MARKETAXESS COMPLIANCE AND SUPERVISORY PROCEDURES

Transcription

1 MARKETAXESS COMPLIANCE AND SUPERVISORY PROCEDURES (For Internal Use Only)

2 TABLE OF CONTENTS I. Introduction... 1 A. Purpose... 1 B. Compliance Statement... 1 C. Description of the Firm s Business Activities... 1 D. Limits on the Firm s Business Activities... 3 E. Use of This Document; Annual Certification... 4 F. Annual Compliance Meeting... 4 G. Supervision... 4 II. Code of Conduct... 5 A. In General... 5 B. Prohibited Activities... 5 C. Confidential Information... 6 D. Personal Transactions... 7 E. Insider Trading Prohibition... 7 F. Private Securities Transactions... 8 G. Outside Employment or Business Interests... 8 H. Electronic Mail/Internet Use... 9 I. Gifts and Gratuities J. Extension of Credit K. Handling Funds or Securities III. Registration, Hiring, Termination and Training A. Registration B. Hiring and Termination of Registered Persons C. Initial Training D. Continuing Education IV. Transaction Activities A. Establishing Trading Relationships/Opening Accounts B. CTD Transaction Processing/ Supervision C. DTD, OTS, Mid-X and CDS CLOB Transaction Processing/ Supervision i

3 V. System Oversight and Maintenance A. System Evaluation, Review & Testing B. Contingency Procedures VI. Communications with the Public and Media VII. Recordkeeping and Financial Reporting A. Books and Records B. Financial Reporting C. Compliance with Regulation ATS D. Compliance with TRACE Rules VII. Reporting Complaints and Other Matters A. Complaints B. Legal and Regulatory Matters - MA Personnel Related C. Legal and Regulatory Matters - Firm Related VIII. Anti-Money Laundering Compliance Program Appendix 1: Form of Annual Certification of Compliance Appendix 2: Policy on Confidential Information Appendix 3: Personal Trading Policy Appendix 4: Policy on Outside Employment and Business Activities Appendix 5: Arbitration Statement Appendix 6: Continuing Education Training Program - - Firm Element Appendix 7: Communications with the Public Appendix 8: Books and Records Appendix 9: Supervisory Duties and Designations Generally Appendix 10: Designation of Supervisory Principals Appendix 11: Anti-Money Laundering Compliance Program Appendix 12: MSRB Policies and Procedures ii

4 I. Introduction A. Purpose These Compliance and Supervisory Procedures set forth the policies and procedures of MarketAxess Corporation and its affiliates ( MarketAxess or the Firm ). As a broker-dealer registered with the Securities and Exchange Commission ( SEC ) and a member of the Financial Industry Regulatory Authority ( FINRA ) and the Municipal Securities Rulemaking Board (MSRB), MarketAxess Corporation is subject to various laws, regulations and rules adopted by the federal and state regulatory authorities and self-regulatory organizations ( SROs ). At all times, MarketAxess endeavors to operate in conformity with the applicable requirements and standards. The purpose of this document is to familiarize the registered persons and other non-registered employees of MarketAxess (collectively, MA Personnel ) with the policies and procedures adopted by the Firm to ensure compliance with applicable legal and regulatory requirements for conducting the Firm s securities business. MA Personnel are expected to be thoroughly familiar with the policies and procedures set forth in this document. Appropriate disciplinary action will be taken for failure to adhere to MarketAxess policies and procedures. Any questions or concerns should be directed to the General Counsel or the Chief Compliance Officer. B. Compliance Statement The Firm expects the conduct of all MA Personnel to be consistent with the highest ethical, business and legal standards. Integrity and ethical behavior are especially important in the financial services industry because of the trust placed in the Firm and the adverse consequences of betraying that trust. Even the appearance of impropriety can do irreparable damage to the Firm s reputation. MA Personnel are reminded of their duty to comply with all requirements imposed on them by the federal and state securities laws and regulations and FINRA/MSRB rules, as well as with the Firm s policies and procedures. C. Description of the Firm s Business Activities MarketAxess Corporation is a broker-dealer registered under Section 15 of the Securities Exchange Act of 1934, as amended ( Exchange Act ), and a member of FINRA and the Securities Investor Protection Corporation ( SIPC ) and the MSRB. The Firm s primary business consists of operating several Internet-based electronic communications systems to 1

