Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of Proposed Rule Change Relating to Post-Trade Transparency for Agency Pass-Through Mortgage-Backed Securities Traded in Specified Pool Transactions and SBA-Backed Asset-Backed Securities Transactions, 56686-56692 [2012-22555]
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56686
Federal Register / Vol. 77, No. 178 / Thursday, September 13, 2012 / Notices
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–67798; File No. SR–FINRA–
2012–042]
Self-Regulatory Organizations;
Financial Industry Regulatory
Authority, Inc.; Notice of Filing of
Proposed Rule Change Relating to
Post-Trade Transparency for Agency
Pass-Through Mortgage-Backed
Securities Traded in Specified Pool
Transactions and SBA-Backed AssetBacked Securities Transactions
September 7, 2012.
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 August
29, 2012, 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
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FINRA is proposing to amend the
FINRA Rule 6700 Series and Trade
Reporting and Compliance Engine
(‘‘TRACE’’) dissemination protocols
regarding the reporting and
dissemination of transactions in
TRACE-Eligible Securities that are: (1)
Agency Pass-Through Mortgage-Backed
Securities traded in Specified Pool
Transactions (‘‘MBS Specified Pool
transactions’’) and (2) Asset-Backed
Securities backed by loans guaranteed
as to principal and interest by the Small
Business Administration (‘‘SBA-Backed
ABS’’) and traded either in Specified
Pool Transactions or to be announced
(‘‘TBA’’) (collectively, ‘‘SBA-Backed
ABS transactions’’).3
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.
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 The terms TRACE-Eligible Security, Agency
Pass-Through Mortgage-Backed Security, Specified
Pool Transaction, Asset-Backed Security and To Be
Announced are defined in, respectively, Rule
6710(a), Rule 6710(v), Rule 6710(x), Rule 6710(m)
and Rule 6710(u). The definition of SBA-Backed
ABS is proposed in Rule 6710(bb).
2 17
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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.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
On April 18, 2012, the SEC approved
the TBA Amendments to provide for the
dissemination of MBS TBA transactions,
subject to dissemination caps, and
concomitant reductions in the reporting
periods for such transactions, which
will become effective November 5,
2012.4 FINRA is proposing to expand
transparency further in the market for
Asset-Backed Securities in the proposed
rule change, which provides for the
dissemination of MBS Specified Pool
and SBA-Backed ABS transactions,
subject to dissemination caps, and
concomitant reductions in the reporting
periods for such transactions.
FINRA proposes to amend Rule 6730
to reduce, in two stages, the time frames
to report MBS Specified Pool and SBABacked ABS transactions. FINRA also
proposes minor clarifying amendments
to Rule 6730(a)(3)(D) and (E) to specify
that the reporting requirements set forth
therein apply solely to MBS TBA
transactions. In connection with such
changes, FINRA proposes amendments
in Rule 6710 to the definitions of
‘‘Agency Pass-Through MortgageBacked Security,’’ ‘‘To Be Announced
4 The proposed rule text includes the
amendments to the FINRA Rule 6700 Series to
provide for reduced reporting times and
dissemination of transactions in TRACE-Eligible
Securities that are Agency Pass-Through MortgageBacked Securities that are traded To Be Announced
(‘‘TBA’’) (‘‘MBS TBA transactions’’), which were
approved by the SEC and will become effective
November 5, 2010. See Securities Exchange Act
Release No. 66829 (April 18, 2012), 77 FR 24748
(April 25, 2012) (Order Approving File No. SR–
FINRA–2012–020) and Regulatory Notice 12–26
(May 2012) (‘‘TBA Amendments’’).
The TBA Amendments distinguished between
MBS TBA transactions for good delivery (‘‘MBS
TBA transactions GD’’) and not for good delivery
(‘‘MBS TBA transactions NGD’’). In response to
comments, FINRA proposed a longer period to
timely report, and lower dissemination caps for,
MBS TBA transactions NGD than the requirements
proposed for MBS TBA transactions GD.
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(‘TBA’),’’ and ‘‘Specified Pool
Transaction,’’ and a new defined term,
‘‘SBA-Backed ABS.’’ Finally FINRA
proposes to amend Rule 6750 to provide
for the dissemination of MBS Specified
Pool and SBA-Backed ABS transactions,
and proposes to establish, as part of
TRACE dissemination protocols, the
specific data elements of the
transactions that will be disseminated as
well as a $10 million dissemination cap
for such transactions.
