Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of Proposed Rule Change To Define Asset-Backed Securities, Mortgage-Backed Securities, and Other Similar Securities as TRACE-Eligible Securities and Require the Reporting of Transactions in Such Securities to TRACE, 55600-55606 [E9-25875]
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Federal Register / Vol. 74, No. 207 / Wednesday, October 28, 2009 / Notices
organization consents, the Commission
will:
(A) By order approve such proposed
rule change, or
(B) Institute proceedings to determine
whether the proposed rule change
should be disapproved.
IV. Solicitation of Comments
2009–067 and should be submitted on
or before November 18, 2009.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.11
Elizabeth M. Murphy,
Secretary.
[FR Doc. E9–25872 Filed 10–27–09; 8:45 am]
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
BILLING CODE 8011–01–P
Electronic Comments
Self-Regulatory Organizations;
Financial Industry Regulatory
Authority, Inc.; Notice of Filing of
Proposed Rule Change To Define
Asset-Backed Securities, MortgageBacked Securities, and Other Similar
Securities as TRACE-Eligible
Securities and Require the Reporting
of Transactions in Such Securities to
TRACE
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an e-mail to rulecomments@sec.gov. Please include File
Number SR–FINRA–2009–067 on the
subject line.
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Paper Comments
• Send paper comments in triplicate
to Elizabeth M. Murphy, Secretary,
Securities and Exchange Commission,
100 F Street, NE., Washington, DC
20549–1090.
All submissions should refer to File
Number SR–FINRA–2009–067. This file
number should be included on the
subject line if e-mail is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for inspection and copying in
the Commission’s Public Reference
Room, 100 F Street, NE., Washington,
DC 20549, on official business days
between the hours of 10 a.m. and 3 p.m.
Copies of the filing also will be available
for inspection and copying at the
principal office of FINRA. All comments
received will be posted without change;
the Commission does not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File Number SR–FINRA–
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SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–60860; File No. SR–FINRA–
2009–065]
October 21, 2009.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
‘‘Act’’) 1 and Rule 19b–4 thereunder,2
notice is hereby given that on October
1, 2009, the Financial Industry
Regulatory Authority, Inc. (‘‘FINRA’’)
filed with the Securities and Exchange
Commission (‘‘SEC’’ or ‘‘Commission’’)
the proposed rule change as described
in Items I, II, and III below, which Items
have been prepared by FINRA. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
FINRA is proposing to amend the
FINRA Rule 6700 Series (except for Rule
6740) and FINRA Rule 7730 to designate
asset-backed securities, mortgagebacked securities and other similar
securities (collectively defined
hereinafter as ‘‘Asset-Backed
Securities’’) as Trade Reporting and
Compliance Engine (‘‘TRACE’’) TRACEEligible Securities, and establish
reporting, fee and other requirements
relating to such securities as follows:
(1) In Rule 6710, to amend the defined
term: (A) ‘‘TRACE-Eligible Security’’ to
include Asset-Backed Securities; and
make certain technical changes in Rule
6710(a); (B) ‘‘Reportable TRACE
Transaction’’ to include specific
requirements regarding certain Asset11 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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Backed Securities in Rule 6710(c); (C)
‘‘Agency Debt Security’’ to incorporate
proposed defined terms in Rule 6710(l);
and (D) ‘‘TRACE System Hours’’ to
transfer the defined term from Rule
6730(a) to Rule 6710(bb);
(2) In Rule 6710, to add the defined
terms, ‘‘Sponsor,’’ ‘‘Issuing Entity,’’
‘‘TBA,’’ ‘‘Agency Pass-Through
Mortgage-Backed Security,’’ ‘‘Factor,’’
‘‘Specified Pool Transaction,’’
‘‘Stipulation Transaction,’’ ‘‘Dollar
Roll,’’ and ‘‘Remaining Principal
Balance,’’ as, respectively, new
paragraphs (s) through (aa);
(3) In Rule 6730, to provide for
reporting of Asset-Backed Securities
transactions;
(4) In Rule 6750, to provide that
information on a transaction in a
TRACE-Eligible Security that is an
Asset-Backed Security will not be
disseminated;
(5) In Rule 6760, to require a member
that is a Sponsor or an Issuing Entity of
an Asset-Backed Security to provide
notice as required under the Rule, and
to modify the notification requirements
to accept a mortgage pool number in
certain circumstances;
(6) In Rule 7730, to establish
transaction reporting fees for AssetBacked Securities that are TRACEEligible Securities at the same rates in
effect for corporate bonds; for certain
Asset-Backed Securities, to identify size
(volume) for determining a trade
reporting fee, and to provide that for
purposes of Rule 7730(b), a transaction
in an Agency Pass-Through MortgageBacked Security is not a List or Fixed
Offering Price Transaction or a
Takedown Transaction; and
(7) In the Rule 6700 Series, except for
Rule 6740, and Rule 7730 to incorporate
certain technical, administrative and
clarifying changes.
The text of the proposed rule change
is available on FINRA’s Web site at
https://www.finra.org, at the principal
office of FINRA and at the
Commission’s Public Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission,
FINRA included statements concerning
the purpose of, and basis for the
proposed rule change and discussed any
comments it received on the proposed
rule change. The text of these statements
may be examined at the places specified
in Item IV below. FINRA has prepared
summaries, set forth in sections A, B,
and C below, of the most significant
aspects of such statements.
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Federal Register / Vol. 74, No. 207 / Wednesday, October 28, 2009 / Notices
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
Introduction
(A) Background
FINRA proposes to expand TRACE to
include Asset-Backed Securities, as
defined in Rule 6710(m), as TRACEEligible Securities, requiring members
to report transactions in such securities
to TRACE. For purposes of this
proposed rule change, the term ‘‘AssetBacked Security’’ is broadly defined,
and the reporting of such securities to
TRACE will permit FINRA to obtain
additional transaction information and
observe patterns of trading, facilitating
the oversight and regulation of the
Asset-Backed Securities market. FINRA
will study the reported data to
determine the volume and trading in
various types of Asset-Backed
Securities.
Generally, FINRA’s policy favors
transparency in the debt securities
markets, and for most TRACE-Eligible
Securities, real-time dissemination of
transaction information is provided for
under Rule 6750(a). Although at this
time FINRA does not propose that
transaction information on AssetBacked Securities be disseminated,
FINRA believes that the transparency in
corporate bonds provided by TRACE
today has contributed to better pricing,
more precise valuations and reduced
investor costs. After FINRA has had an
opportunity to review data over a period
of time, FINRA may determine that
dissemination of some transaction
information for Asset-Backed Securities
is warranted.3
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(B) Summary of Proposed Amendments
To incorporate Asset-Backed
Securities in TRACE, FINRA proposes
significant amendments to Rule 6710,
Rule 6730 and Rule 6750 and lesser
amendments to Rule 6720, Rule 6760
and Rule 7730. In Rule 6710, FINRA
proposes to revise the defined terms,
‘‘TRACE-Eligible Security’’ and
‘‘Reportable TRACE Transaction,’’ 4 and
to add nine defined terms, most of
which relate to the trading of Agency
3 FINRA used this approach previously when it
implemented dissemination in phases for various
types of corporate bonds. Similarly, any proposal to
adopt dissemination protocols for Asset-Backed
Securities will be subject to rulemaking under
Section 19(b)(1) of the Act, 15 U.S.C. 78s(b)(1).
4 FINRA also proposes technical or clarifying
amendments to ‘‘Agency Debt Security,’’ ‘‘AssetBacked Security’’ and ‘‘TRACE System Hours’’ as
defined, respectively, in Rule 6710(l), Rule 6710(m)
and Rule 6710(bb).
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Pass-Through Mortgage-Backed
Securities 5 and other types of AssetBacked Securities that are collateralized
by mortgages or other assets that are
self-amortizing. In Rule 6730, FINRA
proposes more liberal trade reporting
requirements for transactions in AssetBacked Securities than those in effect
for corporate bonds, modifications to
the reporting requirements relating to
particular structural aspects or other
features of certain Asset-Backed
Securities, and, in Rule 6750(b), not to
disseminate transaction information on
Asset-Backed Securities. The proposed
amendments to Rule 6760 characterize a
member that is a Sponsor or an Issuing
Entity 6 of an Asset-Backed Security as
a managing underwriter, requiring such
persons to provide notice as required
under the rule. FINRA proposes
amendments to Rule 7730 to apply the
fees currently in effect under the rule at
the same rates to transactions in AssetBacked Securities; to provide that a
transaction in an Agency Pass-Through
Mortgage-Backed Security will not be
treated as a List or Fixed Offering Price
Transaction or a Takedown Transaction
for purposes of trade reporting fees; and
to define size (volume) for purposes of
the reporting fees payable for
transactions in certain Asset-Backed
Securities. Finally, several minor,
technical or clarifying amendments are
proposed to the Rule 6700 Series
(except for Rule 6740) and Rule 7730.
Discussion
(A) ‘‘TRACE-Eligible Security’’; Other
Defined Terms
TRACE-Eligible Security and AssetBacked Security. Under Rule 6710(a), a
TRACE-Eligible Security is a debt
security that is U.S. dollar denominated
and issued by a U.S. or foreign private
issuer, and if a ‘‘restricted security’’ as
defined in Securities Act Rule 144(a)(3),
sold pursuant to Rule 144A; or is a U.S.
dollar denominated security that is
issued or guaranteed by an Agency or a
Government-Sponsored Enterprise
(‘‘GSE’’).7 Securities excluded from
‘‘TRACE-Eligible Security’’ include U.S.
Treasury Securities, foreign sovereign
securities and other securities not
issued by a private issuer, Money
5 ‘‘Agency Pass-Through Mortgage-Backed
Security’’ is defined in proposed Rule 6710(v) and
discussed, infra.
6 ‘‘Sponsor’’ and ‘‘Issuing Entity’’ are defined in
proposed Rule 6710(s) and proposed Rule 6710(t)
and discussed, infra.
7 ‘‘Agency’’ is defined in Rule 6710(k) and
‘‘Government-Sponsored Enterprise’’ (‘‘GSE’’) is
defined in Rule 6710(n).
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55601
Market Instruments and Asset-Backed
Securities.8
In Rule 6710(m), ‘‘Asset-Backed
Security’’ is defined broadly to include
a security that is defined as such under
Securities Act Regulation AB,9 a
8 ‘‘U.S. Treasury Security’’ is defined in Rule
6710(p); ‘‘Money Market Instrument’’ is defined in
Rule 6710(o); and ‘‘Asset-Backed Security’’ is
defined in Rule 6710(m).
9 Securities Act Regulation AB, Section 1101(c)
defines ‘‘asset-backed security’’ as:
(1)‘Asset-backed security’ means a security that is
primarily serviced by the cash flows of a discrete
pool of receivables or other financial assets, either
fixed or revolving, that by their terms convert into
cash within a finite time period, plus any rights or
other assets designed to assure the servicing or
timely distributions of proceeds to the security
holders; provided that in the case of financial assets
that are leases, those assets may convert to cash
partially by the cash proceeds from the disposition
of the physical property underlying such leases.