5 facilitate transactions in fixed income securities -- a client-to-dealer trading system ( CTD ), a dealer-to-dealer trading system ( DTD ), a mid-level matching auctions trading system ( Mid-X, currently dormant), a singlename CDS central limit order book trading system ( CDS CLOB ) and an open trading system ( OTS ) (collectively, the MarketAxess Systems). Broadly speaking for the purposes of this document, the Firm s client base consists of the subscribers to one or more of these systems. In addition, the Firm runs the Trading and Execution Services desk. MarketAxess Trading Services utilizes traders to attempt to locate matching counterparty interest for institutional investor clients Did Not Trade ( DNT ) orders; i.e., client trade inquiries (orders) that did not result in a completed trade on MarketAxess CTD automated trading system ( MarketAxess System ). MarketAxess Execution Services acts as a resource for firms seeking to transact fixed income securities including municipal securities. Please see the Trading and Execution Services Desk Policies, Procedures and Supervision document for a complete discussion of this business. MA Personnel should familiarize themselves with the different functionalities of the MarketAxess Systems and make note of specific policies and procedures that the Firm has adopted for each system. 1. The Client-to-Dealer Trading System ( CTD ). The CTD (the original MarketAxess trading system) is designed to facilitate transactions between participating dealers in specified fixed income securities ( Participating Dealers ) and their existing institutional clients ( Users ) on a disclosed basis. The CTD subscribers known as Users may receive research relating to fixed income securities from Participating Dealers; indicate their interest in new fixed income issues; and negotiate online with Participating Dealers to effect transactions. The CTD subscribers known as Participating Dealers may post information about new offerings and research; show indicative prices and inventory in specified fixed income securities; and negotiate with Users online to effect transactions. For the purposes of the SEC s financial responsibility rules and the SIPC, each client account of User with a Participating Dealer is a customer of that Participating Dealer and not a customer of MarketAxess. The Participating Dealer is responsible for complying with all applicable securities regulatory requirements in connection with any purchase or sale effected by a User through the CTD, including suitability reviews, account opening, confirmation of transactions, and clearance and settlement. MarketAxess is 2

6 responsible for supplying the CTD to the User, on behalf of the User or its client(s), to enable the User to initiate and conduct transactions with a Participating Dealer as permitted under an agreement between the User and the Participating Dealer. 2. The Dealer-to-Dealer Trading System ( DTD ). The DTD is designed to facilitate transactions between participating dealers in specified fixed income securities on an anonymous basis. All resulting transactions are executed by the Firm, acting as a riskless principal, and are cleared and settled by the Firm s clearing broker. The DTD Participating Dealers are either registered brokerdealers or institutions. 3. The Mid-Level Matching Auctions Trading System ( Mid-X ) (currently dormant). The Mid-X trading system is designed to facilitate transactions of fixed quantities of corporate and sovereign bonds among various participants on an anonymous basis through pre-determined mid-level matching auctions. Once a pre-set auction starts, a subscriber of Mid-X may enter buy or sell orders on each individual bond. All resulting transactions are executed by the Firm, acting as a riskless principal, and are cleared and settled by the Firm s clearing broker. 4. The CDS Central Limit Order Book Trading System ( CDS CLOB ).The CDS CLOB trading system facilitates real-time matching transactions between a Participating Dealer acting as a riskless principal and Users in single-name credit default swaps ( CDS ). All resulting transactions are executed, cleared and settled by the Participating Dealer. 5. The Open Trading System ( OTS ). The OTS is designed to facilitate transactions between Users and both other Users and Participating Dealers in specified fixed income securities on an anonymous basis. All resulting transactions are executed by the Firm, acting as a riskless principal, and are cleared and settled by the Firm s clearing broker. D. Limits on the Firm s Business Activities MarketAxess business does not permit: 3

7 market making or dealer activities; soliciting or recommending particular securities transactions; holding client funds or securities; clearing or settling transactions; issuing research reports; engaging in any investment banking, underwriting or private placement activities; opening any retail customer accounts; municipal securities underwriting; municipal finance activities; municipal securities syndicate activities; municipal financial advisory activities; acting in a fiduciary or agency capacity for an issuer of municipal securities; or the distribution of new issue municipal securities. E. Use of This Document; Annual Certification MA Personnel should review this document, be familiar with its contents, and conduct their activities in compliance with the requirements stated herein. This document may be revised or supplemented from time to time. All such modifications will be communicated by the Firm to MA Personnel, who will be responsible for reviewing and complying with the revised material. MA Personnel must complete the Annual Certification of Compliance with this document, a form of which is attached as Appendix 1. F. Annual Compliance Meeting The Firm conducts an annual compliance meeting, in which MA Personnel, registered as well as non-registered, are required to participate. Attendance is mandatory. Supervisory Principals are responsible for ensuring that all individuals under their supervision attend the annual compliance meeting. G. Supervision The Firm s general supervisory procedures are attached as Appendix 9. In addition, specific supervisory procedures for particular activities may also be found in other parts of this document, as applicable. For example, supervisory procedures for communications with the public are set forth in Appendix 7. Appendix 10 contains a current list of Offices of Supervisory Jurisdiction ( OSJ ), designated Supervisory Principals, and registered representatives assigned to each Supervisory Principal. Appendix 12 4

8 contains procedures, supervisory and otherwise, specifically pursuant to MSRB rules. II. Code of Conduct A. In General MarketAxess follows a policy of strict adherence to high ethical standards. In this regard, the Firm insists upon full compliance with all laws, rules and regulations applicable to MA Personnel. Supervisory Principals must be alert to, and must immediately investigate any questionable conduct by MA Personnel, must make a record of the investigation and must promptly report the matter to the General Counsel or the Chief Compliance Officer. B. Prohibited Activities MA Personnel may not: Handle discretionary accounts. Directly or indirectly guaranty against loss in any account or on any transaction. Warrant or guaranty the present or future value or price of any security or that the issuer will meet its promises or obligations. Agree to repurchase, at some future date, a security from any client for his/her own account, the account of the Firm, or for any other account. Raise money, or participate in the raising of money, for any company, individual, or venture, other than as an agent for the Firm in a transaction approved in advance by the Chief Compliance Officer. Act as a personal custodian of securities, stock powers, money, or other property belonging to any client. Use or borrow funds or securities from any client. Forward, or agree to forward, confirmations or statements of accounts other than to the official post office address of any client, or change the mailing address of any client without the client s written authorization. Operate an account under a fictitious name in order to execute or disguise transactions that would otherwise be prohibited by Firm 5