MBS Specified Pool Transactions
Generally, Agency Pass-Through
Mortgage-Backed Securities are traded
either TBA or in Specified Pool
Transactions as defined in Rule 6710(u)
and (x), respectively. In MBS Specified
Pool transactions, on the date of trade
(trade date), the seller agrees to deliver
to the buyer a specific Agency PassThrough Mortgage-Backed Security
identifiable by a unique identification
number, representing a specific pool of
mortgage loans. In an MBS TBA
transaction, the mortgage pools to be
delivered are described (e.g., by
program, interest rate, type of
residential mortgage, maturity) but are
not specifically identified, and will not
be identified until shortly before
settlement. While the majority of
Agency Pass-Through Mortgage-Backed
Securities are traded TBA, the daily
volume of MBS Specified Pool
transactions represents significant
economic activity in mortgage-related
securities, and FINRA believes that
additional transparency in such
securities is appropriate. The reported
transaction data shows that MBS
Specified Pool transaction pricing is
strongly correlated to (and in general is
priced at a premium over) the pricing of
similar mortgage pools traded in the
substantially larger MBS TBA market.
Moreover, the two market sectors
exhibit similar trading characteristics,
and the same programs dominate both
markets. For example, approximately 98
percent of the total volume in MBS
Specified Pool transactions, and
approximately 95 percent of the total
volume in MBS TBA transactions,
occurs in securities backed by singlefamily mortgage loans.5 Accordingly,
the TRACE data sets are complimentary
and the dissemination of the additional
pricing information for MBS Specified
Pool transactions will further improve
5 Over half of all transactions in MBS Specified
Pool transactions, and approximately 77 percent of
all transactions in MBS TBA transactions, occur in
Federal National Mortgage Association (‘‘Fannie
Mae’’) program securities. The information is based
on FINRA staff’s review of all Asset-Backed
Securities transactions reported to TRACE from
May 16, 2011 through October 31, 2011.
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transparency in the Agency PassThrough Mortgage-Backed Securities
market.
SBA-Backed ABS Transactions
SBA-Backed ABSs are Asset-Backed
Securities created from pooling loans
made to small business by banks and
other financial institutions in
conformity with the program
requirements of the Small Business
Administration (‘‘SBA’’). Loans that
meet the SBA’s requirements are
guaranteed by SBA as to the timely
payment of principal and interest, and
pools are then created to issue SBABacked Asset-Backed Securities.
SBA-Backed ABS also are traded TBA
and in Specified Pool Transactions.6
Like Agency Pass-Through MortgageBacked Securities discussed above, such
TBA trading may occur because market
participants may anticipate with some
certainty the creation of loan pools and
are aware of the pool characteristics,
and the extent to which such loan pools
are fungible with previously-settled
SBA-Backed ABS. FINRA proposes that
both types of SBA-Backed ABS
transactions be subject to dissemination.
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Amendments to Defined Terms
FINRA proposes to define ‘‘SBABacked ABS’’ in proposed Rule 6710(bb)
as an Asset-Backed Security issued in
conformity with a program of the Small
Business Administration (‘‘SBA’’), for
which the timely payment of principal
and interest is guaranteed by the SBA,
representing ownership interest in a
pool (or pools) of loans and structured
to ‘‘pass through’’ the principal and
interest payments made by the
borrowers in such loans to the holders
of the security on a pro rata basis.
In connection with the proposed
addition of the definition of SBABacked ABS, FINRA also proposes
amendments to the definitions of ‘‘To
Be Announced (‘TBA’)’’ and ‘‘Specified
Pool Transaction’’ in Rule 6710(u) and
Rule 6710(x), respectively. Both
definitions currently apply only to
Agency Pass-Through Mortgage-Backed
Securities. As amended, both terms
would include transactions in SBABacked ABS.7 In addition, FINRA
6 SBA-Backed ABS transactions constitute a very
minor portion of all Specified Pool Transactions.
SBA-Backed ABS Specified Pool Transactions
account for only 0.41 percent of the combined total
volume of all Specified Pool Transactions (i.e., the
total volume of Agency Pass-Through Mortgage
Backed-Securities and SBA-Backed ABS traded in
Specified Pool Transactions).
7 As revised, Rule 6710(u) would provide:
‘‘To Be Announced’’ (‘‘TBA’’) means a transaction
in an Agency Pass-Through Mortgage-Backed
Security as defined in paragraph (v) or an SBABacked ABS as defined in paragraph (bb) where the
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proposes amendments to the definition
of ‘‘Agency Pass-Through MortgageBacked Security’’ in Rule 6710(v) to
incorporate minor, technical changes to
the defined term.8
Reduction of Reporting Period
Currently, Asset-Backed Securities
transactions (except certain pre-issuance
transactions in collateralized mortgage
obligations (‘‘CMOs’’) and real estate
mortgage investment conduits
(‘‘REMICs’’)) that are executed on a
business day through 5:00:00 p.m.