(2) The following additional conditions apply in
order to be considered an asset-backed security:
(i) Neither the depositor nor the issuing entity is
an investment company under the Investment
Company Act of 1940 (15 U.S.C. 80a–1 et seq.) nor
will become an investment company as a result of
the asset-backed securities transaction.
(ii) The activities of the issuing entity for the
asset-backed securities are limited to passively
owing or holding the pool of assets, issuing the
asset-backed securities supported or serviced by
those assets, and other activities reasonably
incidental thereto.
(iii) No non-performing assets are part of the asset
pool as of the measurement date.
(iv) Delinquent assets do not constitute 50% or
more, as measured by dollar volume, of the asset
pool as of the measurement date.
(v) With respect to securities that are backed by
leases, the portion of the securitized pool balance
attributable to the residual value of the physical
property underlying the leases, as determined in
accordance with the transaction agreements for the
securities, does not constitute:
(A) For motor vehicle leases, 65% or more, as
measured by dollar volume, of the securitized pool
balance as of the measurement date.
(B) For all other leases, 50% or more, as measured
by dollar volume, of the securitized pool balance as
of the measurement date.
(3) Notwithstanding the requirement in paragraph
(c)(1) of this section that the asset pool be a discrete
pool of assets, the following are considered to be
a discrete pool of assets for purposes of being
considered an asset-backed security:
(i) Master Trusts. The offering related to the
securities contemplates adding additional assets to
the pool that backs such securities in connection
with future insurances of asset-backed securities
backed by such pool. The offering related to the
securities also may contemplate additions to the
asset pool, to the extent consistent with paragraphs
(c)(3)(ii) and (c)(3)(iii) of this section, in connection
with maintaining minimum pool balances in
accordance with the transaction agreements for
master trusts with revolving periods or receivables
or other financial assets that arise under revolving
accounts.
(ii) Prefunding Periods. The offering related to the
securities contemplates a prefunding account where
a portion of the proceeds of that offering is to be
used for the future acquisition of additional pool
assets, if the duration of the prefunding period does
not extend for more than one year from the date of
insurance of the securities and the portion of the
proceeds for such prefunding account does not
involve in excess of:
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Federal Register / Vol. 74, No. 207 / Wednesday, October 28, 2009 / Notices
mortgage-backed security, a
collateralized mortgage obligation, a
synthetic asset-backed security, or any
instrument involving or based on the
securitization of mortgages or other
credits or assets, including but not
limited to a collateralized debt
obligation, a collateralized bond
obligation, a collateralized debt
obligation of Asset-Backed Securities or
a collateralized debt obligation of
collateralized debt obligations. These
instruments include any instrument
involving or based on the securitization
of mortgages or other credits or assets,
such as asset-backed securities backed
by a pool credit card receivables,
automobile loans, student loans, or
Small Business Administration loans.
The term includes Asset-Backed
Securities that are issued or guaranteed
by an Agency or a GSE.10
FINRA proposes to amend the defined
term ‘‘TRACE-Eligible Security’’ in Rule
6710(a) to include all Asset-Backed
Securities as broadly defined in Rule
6710(m) as TRACE-Eligible Securities.
The specific exclusion of Asset-Backed
Securities in the definition of ‘‘TRACEEligible Security’’ will be deleted. The
proposed amendment will include in
TRACE a significant, high dollar volume
and increasing number of debt
securities.
In addition, in Rule 6710(m) FINRA
proposes minor amendments to the
term, ‘‘Asset-Backed Security,’’ which
will clarify but will not change the
scope or meaning of the definition. As
amended, the definition will provide:
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‘‘Asset-Backed Security’’ means a security
collateralized by any type of financial asset,
such as loans, leases, mortgages, or secured
or unsecured receivables, and includes but is
not limited to an asset-backed security as
used in Securities Act Regulation AB,
Section 1101(c), a mortgage-backed security,
a collateralized mortgage obligation, a
synthetic asset-backed security, a
collateralized debt obligation, a collateralized
bond obligation, a collateralized debt
obligation of Asset-Backed Securities or a
(A) For master trusts, 50% of the aggregate
principal balance of the total asset pool whose cash
flows support the securities; and
(B) For other offerings, 50% of the proceeds of the
offering.
(iii) Revolving Periods. The offering related to the
securities contemplates a revolving period where
cash flows from the pool assets may be used to
acquire additional pool assets, provided, that, for
securities backed by receivables or other financial
assets that do not arise under revolving accounts,
the revolving period does not extend for more than
three years from the date of issuance of the
securities and the additional pool assets are of the
same general character as the original pool assets.
10 The defined term ‘‘Agency Debt Security’’ in
Rule 6710(l) does not include an Asset-Backed
Security, even if such security is issued or
guaranteed by an Agency or a GSE.
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Jkt 220001
collateralized debt obligation of
collateralized debt obligations.
Reportable TRACE Transaction.
FINRA recently amended the Rule 6700
Series to require members to report
primary market transactions, which
harmonized the reporting requirements
regarding such transactions with the
requirements of The Municipal
Securities Rulemaking Board
(‘‘MSRB’’).11 Neither FINRA, with
respect to TRACE-Eligible Securities,
nor the MSRB, with respect to
municipal securities, require that the
initial sale from an issuer to an
underwriter(s) or an initial purchaser(s)
be reported as a primary market
transaction.
FINRA proposes to amend the term
‘‘Reportable TRACE Transaction’’ in
Rule 6710(c) to provide that, for Agency
Pass-Through Mortgage-Backed
Securities, all transactions, including
the initial sale of an Agency PassThrough Mortgage-Backed Security from
an Issuing Entity or a Sponsor to an
underwriter or an initial purchaser, are
Reportable TRACE Transactions. FINRA
proposes that such initial sales in an
Agency Pass-Through Mortgage-Backed
Security be reported due to the
particular origination process, including
the manner in which such securities are
sold initially. In most cases, the
origination of a TRACE-Eligible Security
involves an offering where an issuer
sells securities to one or more
underwriters or initial purchasers that
then resell such securities. However,
due in part to the TBA process, and
their status as exempt securities, Agency
Pass-Through Mortgage-Backed
Securities generally are not sold in
traditional private offerings (or a
traditional public offering).
Consequently, requiring the reporting of
the initial transaction may be the only
opportunity to elicit necessary
information for a regulatory audit trail
of Asset-Backed Securities. In addition,
the proposed amendments clarify that
similar primary market sale transactions
from the issuer to an underwriter or
initial purchaser in other TRACEEligible Securities will continue not to
be Reportable TRACE Transactions.
FINRA also proposes to streamline the
definition, ‘‘Agency Debt Security,’’ in
Rule 6710(l) by using proposed defined
terms and to transfer the defined term
‘‘TRACE System Hours’’ from Rule
11 Securities Exchange Act Release No. 60726
(September 28, 2009), 74 FR 50991 (October 2,
2009) (Order Approving SR–FINRA–2009–010)
(hereinafter ‘‘SEC Order Approving TRACE
Expansion—Agency Debt Securities’’). The MSRB
requires the reporting of primary market
transactions in municipal securities under MSRB
Rule G–14.
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6730(a) to Rule 6710(bb), with a minor
amendment to clarify that the TRACE
system operates only on business days.
New Defined Terms
FINRA proposes to add to Rule 6710
the following defined terms: ‘‘Sponsor’’
as proposed Rule 6710(s); ‘‘Issuing
Entity’’ as proposed Rule 6710(t);
‘‘TBA’’ as proposed Rule 6710(u);
‘‘Agency Pass-Through MortgageBacked Security’’ as proposed Rule
6710(v); ‘‘Factor’’ as proposed Rule
6710(w); ‘‘Specified Pool Transaction’’
as proposed Rule 6710(x), ‘‘Stipulation
Transaction’’ as proposed Rule 6710(y);
‘‘Dollar Roll’’ as proposed Rule 6710(z);
and ‘‘Remaining Principal Balance’’ as
proposed Rule 6710(aa).
Sponsor and Issuing Entity. In AssetBacked Securities, the Sponsor of an
Asset-Backed Security is the person
(i.e., usually a non-natural ‘‘person’’
such as a corporation) that decides to
issue a security and determines its
structure, pool and features. FINRA
proposed to incorporate the definition
of ‘‘Sponsor’’ adopted by the
Commission in Securities Act
Regulation AB, Item 1101(l) as proposed
Rule 6710(s). Securities Act Regulation
AB, Item 1101(l) defines ‘‘Sponsor’’ as
‘‘the person who organizes and initiates
an asset-backed securities transaction by
selling or transferring assets, either
directly or indirectly, including through
an affiliate, to the issuing entity.’’ 12
The Sponsor of an Asset-Backed Bond
is generally not the issuer. In AssetBacked Securities, the issuer is often a
trust, or special purpose vehicle
(‘‘SPV’’) or special purpose entity
(‘‘SPE’’) that is established solely to
issue the Asset-Backed Securities and
hold the pool of assets that back the
asset-backed security, and, in SEC
Regulation AB, is referred to as the
‘‘issuing entity.’’ For purposes of
TRACE, FINRA proposes to define
‘‘Issuing Entity’’ as the term is defined
in Securities Act Regulation AB, Item
1101(f) in proposed Rule 6710(t).
Securities Act Regulation AB, Item
1101(f) defines an issuing entity as ‘‘the
trust or other entity created at the
direction of the sponsor or depositor
that owns or holds the pool assets and
in whose name the asset-backed
securities supported or serviced by the
pool assets are issued.’’ 13 Among other
things, under the TRACE provisions,
members that are Sponsors or Issuing
12 Securities Act Regulation AB, Item 1101(l), 17
CFR 229.1101(l).
13 Securities Act Regulation AB, Item 1101(f), 17
CFR 229.1101(f).
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Entities are required to provide notice to
FINRA Operations under Rule 6760.
TBA. FINRA proposes to add the
defined term ‘‘TBA’’ as proposed Rule
6710(u). ‘‘TBA’’ stands for ‘‘to be
announced’’ and refers to a transaction
in an Agency Pass-Through MortgageBacked Security, as defined in proposed
Rule 6710(v) and discussed in the
following paragraph, where the parties
agree to specific terms (i.e., face amount
of the security, coupon, maturity, the
Agency or GSE under which the
mortgage pools will be issued or
guaranteed, price and clearance and
settlement in conformity with the
uniform practices established as ‘‘good
delivery’’ on a standard pre-announced
settlement date for such instruments),
but do not identify the specific pool(s)
of mortgages that will be delivered on
settlement date.14
Agency Pass-Through MortgageBacked Security. Proposed Rule 6710(v)
defines Agency Pass-Through MortgageBacked Security to mean:
[A] mortgage-backed security issued by an
Agency or a Government-Sponsored
Enterprise, for which the timely payment of
principal and interest is guaranteed by an
Agency or a Government-Sponsored
Enterprise, representing ownership interests
in a pool or pools of residential mortgage
loans with the security structured to ‘‘pass
through’’ the principal and interest payments
made by the mortgagees to the owners of the
pool(s) on a pro rata basis.