9 policy or by law, regulations, or the rules of the applicable regulatory agencies. Divide or otherwise split commissions received in connection with the purchase or sale of securities with any person who is not a licensed broker-dealer or registered representative. Recommend any transaction on the basis of material non-public information. All MA Personnel should consult Appendix 2 for the Firm s Policy on Confidential Information. Effect any transaction or series of transactions that are wash trades. Wash trades are those in which no change of beneficial ownership occurs. Similarly, no transactions may be effected that are manipulative and/or are intended to peg the price of a security or paint the tape. Give legal and/or tax advice, such as regarding the creation of trusts, joint tenancy, estate matters, or tax problems. If asked for such advice by a client, MA Personnel should advise the client to consult his or her own attorney or tax adviser. Front-run a client order i.e., trade in a security in advance of the execution of any pending client order with personal knowledge of the order. C. Confidential Information MA Personnel must treat all information relating to any order entered or transaction executed through the systems, or any other non-public information relating to any MarketAxess System subscriber, as confidential during and after employment and must take appropriate steps to protect all such information from unauthorized use and disclosure. MA Personnel also must treat all information created or obtained by the Firm for its business purposes, such as proprietary software, as the exclusive property of the Firm and as confidential, both during and after employment. Accordingly, MA Personnel are expected to limit disclosure of confidential information to those persons who have a need-to-know (i.e., those persons who must have the information to serve the business purposes of the Firm and can be expected to maintain the information in confidence). In addition, all communications of confidential information should be conducted in a manner designed not to be overheard by persons unauthorized to hear such information. MarketAxess has in place a set of procedures pertaining to the handling of confidential information (attached as Appendix 2). 6

10 D. Personal Transactions 1. In general. Securities transactions by MA Personnel in Employee Accounts are subject to the procedures and restrictions set forth in the Firm s Personal Trading Policy (attached as Appendix 3). Supervisory Principals are responsible for ensuring that all MA Personnel under their supervision adhere to the applicable requirements set forth in these policies. 2. Supervision. The Firm reviews all transactions in Employee Accounts (as defined in Appendix 3). The Legal and Compliance Department is responsible for reviewing each quarter all Employee Account confirmations and monthly account statements for potential irregularities and conflicts of interest, as well as for frequency and type of activity. During this review, the Legal and Compliance Department will look for trading in quantities that seem disproportionate to the personnel s general income level, levels of trading activity that suggest that the personnel is spending too much time on personal trading, or trading in leveraged or speculative products. The Legal and Compliance Department also will look for a sudden or suspicious change in personal trading activity for which there is no apparent explanation or unusually large or speculative orders in options or commodities. E. Insider Trading Prohibition The misuse of material non-public information in connection with the purchase or sale of a security or related financial instrument is a violation of the Firm s policy and may result in a violation of U.S. or other legal and regulatory requirements, with severe criminal and civil sanctions for both the individual(s) involved and MarketAxess. The insider trading laws generally make it illegal to buy or sell or recommend a security or other financial instrument (including a future or option) while in possession of non-public information that is material to that security or other financial instrument, or to convey such information to others with the expectation that they will trade on it. MarketAxess has in place a set of procedures concerning the handling of material, non-public information by its personnel (attached as Appendix 2). If there is any question as to whether particular information is material, non-public information, MA Personnel should contact the General Counsel or the Chief Compliance Officer immediately. They should not discuss the information with anyone else, including their own supervisors, until authorized to do so by the General Counsel or the Chief Compliance Officer. Supervisory Principals should ensure that all personnel under their supervision are familiar with the requirements of this policy. 7

11 F. Private Securities Transactions 1. In general. No MA Personnel may effect any private securities transaction without prior written notice to, and approval of, the Chief Compliance Officer. Approval may be granted only upon review of relevant information, including a written description of (i) the proposed private securities transaction; (ii) the individual s role in the transaction or services being provided; and (iii) the method or the amount of direct or indirect selling compensation, if any, that such person may receive, from whatever source, in connection with the transaction, including: commissions; finders fees; securities or rights to acquire securities; rights or participation in profits; tax benefits; dissolution proceeds, as a general partner or otherwise; or expense reimbursements. Should there be any change in the arrangement at any time; a new written request must be submitted to the Chief Compliance Officer, detailing the arrangement. 2. Scope. The term private securities transaction refers to any securities transaction effected by MA Personnel outside the regular scope of their employment with the Firm, including any new offerings of securities (whether registered with the SEC or not). A private securities transaction does not include any transactions among immediate family members for which no selling compensation is received. It also does not include any personal transactions effected by MA Personnel for Employee Accounts in accordance with the Firm s Personal Trading Policy. 3. Approval. In general, the Firm will not approve a proposed private securities transaction in which any MA Personnel may receive selling compensation. Exceptions to this policy (if any) will be allowed subject to such terms and conditions as are deemed appropriate or necessary in the Chief Compliance Officer s discretion. If, at any time in the future, a private securities transaction in which selling compensation is received is approved by the Chief Compliance Officer, the Chief Compliance Officer will record the transaction and the individual s participation in the transaction will be supervised by the individual s designated Supervisory Principal as if the transaction were executed on behalf of the Firm. G. Outside Employment or Business Interests 1. In general. Please refer to Appendix 4 for MarketAxess policy on outside employment and business interests. 8