Eastern Time must be reported to
TRACE on the Trade Date during
TRACE System Hours, as provided in
Rule 6730(a)(3)(A)(i), subject to the
exceptions for transactions executed
after 5:00:00 p.m. and during times
when the TRACE System is not open in
Rule 6730(a)(3)(A)(ii) and (iii). In
contrast, secondary market transactions
in all other TRACE-Eligible Securities
must be reported within 15 minutes of
the Time of Execution.9 With certain
exceptions, transaction information on
such TRACE-Eligible Securities is
disseminated as soon as the transaction
is reported, and the 15-minute reporting
requirement results in meaningful price
transparency for market participants
trading such securities.10 In addition,
effective November 5, 2012, MBS TBA
transactions will be disseminated, and,
in connection with their dissemination,
the timeframes for timely reporting such
transactions will be reduced to provide
market participants meaningful and
parties agree that the seller will deliver to the buyer
a pool or pool(s) of a specified face amount and
meeting certain other criteria but the specific pool
or pool(s) to be delivered at settlement is not
specified at the Time of Execution, and includes
TBA transactions ‘‘for good delivery’’ (‘‘GD’’) and
TBA transactions ‘‘not for good delivery’’ (‘‘NGD’’).
As revised, Rule 6710(x) would provide:
‘‘Specified Pool Transaction’’ means a transaction
in an Agency Pass-Through Mortgage-Backed
Security as defined in paragraph (v) or an SBABacked ABS as defined in paragraph (bb) requiring
the delivery at settlement of a pool or pool(s) that
is identified by a unique pool identification number
at the Time of Execution.
8 As revised, Rule 6710(v) would provide:
‘‘Agency Pass-Through Mortgage-Backed
Security’’ means a type of Asset-Backed Security
issued in conformity with a program of an Agency
or a Government-Sponsored Enterprise (‘‘GSE’’), for
which the timely payment of principal and interest
is guaranteed by the Agency or GSE, representing
ownership interest in a pool (or pools) of mortgage
loans structured to ‘‘pass through’’ the principal
and interest payments to the holders of the security
on a pro rata basis.
9 The term Time of Execution is defined in Rule
6710(d).
10 See Rule 6750(b) for exceptions to
dissemination. See also supra note 4 regarding the
TBA Amendments and dissemination of MBS TBA
transactions.
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56687
timely price information about MBS
TBA transactions.11
In connection with proposing that
MBS Specified Pool and SBA-Backed
ABS transactions be disseminated,
FINRA proposes to reduce the reporting
timeframes for such transactions for the
same reasons. The proposed reduction
of the reporting timeframes would occur
in two stages to permit industry
participants time to adjust policies and
procedures and to make required
technological changes, as also done in
connection with the TBA Amendments.
The requirements to report MBS
Specified Pool and SBA-Backed ABS
transactions are set forth in,
respectively, proposed Rule
6730(a)(3)(F) and proposed Rule
6730(a)(3)(G). First, FINRA proposes to
reduce the reporting period for MBS
Specified Pool and SBA-Backed ABS
transactions from no later than the close
of the TRACE system on Trade Date to
no later than two hours (i.e., 120
minutes) from the Time of Execution for
the duration of the proposed MBS
Specified Pool Pilot Program and the
proposed SBA-Backed ABS Pilot
Program in, respectively, proposed Rule
6730(a)(3)(F)(i) and proposed Rule
6730(a)(3)(G)(i).12 Like the reporting
requirements currently in effect for
other TRACE-Eligible Securities, FINRA
also proposes exceptions to the 120minute timeframe for transactions
executed near the end of the business
day or when the TRACE system is not
open.13 Second, after the pilot programs
11 See supra note 4. Under the TBA Amendments,
which become effective November 5, 2012, MBS
TBA transactions GD must be reported generally
within 45 minutes of the Time of Execution until
May 10, 2013 (reduced to 15 minutes after May 10,
2013), and MBS TBA transactions NGD be reported
within 120 minutes until May 10, 2013 (reduced to
60 minutes after May 10, 2013). Both reporting
requirements are subject to exceptions for
transactions executed close to the end of the
business day or when the TRACE system is not
open.
12 Proposed Rule 6730(a)(3)(F)(i) and proposed
Rule 6730(a)(3)(G)(i) each incorporate by reference
Rule 6730(a)(3)(E)(i)a. through d., which provides
for a 120-minute reporting timeframe in Rule
6730(a)(3)(E)(i)b.