Several of the defined terms and other
amendments to the Rule 6700 Series
and Rule 7730 in this proposed rule
change address issues that are specific
to transactions in Agency Pass-Through
Mortgage-Backed Securities.
Remaining Principal Balance and
Factor. The related terms, ‘‘Remaining
Principal Balance’’ and ‘‘Factor’’ are
defined, respectively, in proposed Rule
6710(aa) and proposed Rule 6710(w).
Factors and Remaining Principal
Balances are relevant in the pricing and
valuation of mortgage-backed securities
and certain other types of Asset-Backed
Securities that are backed by mortgage
pools or other pools containing assets
that are self-amortizing. Proposed Rule
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14 Specifically,
proposed Rule 6710(u) provides:
‘‘TBA’’ means ‘‘to be announced’’ and refers to a
transaction in an Agency Pass-Through MortgageBacked Security as defined in paragraph (v) where
the parties agree that the seller will deliver to the
buyer an Agency Pass-Through Mortgage-Backed
Security of a specified face amount and coupon
from a specified Agency or Government Sponsored
Enterprise program representing a pool (or pools) of
mortgages (that are not specified by unique pool
number), at a specified price, and the parties will
clear and settle the transaction in conformity with
the uniform practices established as ‘‘good
delivery’’ for such transactions and will not impose
any special conditions or stipulations.
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15:34 Oct 27, 2009
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6710(aa) defines ‘‘Remaining Principal
Balance’’ to mean:
[F]or an Asset-Backed Security backed by
a pool of mortgages or other assets that are
self-amortizing, the total unpaid principal
balance of all such mortgages, or the
equivalent remaining value of such selfamortizing assets held in the asset pool, at a
specific time, such as the Time of Execution.
A ‘‘Factor’’ is used by dealers and
other market professionals to calculate
the Remaining Principal Balance of an
Asset-Backed Security that is backed by
a pool of mortgages or other selfamortizing assets. Specifically,
proposed Rule 6710(w) defines ‘‘Factor’’
as:
[T]he decimal value representing the
proportion of the outstanding principal value
of a security to its original principal value.
For example, at issuance, the Factor
for every mortgage-backed security and
certain other types of Asset-Backed
Securities for which a Factor is used is
1.0. Over time, the Factor for the
specific security changes, reflecting the
Remaining Principal Balance of the pool
of assets for such security.15 In a
transaction in an Asset-Backed Security
that is backed by mortgages or other
assets that are self-amortizing, under
proposed amendments to Rule
6730(d)(2), discussed infra, a member
will be required to report a Factor,
which is used to price the security.
However, not all types of Asset-Backed
Securities are priced using a Factor.
Specified Pool Transaction;
Stipulation Transaction; Dollar Roll. In
proposed Rule 6710(x), Rule 6710(y),
and Rule 6710(z), respectively, FINRA
defines three special types of
transactions that occur solely in Agency
Pass-Through Mortgage-Backed
Securities. The term ‘‘Specified Pool
Transaction’’ is defined in proposed
Rule 6710(x). A ‘‘Specified Pool
Transaction’’ is a transaction in an
Agency Pass-Through Mortgage-Backed
Security that requires the seller to
deliver at settlement ‘‘one or more pools
of mortgages that, at the Time of
Execution, are identified by their unique
pool identification numbers and original
principal value.’’ The conditions
limiting the seller’s delivery options
affect pricing, and FINRA proposes that
such transactions be reported with an
indicator, as discussed infra.
In proposed Rule 6710(y), the term
‘‘Stipulation Transaction’’ is defined to
mean a transaction:
15 For example, a mortgage-backed security with
an original face value of $10 million that has a
Factor of .5 on April 15, 2009 has a Remaining
Principal Balance of $5 million as of April 15, 2009
(assuming all mortgage payments and prepayments
have been included in the calculation of the Factor).
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[I]n an Agency Pass-Through MortgageBacked Security as defined in paragraph (v)
where, at the Time of Execution, the parties
agree that the seller will deliver to the buyer
an Agency Pass-Through Mortgage-Backed
Security of a specified face amount and
coupon from a specified Agency or
Government-Sponsored Enterprise program
that represents a pool (or pools) of mortgages,
at a specified price, and the parties stipulate
that the pool or pools to be delivered meet
certain conditions that preclude settlement of
the transaction in conformity with the
uniform practices established as ‘‘good
delivery’’ for an Agency Pass-Through
Mortgage-Backed Security effected TBA.
A transaction in an Agency PassThrough Mortgage-Backed Security that
is a Stipulation Transaction differs from
a ‘‘Specified Pool Transaction’’ because
good delivery, although conditioned by
the special stipulations, is not limited to
specific pools that the parties have
identified by pool number. Again, the
special conditions that limit the seller’s
flexibility as to delivery affect pricing,
and FINRA proposes that such trades be
reported with an indicator.
The term ‘‘Dollar Roll,’’ as defined in
proposed Rule 6710(z), describes
simultaneous transactions that are
executed pursuant to an agreement
between a buyer and seller of an Agency
Pass-Through Mortgage-Backed
Security. At the time of the transactions,
the initial buyer of the Agency PassThrough Mortgage-Backed Security pays
a specific purchase price, agrees to a
settlement date, and also agrees to
reverse the purchase transaction at a
later occurring settlement date, at a
different price, and deliver to the initial
seller of such securities the same or
substantially similar securities. FINRA
also proposes amendments to Rule 6730
requiring a member to report any of
such transactions with an indicator, as
discussed, infra.16
(B) Reporting
Rule 6730(a) requires members to
report transactions to TRACE within 15
minutes of the Time of Execution, with
certain exceptions for trades executed
during non-TRACE System Hours.17
The 15 minute reporting requirement
applies to all TRACE-Eligible Securities
transactions, except primary market
16 Specifically,
proposed Rule 6710(z) provides:
‘‘Dollar Roll’’ means a simultaneous sale and
purchase of an Agency Pass-Through MortgageBacked Security as defined in paragraph (v) for
different settlement dates, where the initial seller
agrees to take delivery, upon settlement of the repurchase transaction, of the same or substantially
similar securities.
17 Rules 6730(a)(1) through (4) provides
exceptions to the standard 15 minute reporting
requirement if a member executes a transaction
after or before TRACE System Hours or less than 15
minutes before the TRACE system closes.
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transactions that are List or Fixed
Offering Price Transactions or
Takedown Transactions.18 Rules 6730(a)
through (d) list the information that
must be reported, including certain
trade reporting indicators and modifiers
that are required for some transaction
reports.
End-of-Day Reporting
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FINRA proposes to liberalize the
reporting period for Asset-Backed
Securities transactions. Under proposed
Rule 6730(a)(6), members executing
Asset-Backed Securities transactions
will have until the end of the business
day—until the TRACE system closes—to
report such transactions. If a transaction
in an Asset-Backed Security is executed
after 5 p.m. Eastern Time, a brokerdealer will have until the end of the
next business day to report the
transaction under proposed Rules
6730(a)(6)(B)(i). In addition, if a brokerdealer executes an Asset-Backed
Securities transaction at any time
outside of the TRACE System Hours, the
broker-dealer will have until the end of
the TRACE System Hours on the next
business day to report such transactions
under Rules 6730(a)(6)(B)(ii) and (iii).19
Generally, transactions must be
reported within 15 minutes of the Time
of Execution to facilitate better pricing
and to enhance transparency.20 The
more liberal end-of-day reporting
requirements proposed for Asset-Backed
Securities transactions are appropriate
because, although pricing and other
transaction information will be
reviewed for surveillance, Asset-Backed
Securities transactions initially will not
be disseminated publicly to market
participants. Also, the end-of-day
reporting provisions will provide
broker-dealers operational flexibility
and will ease compliance burdens,
particularly during the implementation
of the proposed changes. FINRA will
work with broker-dealers and third
party vendors to ensure effective and
cost efficient implementation.
18 See SEC Order Approving TRACE Expansion—
Agency Debt Securities.
19 In Rule 6730(a)(6)(B)(iii), the proposed
reporting requirements for transactions in AssetBacked Securities that a broker-dealer executes on
a Saturday, a Sunday, or a Federal or religious
holiday when the TRACE system is closed include
specific information requirements and have
parallels to the reporting requirements for
transactions reported under Rule 6730(a)(4).
20 The extended reporting period that was
recently approved by the SEC for List or Fixed
Offering Price Transactions and Takedown
Transactions permits T + 1 reporting only of those
transactions that occur at the fixed price stated in
the offering materials and are executed on the first
day of an offering. See SEC Order Approving
TRACE Expansion—Agency Debt Securities.
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Additional Reporting Requirements for
Asset-Backed Securities
Security Identification. Rule
6730(c)(1) requires a member to identify
a TRACE-Eligible Security by a CUSIP
number or a FINRA symbol in each
transaction report. However, certain
Asset-Backed Securities may be traded
without an assigned CUSIP. FINRA
proposes to amend Rule 6730(c)(1) to
permit a member, when a CUSIP
number is not available at the Time of
Execution (or will not be assigned), to
provide a similar numeric identifier,
such as a mortgage pool number or a
FINRA symbol. (FINRA symbols are
assigned by FINRA Operations upon
request.)
Size (Volume). Currently, members
report the size (or volume) of a
transaction for TRACE-Eligible
Securities by reporting the number of
bonds, as provided in Rule 6730(c)(2)
and Rule 6730(d)(2). The TRACE
System converts the information to a
dollar value for purposes of the
dissemination of transaction
information. The stated reporting
requirement includes the assumption
that one bond represents a specific par
amount, typically $1,000 par (or
principal) value.21
For certain Asset-Backed Securities,
such as Agency Pass-Through MortgageBacked Securities, the principal value—
the value of the collateral of the
mortgages or other assets backing the
security—declines over time (e.g., the
mortgagees in the pool of mortgages pay
down their mortgages).22 In such cases,
the size (volume) of such Asset-Backed
Securities is the original face value or
principal amount of the security at
issuance, stated in dollars, and
thereafter, the Remaining Principal
Balance. The Remaining Principal
Balance is calculated by multiplying the
original face value by a Factor. FINRA
proposes to amend Rule 6730(d)(2),
which provides guidance on how to
report size (volume) under Rule
6730(c)(2). In a transaction in an AssetBacked Security for which par value is
not used to measure the size (volume)
of a transaction, the proposed
amendments to Rule 6730(d)(2) will
require a member to report the original
face value of such security and, in a
second field, the Factor the member
used at the Time of Execution.
Generally, FINRA expects that the
Factor a member uses to execute a
21 For example, a member reports a trade of 10
bonds and the total par value of $10,000 is
displayed.
22 Occasionally, the value of the collateral
increases—for example, in ‘‘interest only’’
mortgages, the loan balances may increase.