12 2. Scope. The activities approved by the Chief Compliance Officer subject to the Firm s policy on private securities transactions or other approved activities undertaken by MA Personnel in the regular course or scope of their co-employment with the entities affiliated with the Firm are not subject to MarketAxess policy on outside employment or business interests. The prior approval requirement also is not applicable to any volunteer activities undertaken by MA Personnel who volunteer to serve in charitable, civic or community service organizations, unless a potential conflict of interest with the Firm s other activities or other regulatory concerns exist. 3. Supervision. The Legal and Compliance Department will maintain a record of all approvals granted under this policy. H. Electronic Mail/Internet Use 1. Generally. MA Personnel are reminded that their use of electronic facilities, including the Firm s Internet, and instant messaging systems, must comply with MarketAxess policy, particularly its policy on communications with the public (attached as Appendix 7) and its general electronic mail policy detailed in the and Internet Usage Policy and Guidelines. MarketAxess owns all Internet and accounts used by personnel as well as all incoming and outgoing messages sent from or to such accounts. The Firm may read, copy, distribute, review, and store all incoming and outgoing messages, and personnel should not expect that any communication through or the Internet is, to any degree, private or confidential. MA Personnel should communicate via and the Internet as if such communications were being made at a public meeting. 2. Web Sites/Chat Rooms/Social Media. Personal web sites, electronic bulletin boards, chat rooms and personal social media web sites should not be used for MarketAxess business. MA Personnel generally are prohibited from using the Firm s name or transmitting communications relating to the Firm s business in any public forum on the Internet, outside the confines of the authorized web site. In particular, MA Personnel are prohibited from identifying themselves as employees of the Firm or discussing securitiesrelated business in electronic chat rooms, bulletin boards or news groups. Registered persons should note that FINRA has taken the position that the fact that an individual is registered, even if not identified as such, subjects him/her to a higher standard than the general public. 9

13 3. Please refer to the and Internet Usage Policy and Guidelines for a more detailed discussion of the Firm s policy on electronic mail and Internet usage. I. Gifts and Gratuities 1. Giving. MA Personnel may not give, directly or indirectly, any gifts or gratuities exceeding an aggregate of $100 per individual per year, to any person, principal, employee, agent or representative of another person, where such payment or gratuity is in relation to the business of MarketAxess. Promotional items of nominal value (pens, mugs, T-shirts and similar items imprinted with the MarketAxess logo) may be given, provided that the aggregate value of all such items received by any individual in any given year does not exceed $100. Customary and reasonable business meals and entertainment at which MA Personnel are present are permitted, and their cost will not be aggregated with other items given for the purpose of determining the $100 threshold. 2. Receiving. MA Personnel and members of their immediate families may not receive benefits, favors, gifts or entertainment that might adversely affect the exercise of their judgment on behalf of MarketAxess or create an appearance of impropriety. MA Personnel and members of their immediate families may not accept gifts or gratuities (including meals, travel, tickets to sporting events, etc.), other than those of nominal value, from any person or organization with which the Firm has a current or potential business relationship. 3. Exceptions. a) Personal Gifts. The aforementioned restrictions on gifts generally do not apply to personal gifts such as a wedding gift or a congratulatory gift for the birth of a child, provided that these gifts are not in relation to the business of the employer of the recipient. In determining whether a gift is in relation to the business of the employer of the recipient, MA Personnel should consider a number of factors, including the nature of any pre-existing personal or family relationship between the person giving the gift and the recipient, and whether the gift was paid for by the MA Person. If MarketAxess bears the cost of a gift, either directly or by reimbursing an employee, FINRA presumes that such gift is in relation to the business of the employer of the recipient. The analysis of whether a gift is in relation to the business 10