Each of the pilot programs would expire after
approximately 180 days. To accommodate member
requests that, if possible, rule changes requiring
technology changes occur on a Friday, proposed
Rule 6730(a)(3)(F)(i) and proposed Rule
6730(a)(3)(G)(i) provide that the MBS Specified
Pool Pilot Program and the SBA-Backed ABS Pilot
Program each would expire on a Friday (i.e., on the
180th day, if a Friday, or, if the 180th day is not
a Friday, on the Friday next occurring that the
TRACE system is open).
13 See proposed Rule 6730(a)(3)(F)(i) and
proposed Rule 6730(a)(3)(G)(i), which incorporate
by reference Rule 6730(a)(3)(E)(i)a., c., and d.,
which apply to transactions executed near the end
of the business day or when the TRACE system is
not open. Under Rule 6730(a)(3)(E)(i)a., transactions
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Federal Register / Vol. 77, No. 178 / Thursday, September 13, 2012 / Notices
expire, the reporting periods for MBS
Specified Pool and SBA-Backed ABS
transactions would be reduced from no
later than two hours (120 minutes) from
the Time of Execution to no later than
one hour (60 minutes) from the Time of
Execution, as set forth in, respectively,
proposed Rule 6730(a)(3)(F)(ii) and
proposed Rule 6730(a)(3)(G)(ii).14
Currently, approximately 84 percent of
MBS Specified Pool and SBA-Backed
ABS transactions are reported within
two hours of execution, and
approximately 75 percent are reported
within one hour of execution.
After the 60-minute reporting
requirement is implemented, FINRA
will continue to review the reporting of
MBS Specified Pool and SBA-Backed
ABS transactions and may recommend
further reductions in the reporting
period.
FINRA also proposes minor clarifying
amendments to Rule 6730(a)(3)(D) and
(E) to specify that the reporting
requirements set forth therein apply
solely to MBS TBA transactions.
Dissemination
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Amendment to Rule 6750
Although members began reporting
transactions in Asset-Backed Securities
to TRACE on May 16, 2011, FINRA
currently does not disseminate publicly
Asset-Backed Securities transaction data
reported to TRACE as provided in Rule
6750(b)(4). However, on November 5,
2012, transparency in Asset-Backed
Securities transactions will increase
significantly with the dissemination of
MBS TBA transactions, which represent
approximately 87 percent of the average
executed on a business day at or after 12:00:00 a.m.
Eastern Time through 7:59:59 a.m. Eastern Time
must be reported the same day no later than 120
minutes after the TRACE system opens. Under Rule
6730(a)(3)(E)(i)c., transactions executed on a
business day less than 120 minutes before 6:30:00
p.m. Eastern Time (the time the TRACE system
closes) must be reported no later than 120 minutes
after the TRACE system opens the next business
day (T + 1), and if reported on T + 1, designated
‘‘as/of’’ and include the date of execution. Under
Rule 6730(a)(3)(E)(i)d., transactions executed on a
business day at or after 6:30:00 p.m. Eastern Time
through 11:59:59 p.m. Eastern Time or on a
Saturday, a Sunday, a federal or religious holiday
or other day on which the TRACE system is not
open at any time during that day (determined using
Eastern Time) must be reported the next business
day (T + 1), no later than 120 minutes after the
TRACE system opens, designated ‘‘as/of’’ and
include the date of execution.
14 Proposed Rule 6730(a)(3)(F)(ii) and proposed
Rule 6730(a)(3)(G)(ii)—the ‘‘post-pilot program’’
reporting provisions—incorporate by reference the
reporting requirements set forth in Rule
6730(a)(3)(E)(ii)a. through d., including the
exceptions to the requirement to report within 60
minutes that apply to transactions executed near
the end of the business day or when the TRACE
system is not open in Rule 6730(a)(3)(E)(ii)a., c.,
and d.
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daily volume traded in all Asset-Backed
Securities.15 After obtaining the SEC’s
approval to disseminate such
transaction information, FINRA
continued to examine transactions in
Asset-Backed Securities to determine if
FINRA should propose to disseminate
additional Asset-Backed Securities. The
SEC has been supportive of such
efforts.16
FINRA has reviewed the data reported
for Asset-Backed Securities other than
MBS TBA transactions, including MBS
Specified Pool and SBA-Backed ABS
transactions, and studied the total
volume of MBS Specified Pool and
SBA-Backed ABS transactions, the
concentration of trading in such
securities, and the pricing disparity
among various types of MBS Specified
Pool and SBA-Backed ABS transactions
to understand their liquidity and
fungibility. The market activity reported
and reviewed reveals that for MBS
Specified Pool transactions, the market
is generally active and liquid, and with
liquidity comparable to that of corporate
bonds.17 Based on the review, FINRA
believes that it is appropriate to amend
Rule 6750 to provide for the immediate
dissemination of MBS Specified Pool
and SBA-Backed ABS transaction
information, and that such
dissemination will benefit market
participants by improving transparency
in both market segments. Specifically,
Rule 6750(b)(4) would be amended to
provide that FINRA will not
disseminate information on a
transaction in a TRACE-Eligible
Security that is an Asset-Backed
Security, except: (A) An Agency PassThrough Mortgage-Backed Security; and
(B) an SBA-Backed ABS.18 Thus,
information would be disseminated on
MBS Specified Pool and SBA-Backed
ABS transactions immediately upon
receipt of the transaction report and no
later than 120 minutes, or, after the
expiration of the applicable pilot
15 See
supra note 4.