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transaction will be the Factor that was
most recently published by the Sponsor
or Issuing Entity of the security or other
source providing such information
periodically to market participants.
Price. Rule 6730(c)(3) and Rule
6730(d)(1) require members to report
price. If a price field is not available,
members are required to report the
contract amount and the accrued
interest. Accrued interest is not a
component of the total sale price of
Asset-Backed Securities. To harmonize
the reporting provision in connection
with the reporting of Asset-Backed
Securities, proposed amended Rule
6730(d)(1) will require members to
report accrued interest only if
applicable.
Settlement Modifiers. FINRA proposes
several amendments to Rule 6730(d)(4)
providing for modifiers and indicators
that will distinguish certain trades
executed at special prices or subject to
other conditions affecting price. FINRA
proposes to amend Rule 6730(d)(4)(B) to
clarify that many securities are
conventionally settled on T + 3, by
stating this specifically, instead of using
the phrase ‘‘regular way.’’ The change is
necessary because the T + 3 convention
for settlement of many securities does
not apply to certain Asset-Backed
Securities to be included in TRACE.23 In
addition, FINRA proposes additional
amendments to Rule 6730(d)(4)(B) to
reflect settlement conventions regarding
Agency Pass-Through Mortgage-Backed
Securities and the settlement of other
Asset-Backed Securities. Transactions in
Agency Pass-Through Mortgage-Backed
Securities, by industry convention, are
assigned one of four monthly settlement
dates according to the type of Agency
Pass-Through Mortgage-Backed Security
to be settled.24 The proposed
amendments to Rule 6730(d)(4)(B) will
not require a member to use a settlement
modifier for a transaction in an Agency
Pass-Through Mortgage-Backed Security
that the parties will settle in conformity
with the uniform practices established
as ‘‘good delivery’’ for such transactions
on the next occurring monthly date
announced for settlement of such
23 In some cases, certain types of Asset-Backed
Securities transactions routinely may settle a
number of months after trade date.
24 Industry professionals involved in transactions
in Agency Pass-Through Mortgage-Backed
Securities effected TBA developed a convention for
‘‘regular way’’ settlement of these instruments.
According to the type of security, such securities
are settled monthly on specified settlement dates,
which are announced for each month several
months in advance. In total, four monthly
Settlement Dates (A through D), per month, were
established and published, to establish settlement
conventions for the various types of securities being
originated and traded.
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securities. However, if the parties will
settle other than in conformity with the
uniform practices established as ‘‘good
delivery’’ for such transactions, under
the amendments members will be
required to report using the settlement
modifier (‘‘.sNN’’), indicating the
number of days until settlement (e.g.,
‘‘.s55’’). In addition, the proposed
amendments to Rule 6730(d)(4)(B) will
require members to report transactions
in all other types of Asset-Backed
Securities using the settlement modifier
(‘‘.sNN’’) and providing the specified
number of days to settlement (e.g.,
‘‘.s55’’).
Indicators for Specified Pool
Transactions; Stipulation Transactions;
Dollar Rolls. As discussed above,
transactions in Agency Pass-Through
Mortgage-Backed Securities that are
Specified Pool Transactions or
Stipulation Transactions contain
additional terms and conditions, which
affect price. Price also is impacted in a
Dollar Roll, which is a third type of
transaction also discussed above that
occurs in Agency Pass-Through
Mortgage-Backed Securities. FINRA
proposes indicators that a member must
use when reporting a Specified Pool
Transaction, a Stipulation Transaction,
a Dollar Roll, and a transaction that is
both a Dollar Roll and a Stipulation
Transaction in, respectively, proposed
Rule 6730(d)(4)(E)(i), (ii), (iii) and (iv).
Agency Pass-Through MortgageBacked Security Initial Sale. FINRA
recently amended the Rule 6700 Series
to require that primary market
transactions be reported to TRACE. The
reporting requirements for primary
market transactions that are List or
Fixed Offering Price transactions and
Takedown Transactions are set forth in
Rule 6730(a)(5), and extend the
reporting period to the close of the
TRACE system on T + 1. FINRA
proposes that these reporting
requirements will not apply to a
transaction in an Agency Pass-Through
Mortgage-Backed Security, which are
not sold in a traditional underwriting or
placement as envisioned and
incorporated in the definitions of List or
Fixed Offering Price Transaction and
Takedown Transaction.
(C) Dissemination
Generally, FINRA’s policy favors
transparency in the debt securities
markets, and for most TRACE-Eligible
Securities, real-time dissemination of
transaction information is provided for
under Rule 6750(a). Dissemination of
the information occurs immediately
upon receipt of the transaction report.
The exceptions to the policy favoring
dissemination in Rule 6750(b) are
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15:34 Oct 27, 2009
Jkt 220001
currently limited to transactions
effected pursuant to Securities Act Rule
144A, transfers of certain proprietary
positions effected in connection with
broker-dealer mergers or other brokerdealer consolidations, and List or Fixed
Offering Price Transactions and
Takedown Transactions.25
However, at this time, FINRA
proposes not to disseminate information
on transactions in Asset-Backed
Securities in proposed Rule 6750(b)(4).
The reporting of Asset-Backed
Securities transactions will permit
FINRA to obtain additional information,
observe patterns of trading and
otherwise engage in more in-depth
surveillance of the Asset-Backed
Securities market. FINRA will study the
collected data to determine the volume
and trading in various types of AssetBacked Securities. FINRA may
determine that dissemination of
transaction information is warranted
with respect to Asset-Backed Securities
after it has had an opportunity to review
data over a period of time. FINRA used
this approach previously when it
implemented dissemination in phases
for various types of corporate bonds.
(D) Other Amendments to Rule 6700
Series
Rule 6760. Currently, Rule 6760
requires members that are managing
underwriters to notify FINRA that a new
TRACE-Eligible Security is about to be
offered and sold in a primary offering.
FINRA must have this information in
the TRACE system to facilitate timely
transaction reporting by all members
that have effected transactions in a
newly issued TRACE-Eligible Security.
For TRACE-Eligible Securities that are
Asset-Backed Securities, for the
purposes of Rule 6760, FINRA proposes
to amend Rule 6760(a) to characterize a
Sponsor and an Issuing Entity of an
Asset-Backed Security, if members, as
managing underwriters, and require
them, like underwriters or initial
purchasers of Asset-Backed Securities,
to provide FINRA Operations notice of
25 TRACE-Eligible Securities transactions that are
not disseminated are set forth in Rule 6750(b). Rule
6750(b)(1) applies as to transactions in TRACEEligible Securities that are affected as Securities Act
Rule 144A transactions. Under Rule 6750(b)(2),
FINRA does not disseminate information on a
transfer of proprietary securities positions between
a member and another member or non-member
broker-dealer where the transfer: (A) Is effected in
connection with a merger of one broker-dealer with
the other broker-dealer or a direct or indirect
acquisition of one broker-dealer by the other brokerdealer or the other broker-dealer’s parent company,
and (B) is not in furtherance of a trading or
investment strategy. Under recently approved Rule
6750(b)(3), FINRA will not disseminate List or
Fixed Offering Price Transactions and Takedown
Transactions.
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55605
a new Asset-Backed Security and
information that identifies the new
security by CUSIP (or if a CUSIP
number is not available, a similar
numeric identifier (e.g., a mortgage pool
number) or a FINRA symbol) and
describes the security.
For an Asset-Backed Security, FINRA
proposes to amend the notice
requirements in Rule 6760(b) to require
the names of the Issuing Entity and the
Sponsor, in addition to the CUSIP (or an
alternative identifier) and other
currently required information (i.e.,
coupon rate; maturity; the time the new
issue is priced, and, if different, the time
that the first transaction in the
distribution or offering is executed; a
brief description of the security type;
and if the security will be traded subject
to Securities Act Rule 144A).
FINRA also proposes minor technical,
stylistic, or conforming changes to the
Rule 6700 Series, including
renumbering certain provisions,
incorporating the term TRACE System
Hours in certain provisions, and
restating certain requirements regarding
settlement and settlement modifiers.
(E) Fees
FINRA proposes that the current trade
reporting fees set forth in Rule 7730 also
apply to the reporting of transactions in
Asset-Backed Securities. Because AssetBacked Securities transaction
information will not be disseminated,
there will not be any market data
available, and thus no market data fees
are proposed. For transactions in AssetBacked Securities, such as Agency PassThrough Mortgage-Backed Securities,
for which par value is not used to
determine the size (or volume) of a
transaction, FINRA clarifies how
transaction fees will be assessed. For
purposes of trade reporting fees,
proposed Rule 7730(b)(1)(B) provides
that transaction size for such securities
will be the lesser of the original face
amount or Remaining Principal Balance.
In proposed Rule 7730(b)(1)(D),
FINRA proposes that transactions in an
Agency Pass-Through Mortgage-Backed
Security not be considered List or Fixed
Offering Price Transactions or
Takedown Transactions for purposes of
the reporting fees in Rule 7730(b),
which will eliminate any possible
application to Agency Pass-Through
Mortgage-Backed Security transactions
of the recently adopted provision in
Rule 7730(b)(1)(C). Rule 7730(b)(1)(C)
provides that a member that reports a
List or Fixed Offering Price Transaction
or a Takedown Transaction shall not be
charged the standard trade reporting fee
assessed under Rule 7730(b)(1).
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Finally, FINRA proposes minor
technical, stylistic, or conforming
changes to Rule 7730, including changes
to conform the fee chart to the changes
in the rule text.
FINRA will announce the effective
date of the proposed rule change in a
Regulatory Notice to be published no
later than 60 days following
Commission approval. The effective
date will be no later than 270 days
following publication of the Regulatory
Notice announcing Commission
approval.
2. Statutory Basis
FINRA believes that the proposed rule
change is consistent with the provisions
of Section 15A(b)(6) of the Act,26 which
requires, among other things, that
FINRA rules must be designed to
prevent fraudulent and manipulative
acts and practices, to promote just and
equitable principles of trade, and, in
general, to protect investors and the
public interest and Section 15A(b)(5) of
the Act,27 which requires, among other
things, that FINRA rules provide for the
equitable allocation of reasonable dues,
fees and other charges among members
and issuers and other persons using any
facility or system that FINRA operates
or controls in that: (i) the proposed rule
change will enhance FINRA’s
surveillance of the debt market in
connection with Asset-Backed
Securities transactions generally; and
(ii) the proposed fee proposal provides
for reporting fees that mirror the fees
currently in effect for corporate bonds,
and are reasonable and equitably
allocated among members.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
FINRA does not believe that the
proposed rule change will result in any
burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act.
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C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants or Others
Written comments were neither
solicited nor received.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 35 days of the date of
publication of this notice in the Federal
Register or within such longer period (i)
as the Commission may designate up to
90 days of such date if it finds such
26 15
U.S.C. 78o–3(b)(6).
27 15 U.S.C. 78o–3(b)(5).