14 of the employer is required in connection with all gifts; MarketAxess does not offer a blanket exemption for gifts as personal in nature merely because they are given during the holiday season or for other life events. Please see the Chief Compliance Officer if you have any questions regarding this policy. b) In limited circumstances, the Chief Compliance Officer may approve an exception to this policy. Such approval must occur prior to the individual giving or receiving the gift or gratuity. 4. Recordkeeping. Gifts and gratuities that personnel receive must be recorded on a disclosure form and kept in records by the Legal and Compliance Department. All personnel must complete accurate expense reports for all gifts or gratuities paid for by the Firm. J. Extension of Credit MA Personnel may not arrange for the extension or maintenance of credit, to or for any account, that violates the Exchange Act, or the regulations promulgated thereunder by the SEC or the Board of Governors of the Federal Reserve System. Any questions about whether an activity constitutes arranging extensions of credit under Regulation T should immediately be brought to the attention of the Chief Compliance Officer. K. Handling Funds or Securities MA Personnel are reminded that they may not hold any client funds or securities. Delivery of securities should be made to the Firm s clearing broker and endorsed to the Firm s clearing broker. In the event that any securities are mailed to the Firm by a client, they should be delivered to the Firm s clearing broker within 24 hours of receipt. III. Registration, Hiring, Termination and Training A. Registration 1. Generally. MarketAxess will not permit any individual to effect securities transactions, to receive transaction-related compensation on securities business, or otherwise to engage in the offer or sale of securities unless such individual is properly registered with federal and state authorities, as applicable. The Legal and Compliance Department maintains an up-to-date list of both Firm and individual registrations. Any questions relating to an individual s registration qualifications and requirements should be directed to the Chief Compliance Officer. 11

15 2. Supervision. Supervisory Principals are responsible for assuring that all personnel who report to them are properly registered with FINRA and state regulators, as appropriate. When the Supervisory Principal becomes aware that an individual has not satisfied a registration requirement, including FINRA s continuing education requirement, he or she must promptly notify in writing the individual and follow-up with the individual until the matter is resolved. Once notification of non-compliance has been given to the individual, future violations may result in the termination of employment. 3. Review. The Legal and Compliance Department should regularly review the Firm s record in Web/CRD and with the states (including, but not limited to, Form BD) and should ensure that the Firm continues to comply with all applicable regulatory requirements. B. Hiring and Termination of Registered Persons 1. Hiring. MarketAxess is required to ascertain the good character, business repute, qualifications, and experience of any person prior to hiring the person, which includes obtaining a copy of the applicant s Form U-5 filed by the applicant s most recent previous FINRA member employer where an applicant has previously been registered with FINRA. Please refer to the Firm s Human Resources Policies and Procedures for more information on background investigations in general. One or more designated Supervisory Principals will be responsible for reviewing and approving all final employment decisions. For each new associated person who will be required to be registered because of the activities he or she will perform, the designated Supervisory Principal will receive a written notice from the Legal and Compliance Department that indicates the date of effective registration as well as the licenses held by the individual. It is a violation of Firm policy to engage in the securities business prior to receipt of such written notice. The Legal and Compliance Department is responsible for preparing and filing FINRA Form U-4 and Disclosure Reporting Pages for each new associated person, where applicable. The Legal and Compliance Department also is responsible for submitting any required fingerprint cards to FINRA for processing and CRD notification. The Legal and Compliance Department also will maintain reports of fingerprints in compliance with Rule 17f-2 under the Exchange Act. 2. Arbitration Statement. MarketAxess shall provide each associated person with the written statement regarding arbitration attached as 12

16 Appendix 5 whenever the associated person is asked to sign a new Form U Termination - Form U-5. The Legal and Compliance Department is responsible for filing a Form U-5 with FINRA and any applicable state regulators within 30 days of termination of any registered person s association with MarketAxess. A copy of the Form U-5 also must be provided to the terminated registered person within 30 days. The Human Resources Department is responsible for assuring that the Legal and Compliance Department receives prompt notice of the termination of any registered person s association with MarketAxess, to enable the Legal and Compliance Department to timely file the Form U-5. C. Initial Training All registered persons and other employees new to the Firm will receive a copy of this document, and he or she must attend such education and training programs as may be conducted by MarketAxess during the initial training period. As a reminder, all MA Personnel must certify that they have received a copy of this document and understand the relevant policies and procedures set forth herein. Supervisory Principals are responsible, in conjunction with the Legal and Compliance Department, for training MA Personnel under their supervision in compliance and other matters necessary for effective job performance. While it is the responsibility of the Legal and Compliance Department to obtain appropriate certifications, it is the responsibility of the designated Supervisory Principals to discuss compliance issues frequently and emphasize the importance of compliance. D. Continuing Education MarketAxess will not permit any registered person to continue to perform duties as a registered person, unless such person has complied with the continuing education requirements imposed by FINRA and has attended the necessary continuing education program administered by MarketAxess. The Firm Element Continuing Education Program is outlined in Appendix 6. All registered persons also must meet FINRA s Regulatory Element continuing education requirements, as set forth by FINRA. The Legal and Compliance Department is responsible for advising personnel of their requirements to attend any upcoming computer-based training. Supervisory Principals should ensure that registered persons under their supervision attend the annual compliance meetings arranged by the Firm, as well as the Firm s training sessions designed to meet FINRA s Firm 13