Securities Exchange Act Release No. 61566
(February 22, 2010), 75 FR 9262, 9265 (March 1,
2010) (Order Approving File No. SR–FINRA–2009–
065).
17 Liquidity as measured by par value traded is
comparable to corporate bonds. Although MBS TBA
transactions account for approximately 93 percent
of all trading in Agency Pass-Through MortgageBacked Securities, the average daily volume of MBS
Specified Pool transactions is significant—
approximately $17.5 billion is traded daily on
average, in approximately 3,000 trades per day. The
information is based on FINRA staff’s review of all
Asset-Backed Securities transactions reported to
TRACE from May 16, 2011 through October 31,
2011.
18 See supra, note 4.
16 See
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program, no later than 60 minutes, from
the Time of Execution.19
Dissemination Protocols
SBA-Backed ABS Transactions
Traded TBA. The dissemination
protocols applicable to SBA-Backed
ABS transactions traded TBA would be
the same as the dissemination protocols
for MBS TBA transactions NGD and
subject to the dissemination cap
discussed below. Generally, such
securities will be disseminated
immediately upon receipt of transaction
information, and the standard data
elements will be displayed.20
MBS and SBA-Backed ABS Specified
Pool Transactions. FINRA proposes to
modify the dissemination protocols for
MBS Specified Pool transactions and
SBA-Backed ABS traded in Specified
Pool Transactions (collectively ‘‘MBS
and SBA-Backed ABS Specified Pool
transactions’’) from those initially
proposed by FINRA, to strike a balance
between certain anonymity concerns
and providing meaningful
transparency.21 Unlike the
dissemination protocols for other
disseminated TRACE-Eligible
Securities, including MBS TBA
transactions, FINRA proposes not to
disseminate the CUSIP of the MBS or
the SBA-Backed ABS Specified Pool
transaction.22 Instead, certain specified
data elements that are integral to
describing and valuing the security
traded, with numeric values expressed
within specific ranges (i.e., the
information will be truncated and,
depending on the data element, rounded
up or down) would be disseminated.
Although FINRA has determined not to
disseminate the specific CUSIP of the
19 FINRA continues to review Asset-Backed
Security transaction information in other sectors of
the Asset-Backed Securities market and, at a later
date, may propose that transactions in other AssetBacked Securities be disseminated.
20 Standard data elements include, among other
things, CUSIP, time of transaction, size (subject to
dissemination caps), price, counterparty type
(customer or dealer), and buy/sell indicator. FINRA
has represented that the CUSIP for a TBA
transaction identifies the issuer and the
characteristics of the pools of mortgages that can be
delivered to satisfy a TBA transaction but differs
from a standard CUSIP in that it is not unique to
a security and will be re-assigned to future TBA
transactions requiring delivery of the same type of
pools on the same month of delivery. See email
dated September 4, 2012 from Sharon Zackula of
FINRA to Geoffrey Pemble, Special Counsel,
Commission and Michael Bradley, AttorneyAdvisor, Commission.
21 See Item C of this filing for a discussion of SR–
FINRA–2012–021.
22 FINRA notes that notwithstanding the
proposed changes to dissemination protocols,
FINRA is not proposing to change any of the
reporting requirements applicable to such
securities, including the requirement to report the
CUSIP number.
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security, FINRA believes that investor
[sic] must be provided sufficient
information such that the investor can
appropriately interpret the price
transparency provided by the TRACE
data. Part of the valuation analysis of
any Asset-Backed Security includes a
projection of its cash flow which in turn
relies on assumptions about prepayment
rates. FINRA believes that the data
elements outlined below provide
information that will allow market
participants to perform such analysis.
MBS Specified Pool Transactions
In lieu of a CUSIP, the following
information would be disseminated for
each MBS Specified Pool transaction
reported to TRACE: Product type;
amortization type; issuing agency;
coupon; original maturity; weighted
average coupon (‘‘WAC’’); weighted
average maturity (‘‘WAM’’); weighted
average loan age (‘‘WALA’’); average
loan size (‘‘ALS’’); and original loan-tovalue (‘‘original LTV’’) information.