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15:34 Oct 27, 2009
Jkt 220001
longer period to be appropriate and
publishes its reasons for so finding or
(ii) as to which the self regulatory
organization consents, the Commission
will:
(A) By order approve such proposed
rule change, or
(B) Institute proceedings to determine
whether the proposed rule change
should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an e-mail to rulecomments@sec.gov. Please include File
Number SR–FINRA–2009–065 on the
subject line.
Paper Comments
• Send paper comments in triplicate
to Elizabeth M. Murphy, Secretary,
Securities and Exchange Commission,
100 F Street, NE., Washington, DC
20549–1090.
All submissions should refer to File
Number SR–FINRA–2009–065. This file
number should be included on the
subject line if e-mail is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for inspection and copying in
the Commission’s Public Reference
Room, 100 F Street, NE., Washington,
DC 20549, on official business days
between the hours of 10 a.m. and 3 p.m.
Copies of the filing will also be available
for inspection and copying at the
principal office of FINRA. All comments
received will be posted without change;
the Commission does not edit personal
identifying information from
submissions. You should submit only
information that you wish to make
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Fmt 4703
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available publicly. All submissions
should refer to File No. SR–FINRA–
2009–065 and should be submitted on
or before November 18, 2009.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.28
Elizabeth M. Murphy,
Secretary.
[FR Doc. E9–25875 Filed 10–27–09; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–60851; File No. SR–FINRA–
2009–068]
Self-Regulatory Organizations;
Financial Industry Regulatory
Authority, Inc.; Notice of Filing of
Proposed Rule Change Relating to
FINRA’s Rules Governing Clearly
Erroneous Executions
October 21, 2009.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’) 1 and Rule 19b–4 thereunder,2
notice is hereby given that on October
19, 2009, Financial Industry Regulatory
Authority, Inc. (‘‘FINRA’’) (f/k/a
National Association of Securities
Dealers, Inc. (‘‘NASD’’)) filed with the
Securities and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I, II, and
III below, which Items have been
prepared by FINRA. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
FINRA is proposing to adopt NASD
Rule 11890, IM–11890–1, and IM–
11890–2 into the Consolidated FINRA
Rulebook as part of a new FINRA Rule
11890 Series governing clearly
erroneous transactions and to amend
these rules as part of a market-wide
effort designed to provide transparency
and finality with respect to clearly
erroneous executions.
The text of the proposed rule change
is available on FINRA’s Web site at
https://www.finra.org, at the principal
office of FINRA and at the
Commission’s Public Reference Room.
28 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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]]>Agencies
[Federal Register Volume 74, Number 207 (Wednesday, October 28, 2009)]
[Notices]
[Pages 55600-55606]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E9-25875]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-60860; File No. SR-FINRA-2009-065]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing of Proposed Rule Change To Define
Asset-Backed Securities, Mortgage-Backed Securities, and Other Similar
Securities as TRACE-Eligible Securities and Require the Reporting of
Transactions in Such Securities to TRACE
October 21, 2009.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on October 1, 2009, the Financial Industry Regulatory Authority,
Inc. (``FINRA'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission'') the proposed rule change as described in
Items I, II, and III below, which Items have been prepared by FINRA.
The Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
FINRA is proposing to amend the FINRA Rule 6700 Series (except for
Rule 6740) and FINRA Rule 7730 to designate asset-backed securities,
mortgage-backed securities and other similar securities (collectively
defined hereinafter as ``Asset-Backed Securities'') as Trade Reporting
and Compliance Engine (``TRACE'') TRACE-Eligible Securities, and
establish reporting, fee and other requirements relating to such
securities as follows:
(1) In Rule 6710, to amend the defined term: (A) ``TRACE-Eligible
Security'' to include Asset-Backed Securities; and make certain
technical changes in Rule 6710(a); (B) ``Reportable TRACE Transaction''
to include specific requirements regarding certain Asset-Backed
Securities in Rule 6710(c); (C) ``Agency Debt Security'' to incorporate
proposed defined terms in Rule 6710(l); and (D) ``TRACE System Hours''
to transfer the defined term from Rule 6730(a) to Rule 6710(bb);
(2) In Rule 6710, to add the defined terms, ``Sponsor,'' ``Issuing
Entity,'' ``TBA,'' ``Agency Pass-Through Mortgage-Backed Security,''
``Factor,'' ``Specified Pool Transaction,'' ``Stipulation
Transaction,'' ``Dollar Roll,'' and ``Remaining Principal Balance,''
as, respectively, new paragraphs (s) through (aa);
(3) In Rule 6730, to provide for reporting of Asset-Backed
Securities transactions;
(4) In Rule 6750, to provide that information on a transaction in a
TRACE-Eligible Security that is an Asset-Backed Security will not be
disseminated;
(5) In Rule 6760, to require a member that is a Sponsor or an
Issuing Entity of an Asset-Backed Security to provide notice as
required under the Rule, and to modify the notification requirements to
accept a mortgage pool number in certain circumstances;
(6) In Rule 7730, to establish transaction reporting fees for
Asset-Backed Securities that are TRACE-Eligible Securities at the same
rates in effect for corporate bonds; for certain Asset-Backed
Securities, to identify size (volume) for determining a trade reporting
fee, and to provide that for purposes of Rule 7730(b), a transaction in
an Agency Pass-Through Mortgage-Backed Security is not a List or Fixed
Offering Price Transaction or a Takedown Transaction; and
(7) In the Rule 6700 Series, except for Rule 6740, and Rule 7730 to
incorporate certain technical, administrative and clarifying changes.
The text of the proposed rule change is available on FINRA's Web
site at https://www.finra.org, at the principal office of FINRA and at
the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, FINRA included statements
concerning the purpose of, and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. FINRA has prepared summaries, set forth in sections A,
B, and C below, of the most significant aspects of such statements.
[[Page 55601]]
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
Introduction
(A) Background
FINRA proposes to expand TRACE to include Asset-Backed Securities,
as defined in Rule 6710(m), as TRACE-Eligible Securities, requiring
members to report transactions in such securities to TRACE. For
purposes of this proposed rule change, the term ``Asset-Backed
Security'' is broadly defined, and the reporting of such securities to
TRACE will permit FINRA to obtain additional transaction information
and observe patterns of trading, facilitating the oversight and
regulation of the Asset-Backed Securities market. FINRA will study the
reported data to determine the volume and trading in various types of
Asset-Backed Securities.
Generally, FINRA's policy favors transparency in the debt
securities markets, and for most TRACE-Eligible Securities, real-time
dissemination of transaction information is provided for under Rule
6750(a). Although at this time FINRA does not propose that transaction
information on Asset-Backed Securities be disseminated, FINRA believes
that the transparency in corporate bonds provided by TRACE today has
contributed to better pricing, more precise valuations and reduced
investor costs. After FINRA has had an opportunity to review data over
a period of time, FINRA may determine that dissemination of some
transaction information for Asset-Backed Securities is warranted.\3\
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\3\ FINRA used this approach previously when it implemented
dissemination in phases for various types of corporate bonds.
Similarly, any proposal to adopt dissemination protocols for Asset-
Backed Securities will be subject to rulemaking under Section
19(b)(1) of the Act, 15 U.S.C. 78s(b)(1).
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(B) Summary of Proposed Amendments
To incorporate Asset-Backed Securities in TRACE, FINRA proposes
significant amendments to Rule 6710, Rule 6730 and Rule 6750 and lesser
amendments to Rule 6720, Rule 6760 and Rule 7730. In Rule 6710, FINRA
proposes to revise the defined terms, ``TRACE-Eligible Security'' and
``Reportable TRACE Transaction,'' \4\ and to add nine defined terms,
most of which relate to the trading of Agency Pass-Through Mortgage-
Backed Securities \5\ and other types of Asset-Backed Securities that
are collateralized by mortgages or other assets that are self-
amortizing. In Rule 6730, FINRA proposes more liberal trade reporting
requirements for transactions in Asset-Backed Securities than those in
effect for corporate bonds, modifications to the reporting requirements
relating to particular structural aspects or other features of certain
Asset-Backed Securities, and, in Rule 6750(b), not to disseminate
transaction information on Asset-Backed Securities. The proposed
amendments to Rule 6760 characterize a member that is a Sponsor or an
Issuing Entity \6\ of an Asset-Backed Security as a managing
underwriter, requiring such persons to provide notice as required under
the rule. FINRA proposes amendments to Rule 7730 to apply the fees
currently in effect under the rule at the same rates to transactions in
Asset-Backed Securities; to provide that a transaction in an Agency
Pass-Through Mortgage-Backed Security will not be treated as a List or
Fixed Offering Price Transaction or a Takedown Transaction for purposes
of trade reporting fees; and to define size (volume) for purposes of
the reporting fees payable for transactions in certain Asset-Backed
Securities. Finally, several minor, technical or clarifying amendments
are proposed to the Rule 6700 Series (except for Rule 6740) and Rule
7730.
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\4\ FINRA also proposes technical or clarifying amendments to
``Agency Debt Security,'' ``Asset-Backed Security'' and ``TRACE
System Hours'' as defined, respectively, in Rule 6710(l), Rule
6710(m) and Rule 6710(bb).
\5\ ``Agency Pass-Through Mortgage-Backed Security'' is defined
in proposed Rule 6710(v) and discussed, infra.
\6\ ``Sponsor'' and ``Issuing Entity'' are defined in proposed
Rule 6710(s) and proposed Rule 6710(t) and discussed, infra.
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Discussion
(A) ``TRACE-Eligible Security''; Other Defined Terms
TRACE-Eligible Security and Asset-Backed Security. Under Rule
6710(a), a TRACE-Eligible Security is a debt security that is U.S.
dollar denominated and issued by a U.S. or foreign private issuer, and
if a ``restricted security'' as defined in Securities Act Rule
144(a)(3), sold pursuant to Rule 144A; or is a U.S. dollar denominated
security that is issued or guaranteed by an Agency or a Government-
Sponsored Enterprise (``GSE'').\7\ Securities excluded from ``TRACE-
Eligible Security'' include U.S. Treasury Securities, foreign sovereign
securities and other securities not issued by a private issuer, Money
Market Instruments and Asset-Backed Securities.\8\
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\7\ ``Agency'' is defined in Rule 6710(k) and ``Government-
Sponsored Enterprise'' (``GSE'') is defined in Rule 6710(n).
\8\ ``U.S. Treasury Security'' is defined in Rule 6710(p);
``Money Market Instrument'' is defined in Rule 6710(o); and ``Asset-
Backed Security'' is defined in Rule 6710(m).