17 Element continuing education requirements. MarketAxess tracks compliance with FINRA and MarketAxess continuing education requirements for all registered persons. See Appendix 6. IV. Transaction Activities MA Personnel are reminded that the MarketAxess Systems are distinct and that the Firm s policies and procedures may vary, depending on the specific regulatory requirements applicable to each system. In particular, MA Personnel should keep in mind that the Firm has different client on-boarding processes in place for the various MarketAxess Systems. In addition, note that procedures for the Trading and Execution Services desk are detailed in the Trading and Execution Services Desk Policies, Procedures and Supervision document and should be reviewed and followed accordingly. A. Establishing Trading Relationships/Opening Accounts Access to the CTD and the CDS CLOB is granted when the Firm is satisfied that appropriate trading relationships have been established among Participating Dealers, Users, and MarketAxess. By contrast, access to Mid-X and the OTS is granted when an account is opened by the Firm through which transactions executed on the system may be booked. 1. Establishing Trading Relationships for the CTD and the CDS CLOB. a) Participating Dealers. Any dealer interested in becoming a Participating Dealer on the CTD and the CDS CLOB must sign a MarketAxess Dealer Agreement. The MarketAxess Dealer Agreement must be approved and signed by the Firm s Chief Executive Officer. b) Users. Before a new institutional investor may access the CTD or the CDS CLOB, it must become an authorized customer of one or more Participating Dealer(s) and must sign a MarketAxess User Agreement, which must be approved and signed by a designated Supervisory Principal. The MarketAxess User Agreement may be executed electronically through the Firm s click through procedures available on its web site. 2. Account Opening for the DTD, the OTS, and Mid-X. a) New Account Forms. Before a new subscriber is approved for trading on the DTD, the OTS, or Mid-X, a New Account Form must be completed by the registered person familiar 14

18 with the account and be reviewed and signed by a designated Supervisory Principal. Due diligence should be exercised with regard to the opening of a new account, including the review of credit and other relevant information by the designated Supervisory Principal to satisfy the Firm s know-your-customer requirements. b) Gaining Access to the DTD, the OTS, or Mid-X. Once a new account has been approved, the subscriber will receive computer encrypted certificates and passwords to gain access to the DTD, the OTS, or Mid-X. These certificates and passwords are periodically changed for security reasons. It is the Firm s policy that each new subscriber receive proper training to use the DTD, the OTS, or Mid-X and maintain appropriate systems in place to satisfy the Firm s technical requirements. c) Clearing Broker. The Firm s clearing broker requires various agreements and forms to be executed by each new account approved for trading on the DTD, the OTS, or Mid-X. The required agreements and forms will vary, depending on the type of subscriber (e.g., a registered broker-dealer) and the method chosen by such subscriber to settle transactions executed through the system. These agreements and forms must be promptly returned to the clearing broker in order for the account to be maintained. MA Personnel should inform the Legal and Compliance Department with regard to any subscriber who is delinquent in providing the required documentation. d) Investment Adviser Trading Authorization. For one or more accounts managed by a registered investment adviser, the Firm may deal directly with the adviser, provided that the adviser represents to the Firm that it has a written trading authorization on file as to the underlying accounts and forwards a copy of the trading authorization from the adviser s client(s). B. CTD Transaction Processing/ Supervision 1. Authorization Information. The CTD will maintain a daily audit trail of authorization information pertaining to levels of authority in the CTD to perform, review and verify events that can take place in the CTD. This information is necessary to enforce separation of duties as part of the Firm s mandatory integrity policy. The security logs will capture the following general information: the identity of the 15

19 User, the authorization level, the entry(ies) performed and the time(s) the entry(ies) was/were performed. 2. Transactions. The CTD will maintain a daily audit trail for each transaction, message and inquiry initiated through the CTD, through a history log. This redundant information stored in the history log will be used to maintain transaction integrity, for continuous backup purposes and to enable comparison of the main transaction database information with another set of the same data (i.e., Participating Dealer transaction history). The history log will include the following general information: transaction type, product type, Participating Dealer identity, transaction size, coupon, maturity, spread, price and User identity. C. DTD, the OTS, Mid-X and the CDS CLOB Transaction Processing/ Supervision Mid-X is not presently being utilized. The procedures set forth below shall be implemented if Mid-X transactions resume. 1. Order Entry and Execution. All orders entered into the DTD, the OTS or Mid-X will be broadcast and displayed to all subscribers to be executed on an anonymous basis, subject to the special conditions, if any, imposed by the subscriber. 2. Daily Summaries. The DTD, the OTS, Mid-X and the CDS CLOB will maintain daily summaries of trading and time-sequenced records of order information, including the date and time the order was received, the date, time and price at which the order was executed and the identity of the parties to the transaction. 3. Transaction Review. The DTD, the OTS and Mid-X will generate daily transaction blotters for review by a designated Supervisory Principal for any potential irregularities. The designated Supervisory Principal must evidence his or her review by initialing and dating the documents either manually or electronically. All documents initialed to evidence a supervisory review must be maintained as a part of the Firm s official books and records. 4. Mark-ups. All transactions executed through the DTD, the OTS or Mid-X will be charged mark-ups or mark-downs in accordance with the standard rates published by the Firm in a fee schedule. Each party to the trade will see the transaction price, net price and net yield, as well as the net settlement moneys. Accordingly, the markups or mark-downs charged by the Firm will be transparent to the DTD, the OTS or Mid-X subscribers. The Legal and Compliance Department will periodically review the Firm s fee schedule to confirm that the mark-ups or mark-downs are fair and equitable and in compliance with applicable regulatory guidelines. 16