Each data element (except issuing
agency, product type and amortization
type) would be provided in ranges
(truncated and disseminated after
rounding) to further reduce the potential
for ‘‘reverse engineering’’ transaction
data to determine the identification of a
market participant and/or the
participant’s trading strategies. FINRA
believes that these data elements will
permit investors to meaningfully assess
the value and price of the security. If in
the future, FINRA identifies additional
data elements that would significantly
improve transparency using this
approach, FINRA may add such data
elements to the dissemination protocol
for MBS Specified Pool transactions
discussed herein.
Product type, amortization type,
issuing agency, coupon and original
maturity would be disseminated to
permit identification of the security type
traded. Product type refers to the type
of properties (or real-estate related
projects) subject to the mortgages
underlying the Agency-Pass Through
Mortgage-Backed Security (e.g., single
family residential dwelling mortgage
loans, multi-family residential dwelling
mortgage loans, or project loans).
Amortization type identifies the
underlying mortgage types (e.g., level
payment, adjustable rate mortgages
(‘‘ARMs’’) or balloons). Issuing agency
refers to the Agency or GovernmentSponsored Enterprise (GSE) that issues
the certificate and guarantees the
payment of principal and interest of the
Agency Pass-Through Mortgage-Backed
Security (e.g., Fannie Mae, the Federal
Home Loan Mortgage Corporation
(‘‘Freddie Mac’’) and the Government
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National Mortgage Association (‘‘Ginnie
Mae’’)). Coupon refers to the stated
annual percentage rate of interest paid
on the Agency-Pass Through MortgageBacked Security, and would be
disseminated after rounding down to
the nearest quarter percentage point
(e.g., an interest rate of 5.12 percent
would be disseminated at 5.00 percent).
Original maturity refers to the original
stated term after which the principal
amount of the security is due to be
repaid in full, or the end of the life of
the Agency-Pass Through MortgageBacked Security (e.g., 30 years
(expressed as 360 months)). Original
maturity would be disseminated after
rounding up to the nearest 10 (e.g., an
original maturity of 358 months would
be disseminated at 360).
In addition, FINRA will disseminate
WAC, WAM, WALA, ALS, and original
LTV to provide information on recent
and historic cash flows and
prepayments, and permit investors to
develop projections or assumptions
regarding future payments,
prepayments, and cash flows. WAC is
the weighted average interest rate of the
underlying mortgage loans or pools that
serve as collateral for a mortgage
security, weighted by the size of the
principal loan balances.23 WAC would
be disseminated after truncating to a
single decimal (e.g., WAC of 7.13%
would be disseminated as 7.1). WAM is
the weighted average number of months
to the final payment of each loan
backing an Agency Pass-Through
Mortgage-Backed Security (or other
mortgage-backed security), weighted by
the size of the principal loan balances.24
WAM would be disseminated rounded
down to the nearest 10 (e.g., WAM of 87
months would be disseminated as 80).
WALA is the weighted average number
of months since the date of the loan
origination of the mortgages (i.e., the age
of the loans) backing an Agency PassThrough Mortgage Security (or other
mortgage-backed security), weighted by
the size of the principal loan balances.
WALA would be disseminated rounded
up to the nearest 10 (e.g., WALA of 163
months would be disseminated as 170).
Current ALS is obtained by dividing the
current mortgage loan outstanding
principal balance by the number of
loans that remain outstanding. ALS
would be rounded down to the nearest
25 (e.g., an ALS of 113 (i.e., $113,000
average loan size) would be
23 WAC is calculated by weighting the interest
rate of each mortgage loan in the pool by the
amount of the mortgage outstanding.
24 WAM is calculated by weighting the remaining
number of months to maturity for each mortgage
loan in the pool by the amount of the mortgage
outstanding.
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56689
disseminated as 100). Original LTV ratio
expresses the amount of a first mortgage
lien as a percentage of the total
appraised value of real property, and
also would be disseminated rounded
down to the nearest 25 (e.g., an original
LTV of 92 (i.e., 92 percent) would be
disseminated as 75).
The data elements are publicly
available as they are published on a
monthly basis by the issuing agency.
Upon receipt of a transaction report, the
TRACE system will automatically
disseminate the above data elements
corresponding to the CUSIP reported in
lieu of disseminating the CUSIP
number.
Dissemination of SBA-Backed ABS
Traded in Specified Pool Transactions
For Specified Pool transactions in
SBA-Backed ABS, FINRA generally
proposes that dissemination protocols
be established that are substantially
similar to those discussed above for
MBS Specified Pool transactions. The
dissemination protocols would result in
the dissemination of substantially the
same data elements for SBA-Backed
ABS Specified Pool transactions as
those disseminated for MBS Specified
Pool transactions, in lieu of the
dissemination of the specific CUSIP.