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In Rule 6710(m), ``Asset-Backed Security'' is defined broadly to
include a security that is defined as such under Securities Act
Regulation AB,\9\ a
[[Page 55602]]
mortgage-backed security, a collateralized mortgage obligation, a
synthetic asset-backed security, or any instrument involving or based
on the securitization of mortgages or other credits or assets,
including but not limited to a collateralized debt obligation, a
collateralized bond obligation, a collateralized debt obligation of
Asset-Backed Securities or a collateralized debt obligation of
collateralized debt obligations. These instruments include any
instrument involving or based on the securitization of mortgages or
other credits or assets, such as asset-backed securities backed by a
pool credit card receivables, automobile loans, student loans, or Small
Business Administration loans. The term includes Asset-Backed
Securities that are issued or guaranteed by an Agency or a GSE.\10\
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\9\ Securities Act Regulation AB, Section 1101(c) defines
``asset-backed security'' as:
(1)`Asset-backed security' means a security that is primarily
serviced by the cash flows of a discrete pool of receivables or
other financial assets, either fixed or revolving, that by their
terms convert into cash within a finite time period, plus any rights
or other assets designed to assure the servicing or timely
distributions of proceeds to the security holders; provided that in
the case of financial assets that are leases, those assets may
convert to cash partially by the cash proceeds from the disposition
of the physical property underlying such leases.
(2) The following additional conditions apply in order to be
considered an asset-backed security:
(i) Neither the depositor nor the issuing entity is an
investment company under the Investment Company Act of 1940 (15
U.S.C. 80a-1 et seq.) nor will become an investment company as a
result of the asset-backed securities transaction.
(ii) The activities of the issuing entity for the asset-backed
securities are limited to passively owing or holding the pool of
assets, issuing the asset-backed securities supported or serviced by
those assets, and other activities reasonably incidental thereto.
(iii) No non-performing assets are part of the asset pool as of
the measurement date.
(iv) Delinquent assets do not constitute 50% or more, as
measured by dollar volume, of the asset pool as of the measurement
date.
(v) With respect to securities that are backed by leases, the
portion of the securitized pool balance attributable to the residual
value of the physical property underlying the leases, as determined
in accordance with the transaction agreements for the securities,
does not constitute:
(A) For motor vehicle leases, 65% or more, as measured by dollar
volume, of the securitized pool balance as of the measurement date.
(B) For all other leases, 50% or more, as measured by dollar
volume, of the securitized pool balance as of the measurement date.
(3) Notwithstanding the requirement in paragraph (c)(1) of this
section that the asset pool be a discrete pool of assets, the
following are considered to be a discrete pool of assets for
purposes of being considered an asset-backed security:
(i) Master Trusts. The offering related to the securities
contemplates adding additional assets to the pool that backs such
securities in connection with future insurances of asset-backed
securities backed by such pool. The offering related to the
securities also may contemplate additions to the asset pool, to the
extent consistent with paragraphs (c)(3)(ii) and (c)(3)(iii) of this
section, in connection with maintaining minimum pool balances in
accordance with the transaction agreements for master trusts with
revolving periods or receivables or other financial assets that
arise under revolving accounts.
(ii) Prefunding Periods. The offering related to the securities
contemplates a prefunding account where a portion of the proceeds of
that offering is to be used for the future acquisition of additional
pool assets, if the duration of the prefunding period does not
extend for more than one year from the date of insurance of the
securities and the portion of the proceeds for such prefunding
account does not involve in excess of:
(A) For master trusts, 50% of the aggregate principal balance of
the total asset pool whose cash flows support the securities; and
(B) For other offerings, 50% of the proceeds of the offering.
(iii) Revolving Periods. The offering related to the securities
contemplates a revolving period where cash flows from the pool
assets may be used to acquire additional pool assets, provided,
that, for securities backed by receivables or other financial assets
that do not arise under revolving accounts, the revolving period
does not extend for more than three years from the date of issuance
of the securities and the additional pool assets are of the same
general character as the original pool assets.
\10\ The defined term ``Agency Debt Security'' in Rule 6710(l)
does not include an Asset-Backed Security, even if such security is
issued or guaranteed by an Agency or a GSE.
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FINRA proposes to amend the defined term ``TRACE-Eligible
Security'' in Rule 6710(a) to include all Asset-Backed Securities as
broadly defined in Rule 6710(m) as TRACE-Eligible Securities. The
specific exclusion of Asset-Backed Securities in the definition of
``TRACE-Eligible Security'' will be deleted. The proposed amendment
will include in TRACE a significant, high dollar volume and increasing
number of debt securities.
In addition, in Rule 6710(m) FINRA proposes minor amendments to the
term, ``Asset-Backed Security,'' which will clarify but will not change
the scope or meaning of the definition. As amended, the definition will
provide:
``Asset-Backed Security'' means a security collateralized by any
type of financial asset, such as loans, leases, mortgages, or
secured or unsecured receivables, and includes but is not limited to
an asset-backed security as used in Securities Act Regulation AB,
Section 1101(c), a mortgage-backed security, a collateralized
mortgage obligation, a synthetic asset-backed security, a
collateralized debt obligation, a collateralized bond obligation, a
collateralized debt obligation of Asset-Backed Securities or a
collateralized debt obligation of collateralized debt obligations.
Reportable TRACE Transaction. FINRA recently amended the Rule 6700
Series to require members to report primary market transactions, which
harmonized the reporting requirements regarding such transactions with
the requirements of The Municipal Securities Rulemaking Board
(``MSRB'').\11\ Neither FINRA, with respect to TRACE-Eligible
Securities, nor the MSRB, with respect to municipal securities, require
that the initial sale from an issuer to an underwriter(s) or an initial
purchaser(s) be reported as a primary market transaction.
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\11\ Securities Exchange Act Release No. 60726 (September 28,
2009), 74 FR 50991 (October 2, 2009) (Order Approving SR-FINRA-2009-
010) (hereinafter ``SEC Order Approving TRACE Expansion--Agency Debt
Securities''). The MSRB requires the reporting of primary market
transactions in municipal securities under MSRB Rule G-14.
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FINRA proposes to amend the term ``Reportable TRACE Transaction''
in Rule 6710(c) to provide that, for Agency Pass-Through Mortgage-
Backed Securities, all transactions, including the initial sale of an
Agency Pass-Through Mortgage-Backed Security from an Issuing Entity or
a Sponsor to an underwriter or an initial purchaser, are Reportable
TRACE Transactions. FINRA proposes that such initial sales in an Agency
Pass-Through Mortgage-Backed Security be reported due to the particular
origination process, including the manner in which such securities are
sold initially. In most cases, the origination of a TRACE-Eligible
Security involves an offering where an issuer sells securities to one
or more underwriters or initial purchasers that then resell such
securities. However, due in part to the TBA process, and their status
as exempt securities, Agency Pass-Through Mortgage-Backed Securities
generally are not sold in traditional private offerings (or a
traditional public offering). Consequently, requiring the reporting of
the initial transaction may be the only opportunity to elicit necessary
information for a regulatory audit trail of Asset-Backed Securities. In
addition, the proposed amendments clarify that similar primary market
sale transactions from the issuer to an underwriter or initial
purchaser in other TRACE-Eligible Securities will continue not to be
Reportable TRACE Transactions.
FINRA also proposes to streamline the definition, ``Agency Debt
Security,'' in Rule 6710(l) by using proposed defined terms and to
transfer the defined term ``TRACE System Hours'' from Rule 6730(a) to
Rule 6710(bb), with a minor amendment to clarify that the TRACE system
operates only on business days.
New Defined Terms
FINRA proposes to add to Rule 6710 the following defined terms:
``Sponsor'' as proposed Rule 6710(s); ``Issuing Entity'' as proposed
Rule 6710(t); ``TBA'' as proposed Rule 6710(u); ``Agency Pass-Through
Mortgage-Backed Security'' as proposed Rule 6710(v); ``Factor'' as
proposed Rule 6710(w); ``Specified Pool Transaction'' as proposed Rule
6710(x), ``Stipulation Transaction'' as proposed Rule 6710(y); ``Dollar
Roll'' as proposed Rule 6710(z); and ``Remaining Principal Balance'' as
proposed Rule 6710(aa).
Sponsor and Issuing Entity. In Asset-Backed Securities, the Sponsor
of an Asset-Backed Security is the person (i.e., usually a non-natural
``person'' such as a corporation) that decides to issue a security and
determines its structure, pool and features. FINRA proposed to
incorporate the definition of ``Sponsor'' adopted by the Commission in
Securities Act Regulation AB, Item 1101(l) as proposed Rule 6710(s).
Securities Act Regulation AB, Item 1101(l) defines ``Sponsor'' as ``the
person who organizes and initiates an asset-backed securities
transaction by selling or transferring assets, either directly or
indirectly, including through an affiliate, to the issuing entity.''
\12\
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\12\ Securities Act Regulation AB, Item 1101(l), 17 CFR
229.1101(l).
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The Sponsor of an Asset-Backed Bond is generally not the issuer. In
Asset-Backed Securities, the issuer is often a trust, or special
purpose vehicle (``SPV'') or special purpose entity (``SPE'') that is
established solely to issue the Asset-Backed Securities and hold the
pool of assets that back the asset-backed security, and, in SEC
Regulation AB, is referred to as the ``issuing entity.'' For purposes
of TRACE, FINRA proposes to define ``Issuing Entity'' as the term is
defined in Securities Act Regulation AB, Item 1101(f) in proposed Rule
6710(t). Securities Act Regulation AB, Item 1101(f) defines an issuing
entity as ``the trust or other entity created at the direction of the
sponsor or depositor that owns or holds the pool assets and in whose
name the asset-backed securities supported or serviced by the pool
assets are issued.'' \13\ Among other things, under the TRACE
provisions, members that are Sponsors or Issuing
[[Page 55603]]
Entities are required to provide notice to FINRA Operations under Rule
6760.
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\13\ Securities Act Regulation AB, Item 1101(f), 17 CFR
229.1101(f).
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TBA. FINRA proposes to add the defined term ``TBA'' as proposed
Rule 6710(u). ``TBA'' stands for ``to be announced'' and refers to a
transaction in an Agency Pass-Through Mortgage-Backed Security, as
defined in proposed Rule 6710(v) and discussed in the following
paragraph, where the parties agree to specific terms (i.e., face amount
of the security, coupon, maturity, the Agency or GSE under which the
mortgage pools will be issued or guaranteed, price and clearance and
settlement in conformity with the uniform practices established as
``good delivery'' on a standard pre-announced settlement date for such
instruments), but do not identify the specific pool(s) of mortgages
that will be delivered on settlement date.\14\
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\14\ Specifically, proposed Rule 6710(u) provides:
``TBA'' means ``to be announced'' and refers to a transaction in
an Agency Pass-Through Mortgage-Backed Security as defined in
paragraph (v) where the parties agree that the seller will deliver
to the buyer an Agency Pass-Through Mortgage-Backed Security of a
specified face amount and coupon from a specified Agency or
Government Sponsored Enterprise program representing a pool (or
pools) of mortgages (that are not specified by unique pool number),
at a specified price, and the parties will clear and settle the
transaction in conformity with the uniform practices established as
``good delivery'' for such transactions and will not impose any
special conditions or stipulations.
