that could obscure which specific testing obligation actually applies in a given year.
Relevance Across FINRA's Examination Programs
The SIE, Series 63, and Series 65 do not test Rule 7120's participation mechanics, since these exams do not reach into facility-specific technical onboarding requirements. Series 7 candidates should understand conceptually that ADF participation carries specific ongoing conditions a firm must satisfy, reinforcing broader awareness of how FINRA facilities generally operate, without needing command of the rule's specific requirements.
Series 24 candidates supervising a firm's ADF relationship, particularly one used solely for contingency trade reporting, need precise command of the 2016 testing requirements and their two independent exceptions, since a principal reviewing the firm's ADF compliance posture should be able to determine correctly whether the firm is currently subject to connectivity testing, capacity/stress testing, both, or neither, based on the firm's actual trade volume and year-over-year growth. A principal should also understand the clearing broker and correspondent relationship provisions precisely, since a firm's own clearing arrangement changes need to be properly processed and confirmed with FINRA Market Operations before the firm can safely treat a prior correspondent relationship as concluded. Series 57 candidates handling order routing through the ADF need working familiarity with the MPID requirement and the mandatory participation trigger, recognizing that any firm with an obligation to report an OTC transaction to FINRA, absent an alternative reporting mechanism, is required to participate in the System under this rule.
Practical Guidance for Firms
Firms using the ADF purely as a contingency, trade-reporting-only facility should build a specific internal process for tracking their own trade volume against the two testing-exception thresholds Rule 7120 establishes, given that these thresholds operate independently and a firm's status under each can change from year to year based on its actual reporting activity and its underlying TRF-based volume growth. A firm that assumes its testing exemption status established years ago remains permanently accurate, without periodically reconfirming actual current volume against both the 100-trades-per-month and 20-percent-growth thresholds, risks missing a testing obligation that has since become applicable as the firm's business has grown.
Firms managing correspondent clearing relationships through the ADF should treat the specific procedural steps required to properly terminate a correspondent relationship, notification to FINRA Market Operations, acknowledgment of that notification, and FINRA's own affirmative removal action, as a genuine compliance workflow requiring careful tracking, rather than assuming a relationship has concluded the moment the clearing broker sends its own internal notice. A clearing broker that treats a correspondent relationship as terminated before FINRA has actually completed the removal process remains obligated to accept and clear trades for that correspondent under the rule's plain terms, regardless of the clearing broker's own internal belief that the relationship had already ended.
Firms should also maintain clear internal documentation distinguishing their trade reporting participation obligations under Rule 7120 from any separate quoting-related obligations that might apply if the firm were to become an active ADF quoting participant, given how thoroughly today's near-total absence of active ADF quoting activity can make this distinction feel academic until a firm's business model actually changes. A firm considering entering active ADF quoting after historically using the facility only for trade reporting should specifically confirm which additional registration, certification, and deposit requirements under Rules 6271, 6272, and 7580 would newly apply, rather than assuming its existing Rule 7120 participation status alone is sufficient to support quoting activity it has not previously engaged in. This kind of confirmation is particularly important because the quoting-specific requirements are structurally separate from the trade reporting participation framework, meaning a firm's long history of compliant trade reporting participation provides no assurance whatsoever that it has also satisfied the distinct requirements a new quoting relationship would trigger.