Specifically, upon receipt of a
transaction report, FINRA would
disseminate amortization type; coupon;
original maturity; WAC; WAM; and
WALA, except that such values would
be based on SBA-backed pooled loans.
The values, like those for MBS Specified
Pool transactions, would be rounded
and truncated prior to dissemination to
reduce the possibility of potential
identification of a market participant by
‘‘reverse engineering’’ of a transaction.
In addition, if in the future, FINRA
identifies additional data elements that
would significantly improve
transparency using this approach,
FINRA may add such data elements to
the dissemination protocol for SBABacked ABS Specified Pool
transactions.
FINRA believes that, in the absence of
disseminating CUSIP data,
disseminating the information set forth
above will help ensure meaningful price
transparency, by providing relevant
information commonly used to identify,
value and price MBS and SBA-Backed
ABS Specified Pool transactions. FINRA
believes that its proposal strikes the
appropriate balance in achieving
meaningful transparency while
significantly reducing the potential to
‘‘reverse engineer’’ transaction data to
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Federal Register / Vol. 77, No. 178 / Thursday, September 13, 2012 / Notices
identify a market participant and/or
determine its trading strategies.25
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Dissemination Caps
FINRA has established TRACE
dissemination caps for disseminated
TRACE data generally, such that the
actual size of a transaction over a certain
par value is not displayed in
disseminated TRACE transaction data.
For TRACE-Eligible Securities that are
rated Investment Grade, the
dissemination cap is $5 million
(‘‘$5MM’’), and the size of transactions
in excess of $5MM is displayed as
‘‘$5MM+.’’ For TRACE-Eligible
Securities that are rated Non-Investment
Grade, the dissemination cap is $1
million (‘‘$1MM’’), and the size of a
transaction in excess of $1MM is
displayed as ‘‘$1MM+.’’ 26 As of
November 5, 2012, a $25 million
(‘‘$25MM’’) dissemination cap will
apply to MBS TBA transactions GD
(with the size of a transaction in excess
of $25MM displayed as ‘‘$25MM+’’) and
a $10 million (‘‘$10MM’’) dissemination
cap will apply to MBS TBA transactions
NGD (with the size of a transaction in
excess of $10MM displayed as
‘‘$10MM+’’).27
FINRA has analyzed the distribution
of MBS Specified Pool and SBA-Backed
ABS transactions to determine an
appropriate dissemination cap, and
proposes a $10 million (‘‘$10MM’’)
dissemination cap for MBS Specified
Pool and SBA-Backed ABS transactions
initially. Accordingly, the size of MBS
Specified Pool and SBA-Backed ABS
transactions greater than $10 million
would be displayed in disseminated
data as ‘‘$10MM+.’’ In setting the
dissemination caps, FINRA took into
account the liquidity and trading
activity in these segments, and at $10
25 As noted above, with respect to both MBS and
SBA-Backed ABS Specified Pool transactions, if
FINRA identifies additional data elements that
would significantly improve transparency, FINRA
may add such data elements to the dissemination
protocols for such securities.(e.g., FICO).
26 The dissemination caps for Investment Grade
corporate bonds limit the display of actual size for
approximately 1.6 percent of trades representing
approximately 48 percent of total par value traded,
and, for Agency Debt Securities, approximately 6
percent of trades representing approximately 74
percent of total par value traded. The dissemination
cap for Non-Investment Grade corporate bonds
limits the display of actual size for approximately
15 percent of trades representing approximately 84
percent of total par value traded. The information
is based on a review of all transactions in
Investment Grade corporate bonds, Agency Debt
Securities and Non-Investment Grade corporate
bonds reported to TRACE from May 16, 2011
through January 4, 2012.
The terms Investment Grade, Non-Investment
Grade and Agency Debt Security are defined in,
respectively, Rule 6710(h), Rule 6710(i) and Rule
6710(l).
27 See supra note 4.
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million, approximately nine percent of
transactions and approximately 80
percent of par value traded would be
disseminated subject to the $10MM
cap.28 FINRA believes that the proposed
dissemination caps will allow the
marketplace time to adjust to the new
levels of transparency.
As dissemination of MBS Specified
Pool and SBA-Backed ABS transactions
is implemented, FINRA will continue to
review the volume of and liquidity in
these securities, and may recommend
that such dissemination caps be set at
higher levels to provide additional
transparency to market participants.