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Agency Pass-Through Mortgage-Backed Security. Proposed Rule 6710(v)
defines Agency Pass-Through Mortgage-Backed Security to mean:
[A] mortgage-backed security issued by an Agency or a
Government-Sponsored Enterprise, for which the timely payment of
principal and interest is guaranteed by an Agency or a Government-
Sponsored Enterprise, representing ownership interests in a pool or
pools of residential mortgage loans with the security structured to
``pass through'' the principal and interest payments made by the
mortgagees to the owners of the pool(s) on a pro rata basis.
Several of the defined terms and other amendments to the Rule 6700
Series and Rule 7730 in this proposed rule change address issues that
are specific to transactions in Agency Pass-Through Mortgage-Backed
Securities.
Remaining Principal Balance and Factor. The related terms,
``Remaining Principal Balance'' and ``Factor'' are defined,
respectively, in proposed Rule 6710(aa) and proposed Rule 6710(w).
Factors and Remaining Principal Balances are relevant in the pricing
and valuation of mortgage-backed securities and certain other types of
Asset-Backed Securities that are backed by mortgage pools or other
pools containing assets that are self-amortizing. Proposed Rule
6710(aa) defines ``Remaining Principal Balance'' to mean:
[F]or an Asset-Backed Security backed by a pool of mortgages or
other assets that are self-amortizing, the total unpaid principal
balance of all such mortgages, or the equivalent remaining value of
such self-amortizing assets held in the asset pool, at a specific
time, such as the Time of Execution.
A ``Factor'' is used by dealers and other market professionals to
calculate the Remaining Principal Balance of an Asset-Backed Security
that is backed by a pool of mortgages or other self-amortizing assets.
Specifically, proposed Rule 6710(w) defines ``Factor'' as:
[T]he decimal value representing the proportion of the
outstanding principal value of a security to its original principal
value.
For example, at issuance, the Factor for every mortgage-backed
security and certain other types of Asset-Backed Securities for which a
Factor is used is 1.0. Over time, the Factor for the specific security
changes, reflecting the Remaining Principal Balance of the pool of
assets for such security.\15\ In a transaction in an Asset-Backed
Security that is backed by mortgages or other assets that are self-
amortizing, under proposed amendments to Rule 6730(d)(2), discussed
infra, a member will be required to report a Factor, which is used to
price the security. However, not all types of Asset-Backed Securities
are priced using a Factor.
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\15\ For example, a mortgage-backed security with an original
face value of $10 million that has a Factor of .5 on April 15, 2009
has a Remaining Principal Balance of $5 million as of April 15, 2009
(assuming all mortgage payments and prepayments have been included
in the calculation of the Factor).
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Specified Pool Transaction; Stipulation Transaction; Dollar Roll.
In proposed Rule 6710(x), Rule 6710(y), and Rule 6710(z), respectively,
FINRA defines three special types of transactions that occur solely in
Agency Pass-Through Mortgage-Backed Securities. The term ``Specified
Pool Transaction'' is defined in proposed Rule 6710(x). A ``Specified
Pool Transaction'' is a transaction in an Agency Pass-Through Mortgage-
Backed Security that requires the seller to deliver at settlement ``one
or more pools of mortgages that, at the Time of Execution, are
identified by their unique pool identification numbers and original
principal value.'' The conditions limiting the seller's delivery
options affect pricing, and FINRA proposes that such transactions be
reported with an indicator, as discussed infra.
In proposed Rule 6710(y), the term ``Stipulation Transaction'' is
defined to mean a transaction:
[I]n an Agency Pass-Through Mortgage-Backed Security as defined
in paragraph (v) where, at the Time of Execution, the parties agree
that the seller will deliver to the buyer an Agency Pass-Through
Mortgage-Backed Security of a specified face amount and coupon from
a specified Agency or Government-Sponsored Enterprise program that
represents a pool (or pools) of mortgages, at a specified price, and
the parties stipulate that the pool or pools to be delivered meet
certain conditions that preclude settlement of the transaction in
conformity with the uniform practices established as ``good
delivery'' for an Agency Pass-Through Mortgage-Backed Security
effected TBA.
A transaction in an Agency Pass-Through Mortgage-Backed Security
that is a Stipulation Transaction differs from a ``Specified Pool
Transaction'' because good delivery, although conditioned by the
special stipulations, is not limited to specific pools that the parties
have identified by pool number. Again, the special conditions that
limit the seller's flexibility as to delivery affect pricing, and FINRA
proposes that such trades be reported with an indicator.
The term ``Dollar Roll,'' as defined in proposed Rule 6710(z),
describes simultaneous transactions that are executed pursuant to an
agreement between a buyer and seller of an Agency Pass-Through
Mortgage-Backed Security. At the time of the transactions, the initial
buyer of the Agency Pass-Through Mortgage-Backed Security pays a
specific purchase price, agrees to a settlement date, and also agrees
to reverse the purchase transaction at a later occurring settlement
date, at a different price, and deliver to the initial seller of such
securities the same or substantially similar securities. FINRA also
proposes amendments to Rule 6730 requiring a member to report any of
such transactions with an indicator, as discussed, infra.\16\
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\16\ Specifically, proposed Rule 6710(z) provides:
``Dollar Roll'' means a simultaneous sale and purchase of an
Agency Pass-Through Mortgage-Backed Security as defined in paragraph
(v) for different settlement dates, where the initial seller agrees
to take delivery, upon settlement of the re-purchase transaction, of
the same or substantially similar securities.
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(B) Reporting
Rule 6730(a) requires members to report transactions to TRACE
within 15 minutes of the Time of Execution, with certain exceptions for
trades executed during non-TRACE System Hours.\17\ The 15 minute
reporting requirement applies to all TRACE-Eligible Securities
transactions, except primary market
[[Page 55604]]
transactions that are List or Fixed Offering Price Transactions or
Takedown Transactions.\18\ Rules 6730(a) through (d) list the
information that must be reported, including certain trade reporting
indicators and modifiers that are required for some transaction
reports.
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\17\ Rules 6730(a)(1) through (4) provides exceptions to the
standard 15 minute reporting requirement if a member executes a
transaction after or before TRACE System Hours or less than 15
minutes before the TRACE system closes.
\18\ See SEC Order Approving TRACE Expansion--Agency Debt
Securities.
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End-of-Day Reporting
FINRA proposes to liberalize the reporting period for Asset-Backed
Securities transactions. Under proposed Rule 6730(a)(6), members
executing Asset-Backed Securities transactions will have until the end
of the business day--until the TRACE system closes--to report such
transactions. If a transaction in an Asset-Backed Security is executed
after 5 p.m. Eastern Time, a broker-dealer will have until the end of
the next business day to report the transaction under proposed Rules
6730(a)(6)(B)(i). In addition, if a broker-dealer executes an Asset-
Backed Securities transaction at any time outside of the TRACE System
Hours, the broker-dealer will have until the end of the TRACE System
Hours on the next business day to report such transactions under Rules
6730(a)(6)(B)(ii) and (iii).\19\
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\19\ In Rule 6730(a)(6)(B)(iii), the proposed reporting
requirements for transactions in Asset-Backed Securities that a
broker-dealer executes on a Saturday, a Sunday, or a Federal or
religious holiday when the TRACE system is closed include specific
information requirements and have parallels to the reporting
requirements for transactions reported under Rule 6730(a)(4).
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Generally, transactions must be reported within 15 minutes of the
Time of Execution to facilitate better pricing and to enhance
transparency.\20\ The more liberal end-of-day reporting requirements
proposed for Asset-Backed Securities transactions are appropriate
because, although pricing and other transaction information will be
reviewed for surveillance, Asset-Backed Securities transactions
initially will not be disseminated publicly to market participants.
Also, the end-of-day reporting provisions will provide broker-dealers
operational flexibility and will ease compliance burdens, particularly
during the implementation of the proposed changes. FINRA will work with
broker-dealers and third party vendors to ensure effective and cost
efficient implementation.
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\20\ The extended reporting period that was recently approved by
the SEC for List or Fixed Offering Price Transactions and Takedown
Transactions permits T + 1 reporting only of those transactions that
occur at the fixed price stated in the offering materials and are
executed on the first day of an offering. See SEC Order Approving
TRACE Expansion--Agency Debt Securities.
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Additional Reporting Requirements for Asset-Backed Securities
Security Identification. Rule 6730(c)(1) requires a member to
identify a TRACE-Eligible Security by a CUSIP number or a FINRA symbol
in each transaction report. However, certain Asset-Backed Securities
may be traded without an assigned CUSIP. FINRA proposes to amend Rule
6730(c)(1) to permit a member, when a CUSIP number is not available at
the Time of Execution (or will not be assigned), to provide a similar
numeric identifier, such as a mortgage pool number or a FINRA symbol.
(FINRA symbols are assigned by FINRA Operations upon request.)
Size (Volume). Currently, members report the size (or volume) of a
transaction for TRACE-Eligible Securities by reporting the number of
bonds, as provided in Rule 6730(c)(2) and Rule 6730(d)(2). The TRACE
System converts the information to a dollar value for purposes of the
dissemination of transaction information. The stated reporting
requirement includes the assumption that one bond represents a specific
par amount, typically $1,000 par (or principal) value.\21\
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\21\ For example, a member reports a trade of 10 bonds and the
total par value of $10,000 is displayed.
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For certain Asset-Backed Securities, such as Agency Pass-Through
Mortgage-Backed Securities, the principal value--the value of the
collateral of the mortgages or other assets backing the security--
declines over time (e.g., the mortgagees in the pool of mortgages pay
down their mortgages).\22\ In such cases, the size (volume) of such
Asset-Backed Securities is the original face value or principal amount
of the security at issuance, stated in dollars, and thereafter, the
Remaining Principal Balance. The Remaining Principal Balance is
calculated by multiplying the original face value by a Factor. FINRA
proposes to amend Rule 6730(d)(2), which provides guidance on how to
report size (volume) under Rule 6730(c)(2). In a transaction in an
Asset-Backed Security for which par value is not used to measure the
size (volume) of a transaction, the proposed amendments to Rule
6730(d)(2) will require a member to report the original face value of
such security and, in a second field, the Factor the member used at the
Time of Execution. Generally, FINRA expects that the Factor a member
uses to execute a transaction will be the Factor that was most recently
published by the Sponsor or Issuing Entity of the security or other
source providing such information periodically to market participants.
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\22\ Occasionally, the value of the collateral increases--for
example, in ``interest only'' mortgages, the loan balances may
increase.
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Price. Rule 6730(c)(3) and Rule 6730(d)(1) require members to
report price. If a price field is not available, members are required
to report the contract amount and the accrued interest. Accrued
interest is not a component of the total sale price of Asset-Backed
Securities. To harmonize the reporting provision in connection with the
reporting of Asset-Backed Securities, proposed amended Rule 6730(d)(1)
will require members to report accrued interest only if applicable.