20 5. Trade Confirmations. The Firm s clearing broker prepares and sends confirmations of all securities transactions executed through the DTD, the OTS or Mid-X. On a quarterly basis, a designated Supervisory Principal will review a random sampling of the duplicate copies of such confirmations and verify that they comply with SEC Rule 10b-10 (or MSRB Rule G-15 as applicable) and that information provided by the clearing broker is accurate. The designated Supervisory Principal will evidence such reviews by initialing and dating the confirmations reviewed. The relevant Participating Dealer prepares and sends confirmations of all securities transactions executed through the CDS CLOB. V. System Oversight and Maintenance A. System Evaluation, Review & Testing At least once per quarter the Chief Information Officer ( CIO ) will review the MarketAxess Systems to confirm that they are functioning properly. The CIO must immediately report any problems with the systems to the CEO and follow up to ensure that the problems are corrected. The CIO also will review and test both systems periodically to ensure that they have adequate capacity to accommodate the current and reasonably anticipated future transaction activities and to respond to localized emergency conditions. As part of this review, the CIO shall review the current amount of activities occurring through each system and make capacity estimates for future volume. In addition, the CIO will review both systems to ensure that they have adequate protocols in place to protect them from external and internal threats. Such testing may be conducted by either an outside firm specializing in such analysis or utilizing internal testing resources. The CIO must keep a record of the tests of the systems, any problems found, and what steps were taken to correct the problem. B. Contingency Procedures If MA Personnel become aware of any problems relating to the operation of the MarketAxess Systems or systems related to the Trading and Execution Services Desk (e.g., system downtime, performance problems), they should immediately notify the CIO. The CIO is responsible for maintaining appropriate procedures for dealing with any system contingency. 17

21 VI. Communications with the Public and Media Appendix 7 sets forth the policies and procedures of MarketAxess for the preparation, supervision and retention of all written communications with the public relating to its business as a broker-dealer. Written communications include s, letters (whether typed or handwritten), computer-generated printouts, valuations, and facsimiles (whether sent electronically or in paper form). For purposes of this document, all written communications intended for existing or prospective subscribers of the MarketAxess Systems should be deemed subject to the requirements of the policy. As a reminder, MarketAxess policies and procedures regarding written communications will be included in the annual compliance meeting and otherwise will be a part of its continuing education program. Requests for exceptions to these policies and procedures also should be referred to the Chief Compliance Officer. VII. Recordkeeping and Financial Reporting A. Books and Records The Firm requires that all books and records be maintained in reasonable detail and accurately reflect all transactions. Except as otherwise noted, the Legal and Compliance Department is responsible for ensuring compliance with the recordkeeping requirements under SEC Regulation ATS (Rules 302 and 303), Rules 17a-3 and 17a-4 under the Exchange Act, the FINRA Rules of Fair Practice, and all other applicable recordkeeping requirements. Appendix 8 describes in detail the records that MarketAxess is required to maintain. B. Financial Reporting 1. Financial Reporting Obligations. The CFO is responsible for the accuracy of all financial reports and their timely preparation. The CFO should ensure that the Firm complies with all applicable financial reporting requirements, including the following: a) FINRA Assessment Report. The CFO (or a qualified delegee) must report the Firm s annual gross income to FINRA on the FINRA Assessment Report as soon as possible after December 31 of each year and not later than March 27. b) Net Capital and Audited Financial Reports. The CFO (or a qualified delegee) must review Focus Reports Part I and II, or IIA as appropriate, and confirm that they were accurately prepared and timely filed. 18

22 c) SIPC Report. The CFO (or a qualified delegee) must file with the SIPC completed forms SIPC 6 and SIPC 7 on a semiannual and annual basis respectively. 2. Obligations under the Net Capital Rule. The CFO is responsible for ensuring that the Firm complies with the requirements of SEC Rule 15c3-1, the net capital rule. To that end, the CFO (or a qualified delegee) should conduct a monthly review of the net capital computation and verify that all accounting records are accurately kept and up-to-date. The CFO (or a qualified delegee) must immediately report any potential problems with the Firm s net capital to the Chief Compliance Officer. 3. The CFO (or a qualified delegee) must review the Firm s accounting ledgers on a monthly basis to determine if any reportable events have occurred. The CFO should coordinate with the Chief Compliance Officer concerning the filing of any such report. 4. Obligations under the Customer Protection Rule. The CFO is responsible for ensuring that the Firm complies with the requirements of SEC Rule 15c3-3, the Customer Protection Rule. The Firm presently qualifies for an exemption from the requirements of the Customer Protection Rule. The CFO (or a qualified delegee) should ensure continuous compliance by ensuring that a clearing agreement is continuously in effect with the Firm s clearing broker. The CFO (or a qualified delegee) must immediately report any potential problems to the Chief Compliance Officer. C. Compliance with Regulation ATS Regulation ATS under the Exchange Act imposes certain requirements that are applicable to the operation of an Alternative Trading System (an ATS ). The following procedures are designed to ensure that the Firm complies with those requirements: 1. Monthly Review of Trading Volume. As of the date of publication of this document, the ATS is not subject to the fair access, capacity, security and integrity requirements of Regulation ATS. The ATS will become subject to those requirements if, for four of six consecutive calendar months, it facilitates 20% or more of the average daily volume traded in the U.S. in the relevant product class. On a monthly basis, a designated Supervisory Principal will review the volume of the Firm s activity in investment grade corporate debt 19