Settlement Modifiers. FINRA proposes several amendments to Rule
6730(d)(4) providing for modifiers and indicators that will distinguish
certain trades executed at special prices or subject to other
conditions affecting price. FINRA proposes to amend Rule 6730(d)(4)(B)
to clarify that many securities are conventionally settled on T + 3, by
stating this specifically, instead of using the phrase ``regular way.''
The change is necessary because the T + 3 convention for settlement of
many securities does not apply to certain Asset-Backed Securities to be
included in TRACE.\23\ In addition, FINRA proposes additional
amendments to Rule 6730(d)(4)(B) to reflect settlement conventions
regarding Agency Pass-Through Mortgage-Backed Securities and the
settlement of other Asset-Backed Securities. Transactions in Agency
Pass-Through Mortgage-Backed Securities, by industry convention, are
assigned one of four monthly settlement dates according to the type of
Agency Pass-Through Mortgage-Backed Security to be settled.\24\ The
proposed amendments to Rule 6730(d)(4)(B) will not require a member to
use a settlement modifier for a transaction in an Agency Pass-Through
Mortgage-Backed Security that the parties will settle in conformity
with the uniform practices established as ``good delivery'' for such
transactions on the next occurring monthly date announced for
settlement of such
[[Page 55605]]
securities. However, if the parties will settle other than in
conformity with the uniform practices established as ``good delivery''
for such transactions, under the amendments members will be required to
report using the settlement modifier (``.sNN''), indicating the number
of days until settlement (e.g., ``.s55''). In addition, the proposed
amendments to Rule 6730(d)(4)(B) will require members to report
transactions in all other types of Asset-Backed Securities using the
settlement modifier (``.sNN'') and providing the specified number of
days to settlement (e.g., ``.s55'').
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\23\ In some cases, certain types of Asset-Backed Securities
transactions routinely may settle a number of months after trade
date.
\24\ Industry professionals involved in transactions in Agency
Pass-Through Mortgage-Backed Securities effected TBA developed a
convention for ``regular way'' settlement of these instruments.
According to the type of security, such securities are settled
monthly on specified settlement dates, which are announced for each
month several months in advance. In total, four monthly Settlement
Dates (A through D), per month, were established and published, to
establish settlement conventions for the various types of securities
being originated and traded.
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Indicators for Specified Pool Transactions; Stipulation
Transactions; Dollar Rolls. As discussed above, transactions in Agency
Pass-Through Mortgage-Backed Securities that are Specified Pool
Transactions or Stipulation Transactions contain additional terms and
conditions, which affect price. Price also is impacted in a Dollar
Roll, which is a third type of transaction also discussed above that
occurs in Agency Pass-Through Mortgage-Backed Securities. FINRA
proposes indicators that a member must use when reporting a Specified
Pool Transaction, a Stipulation Transaction, a Dollar Roll, and a
transaction that is both a Dollar Roll and a Stipulation Transaction
in, respectively, proposed Rule 6730(d)(4)(E)(i), (ii), (iii) and (iv).
Agency Pass-Through Mortgage-Backed Security Initial Sale. FINRA
recently amended the Rule 6700 Series to require that primary market
transactions be reported to TRACE. The reporting requirements for
primary market transactions that are List or Fixed Offering Price
transactions and Takedown Transactions are set forth in Rule
6730(a)(5), and extend the reporting period to the close of the TRACE
system on T + 1. FINRA proposes that these reporting requirements will
not apply to a transaction in an Agency Pass-Through Mortgage-Backed
Security, which are not sold in a traditional underwriting or placement
as envisioned and incorporated in the definitions of List or Fixed
Offering Price Transaction and Takedown Transaction.
(C) Dissemination
Generally, FINRA's policy favors transparency in the debt
securities markets, and for most TRACE-Eligible Securities, real-time
dissemination of transaction information is provided for under Rule
6750(a). Dissemination of the information occurs immediately upon
receipt of the transaction report. The exceptions to the policy
favoring dissemination in Rule 6750(b) are currently limited to
transactions effected pursuant to Securities Act Rule 144A, transfers
of certain proprietary positions effected in connection with broker-
dealer mergers or other broker-dealer consolidations, and List or Fixed
Offering Price Transactions and Takedown Transactions.\25\
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\25\ TRACE-Eligible Securities transactions that are not
disseminated are set forth in Rule 6750(b). Rule 6750(b)(1) applies
as to transactions in TRACE-Eligible Securities that are affected as
Securities Act Rule 144A transactions. Under Rule 6750(b)(2), FINRA
does not disseminate information on a transfer of proprietary
securities positions between a member and another member or non-
member broker-dealer where the transfer: (A) Is effected in
connection with a merger of one broker-dealer with the other broker-
dealer or a direct or indirect acquisition of one broker-dealer by
the other broker-dealer or the other broker-dealer's parent company,
and (B) is not in furtherance of a trading or investment strategy.
Under recently approved Rule 6750(b)(3), FINRA will not disseminate
List or Fixed Offering Price Transactions and Takedown Transactions.
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However, at this time, FINRA proposes not to disseminate
information on transactions in Asset-Backed Securities in proposed Rule
6750(b)(4). The reporting of Asset-Backed Securities transactions will
permit FINRA to obtain additional information, observe patterns of
trading and otherwise engage in more in-depth surveillance of the
Asset-Backed Securities market. FINRA will study the collected data to
determine the volume and trading in various types of Asset-Backed
Securities. FINRA may determine that dissemination of transaction
information is warranted with respect to Asset-Backed Securities after
it has had an opportunity to review data over a period of time. FINRA
used this approach previously when it implemented dissemination in
phases for various types of corporate bonds.
(D) Other Amendments to Rule 6700 Series
Rule 6760. Currently, Rule 6760 requires members that are managing
underwriters to notify FINRA that a new TRACE-Eligible Security is
about to be offered and sold in a primary offering. FINRA must have
this information in the TRACE system to facilitate timely transaction
reporting by all members that have effected transactions in a newly
issued TRACE-Eligible Security. For TRACE-Eligible Securities that are
Asset-Backed Securities, for the purposes of Rule 6760, FINRA proposes
to amend Rule 6760(a) to characterize a Sponsor and an Issuing Entity
of an Asset-Backed Security, if members, as managing underwriters, and
require them, like underwriters or initial purchasers of Asset-Backed
Securities, to provide FINRA Operations notice of a new Asset-Backed
Security and information that identifies the new security by CUSIP (or
if a CUSIP number is not available, a similar numeric identifier (e.g.,
a mortgage pool number) or a FINRA symbol) and describes the security.
For an Asset-Backed Security, FINRA proposes to amend the notice
requirements in Rule 6760(b) to require the names of the Issuing Entity
and the Sponsor, in addition to the CUSIP (or an alternative
identifier) and other currently required information (i.e., coupon
rate; maturity; the time the new issue is priced, and, if different,
the time that the first transaction in the distribution or offering is
executed; a brief description of the security type; and if the security
will be traded subject to Securities Act Rule 144A).
FINRA also proposes minor technical, stylistic, or conforming
changes to the Rule 6700 Series, including renumbering certain
provisions, incorporating the term TRACE System Hours in certain
provisions, and restating certain requirements regarding settlement and
settlement modifiers.
(E) Fees
FINRA proposes that the current trade reporting fees set forth in
Rule 7730 also apply to the reporting of transactions in Asset-Backed
Securities. Because Asset-Backed Securities transaction information
will not be disseminated, there will not be any market data available,
and thus no market data fees are proposed. For transactions in Asset-
Backed Securities, such as Agency Pass-Through Mortgage-Backed
Securities, for which par value is not used to determine the size (or
volume) of a transaction, FINRA clarifies how transaction fees will be
assessed. For purposes of trade reporting fees, proposed Rule
7730(b)(1)(B) provides that transaction size for such securities will
be the lesser of the original face amount or Remaining Principal
Balance.
In proposed Rule 7730(b)(1)(D), FINRA proposes that transactions in
an Agency Pass-Through Mortgage-Backed Security not be considered List
or Fixed Offering Price Transactions or Takedown Transactions for
purposes of the reporting fees in Rule 7730(b), which will eliminate
any possible application to Agency Pass-Through Mortgage-Backed
Security transactions of the recently adopted provision in Rule
7730(b)(1)(C). Rule 7730(b)(1)(C) provides that a member that reports a
List or Fixed Offering Price Transaction or a Takedown Transaction
shall not be charged the standard trade reporting fee assessed under
Rule 7730(b)(1).
[[Page 55606]]
Finally, FINRA proposes minor technical, stylistic, or conforming
changes to Rule 7730, including changes to conform the fee chart to the
changes in the rule text.
FINRA will announce the effective date of the proposed rule change
in a Regulatory Notice to be published no later than 60 days following
Commission approval. The effective date will be no later than 270 days
following publication of the Regulatory Notice announcing Commission
approval.
2. Statutory Basis
FINRA believes that the proposed rule change is consistent with the
provisions of Section 15A(b)(6) of the Act,\26\ which requires, among
other things, that FINRA rules must be designed to prevent fraudulent
and manipulative acts and practices, to promote just and equitable
principles of trade, and, in general, to protect investors and the
public interest and Section 15A(b)(5) of the Act,\27\ which requires,
among other things, that FINRA rules provide for the equitable
allocation of reasonable dues, fees and other charges among members and
issuers and other persons using any facility or system that FINRA
operates or controls in that: (i) the proposed rule change will enhance
FINRA's surveillance of the debt market in connection with Asset-Backed
Securities transactions generally; and (ii) the proposed fee proposal
provides for reporting fees that mirror the fees currently in effect
for corporate bonds, and are reasonable and equitably allocated among
members.
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\26\ 15 U.S.C. 78o-3(b)(6).
\27\ 15 U.S.C. 78o-3(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
FINRA does not believe that the proposed rule change will result in
any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others
Written comments were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 35 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self regulatory organization consents, the Commission will:
(A) By order approve such proposed rule change, or
(B) Institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an e-mail to rule-comments@sec.gov. Please include
File Number SR-FINRA-2009-065 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-FINRA-2009-065. This
file number should be included on the subject line if e-mail is used.
To help the Commission process and review your comments more
efficiently, please use only one method. The Commission will post all
comments on the Commission's Internet Web site (https://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments,
all written statements with respect to the proposed rule change that
are filed with the Commission, and all written communications relating
to the proposed rule change between the Commission and any person,
other than those that may be withheld from the public in accordance
with the provisions of 5 U.S.C. 552, will be available for inspection
and copying in the Commission's Public Reference Room, 100 F Street,
NE., Washington, DC 20549, on official business days between the hours
of 10 a.m. and 3 p.m. Copies of the filing will also be available for
inspection and copying at the principal office of FINRA. All comments
received will be posted without change; the Commission does not edit
personal identifying information from submissions. You should submit
only information that you wish to make available publicly. All
submissions should refer to File No. SR-FINRA-2009-065 and should be
submitted on or before November 18, 2009.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\28\
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\28\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. E9-25875 Filed 10-27-09; 8:45 am]
BILLING CODE 8011-01-P