23 or in non-investment grade corporate debt relative to the volume figures for the industry to determine if the ATS accounts for more than 20% of industry trading volume in the relevant product class. If the ATS trading volume in such a category exceeds the 20% threshold for four of six consecutive calendar months, the Firm will adopt appropriate policies and procedures to ensure compliance with the requirements of Regulation ATS. 2. Form ATS Amendments and Form ATS-R. Under Regulation ATS, the Firm is required to file an amendment to Form ATS as follows: At least 20 calendar days prior to the implementation of any material change in the ATS operations. A material change generally includes any change to the operating platform, the types of securities traded, or the types of subscribers. Within 30 calendar days after the end of each calendar quarter if any information contained in the Firm s Form ATS has changed but has not been reported in a previous amendment. Promptly if the ATS ceases operations. In addition, the Firm is required to file periodic transaction reports on Form ATS-R within 20 days of the end of each calendar quarter. The CFO (or a qualified delegee) is responsible for preparing and filing all such reports in a timely manner. 3. Examinations, Inspections and Investigations. In accordance with Regulation ATS, the Firm will permit the examination or inspection of its premises, systems and records by the SEC or FINRA. In addition, the Firm will cooperate fully in the examination, inspection, or investigation of any ATS subscriber by the SEC or an SRO with regulatory jurisdiction over the subscriber. The Legal and Compliance Department is responsible for ensuring that MA Personnel understand and comply with the foregoing policy. 20

24 D. Compliance with TRACE Rules On January 23, 2001, the SEC approved proposed rules that require FINRA members to report secondary market transactions in eligible fixed income securities to FINRA and subject certain transaction reports to dissemination. The rules, referred to as the TRACE rules, provide the following: 1. fixed income transactions that must be reported under the new TRACE rules are those secondary market transactions involving a TRACE-eligible security ; 2. the term TRACE-eligible security means all United States dollar denominated debt securities that are depository-eligible securities; Investment Grade and Non-Investment Grade (as defined in the TRACE rules); issued by United States and/or foreign private corporations; and (1) registered with the SEC; or (2) issued pursuant to Section 4(2) of the Securities Act of 1933 (the Securities Act ) and purchased or sold pursuant to Rule 144A under the Securities Act; 3. a member that is a party to a transaction involving a member and a non-member, including a customer, in a fixed income security that is a TRACE-eligible security must report the transaction to FINRA within 15 minutes of the time of execution; 4. when the party on the sell side and the party on the buy side of a transaction in a TRACE-eligible security are both members, both members must report the transaction to FINRA within 15 minutes of the time of execution; 5. FINRA will disseminate transaction information relating to transactions in the following two types of securities: a. a TRACE-eligible security having an initial issuance size of $1 billion or greater that is Investment Grade at the time of receipt of the transaction report; and b. a TRACE-eligible security that is designated as a Fixed Income Pricing System ( FIPS ) security (a FIPS 50 security ) immediately prior to the time that the FIPS rules (the current Rule 6200 Series) are rescinded; and 6. dissemination in the securities transactions referenced in 6 above will occur immediately after the transaction information is received by FINRA. 21

25 The TRACE rules became effective on July 1, The Firm s participation in TRACE for trade reporting purposes is mandatory. Compliance with the TRACE rules is the responsibility of the head of each business unit that is responsible for TRACE reporting. The only MA business units acting as counterparties in securities transactions, and therefore responsible for TRACE (or RTRS, for municipal securities) reporting, are the DTD, the OTS, Mid-X and the Trading and Execution Services desk. All DTD, OTS, Mid-X and Trading and Execution Services transactions, with the exception of municipal securities, are automatically reported to TRACE by MarketAxess. MarketAxess production support team continuously monitors the functioning of our reporting technology and the link to TRACE. The MarketAxess System has been programmed to issue error messages if the direct feed to TRACE is not functioning properly. If such a malfunction were to occur, MarketAxess would report transactions to TRACE manually until the system issue was resolved. Municipal Securities transactions will be reported to the MSRB Real-Time Transaction Reporting System (RTRS) by the Firm s clearing agent. Andrew Luy is the supervisory principal responsible for supervision of trade reporting for Municipal Securities. Trading and Execution Services operations personnel create a daily report comparing all Trading and Execution Services trading activity vs. TRACE/RTRS records to ensure that trades were accurately reported. The report includes a notation of any errors and a description of the status. Operations personnel distribute the report to the supervisory principals daily via . At least one supervisor acknowledges their review of the report daily, evidenced by a reply to operations personnel, who maintain an electronic copy of the acknowledgment. E. Compliance with MSRB Real-time Transaction Reporting System Please see Appendix 12 MSRB Procedures for procedures related to MSRB Rule G-14. VIII. Reporting Complaints and Other Matters A. Complaints MA Personnel must notify designated Supervisory Principals and the General Counsel or the Chief Compliance Officer immediately upon receipt of an oral or written complaint or other indication of grievances from any MarketAxess System subscriber or any Firm clients dealing with the Trading and Execution Services Desk. The Chief Compliance Officer 22