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,29 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. FINRA believes that the
proposed rule change to increase fixed
income market transparency is designed
to prevent fraudulent and manipulative
acts and practices, to promote just and
equitable principles of trade, and,
generally to protect investors and the
public because transparency in MBS
Specified Pool and SBA-Backed ABS
transactions will enhance the ability of
investors and other market participants
to identify and negotiate fair and
competitive prices for these securities,
and because the dissemination of price
and other information publicly will
promote just and equitable principles of
trade among participants in the more
transparent market, and will aid in the
prevention of fraudulent and
28 See supra note 4. The proposed dissemination
caps for MBS TBA transactions GD would limit
display of actual size for approximately 20 percent
of trades representing approximately 84 percent of
par value traded and for MBS TBA transactions
NGD would limit the display of actual size for
approximately 42 percent of trades representing
approximately 85 percent of par value traded. The
information is based on a review of all MBS TBA,
MBS Specified Pool and SBA-Backed ABS
transactions reported to TRACE from May 16, 2011
through January 4, 2012.
29 15 U.S.C. 78o–3(b)(6).
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manipulative acts and practices in the
Asset-Backed Securities market.
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
On April 2, 2012, FINRA filed with
the Commission SR–FINRA–2012–021
(‘‘April 2012 Filing’’), a proposed rule
change to amend the Rule 6700 Series
and TRACE dissemination protocols
regarding the reporting and
dissemination of (1) MBS Specified Pool
transactions and (2) SBA-Backed ABS
traded either in Specified Pool
Transactions or to be announced
(‘‘TBA’’) (collectively, ‘‘SBA-Backed
ABS transactions’’). Specifically, FINRA
proposed to amend Rule 6730 to reduce,
in two stages, the time frames to report
MBS Specified Pool and SBA-Backed
ABS transactions. FINRA also proposed
minor clarifying amendments to Rule
6730(a)(3)(D) and (E) to specify that the
reporting requirements set forth therein
apply solely to MBS TBA transactions.
In connection with such changes,
FINRA proposed amendments to the
definitions of ‘‘To Be Announced
(‘TBA’),’’ ‘‘Specified Pool Transaction,’’
and ‘‘Agency Pass-Through MortgageBacked Security’’ and a new defined
term, ‘‘SBA-Backed ABS.’’ Finally,
FINRA proposed to amend Rule 6750 to
provide for the dissemination of MBS
Specified Pool and SBA-Backed ABS
transactions, and proposed to establish,
as part of TRACE dissemination
protocols, a $10 million dissemination
cap for such transactions. A copy of the
Form 19b–4 and original Exhibit 5 of the
April 2012 Filing is attached as Exhibit
2a.
On April 19, 2012, the April 2012
Filing was published for comment in
the Federal Register.30 A copy of the
Federal Register release is attached as
Exhibit 2b. SEC received two comment
letters in response.31 A list of the
comment letters received in response to
30 See Securities Exchange Act Release No. 66804
(April 13, 2012), 77 FR 23524 (April 19, 2012)
(Notice of Filing of File No. SR–FINRA–2012–021).
31 See Letter from Chris Killian, Managing
Director, Securities Industry and Financial Markets
Association (‘‘SIFMA’’), to Elizabeth M. Murphy,
Secretary, SEC, dated May 10, 2012 (‘‘SIFMA
Letter’’) and Letter from Michael Nicholas, Chief
Executive Officer, Bond Dealers of America
(‘‘BDA’’), to Elizabeth M. Murphy, Secretary, SEC,
dated May 10, 2012 (‘‘BDA Letter’’).
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the April 2012 Filing is attached as
Exhibit 2c. Copies of the comment
letters received in response to the April
2012 Filing are attached as Exhibit 2d.
One commenter focuses its comments
solely on the aspects of the proposal
relating to MBS Specified Pool
transactions. The commenter states that
a pool traded on a specified basis (i.e.,
by CUSIP) may not trade frequently, that
most trades in pools—or at least those
for smaller pools—are trades of the
whole pool, which means that most
pools are owned by a single investor, or
two or three investors, instead of being
widely held, and that most market
participants track which pools they
trade to and from their various
counterparties. As a result, the
commenter is concerned that FINRA’s
proposal to disseminate such a
security’s CUSIP as part of disseminated
transaction information will
compromise sensitive information
regarding investors’ trading strategies,
volumes, identities and positions, and,
over time, market participants will be
able to ‘‘reverse engineer’’ and develop
quite detailed and precise estimates of
other participants strategies and
positions. The commenter expresses
concern that the impact of ‘‘such
diminution of confidentiality,’’
especially regarding positions and
strategy, may be quite negative and
impair participation and liquidity in the
market for such instruments.32 The
second commenter discusses the same
issues raised by the first,—though the
second commenter raises such issues in
connection with SBA-Backed TBA
transactions as well as MBS and SBABacked Specified Pool transactions.33
Both commenters recommend that
certain information be withheld from
dissemination. One commenter
recommended that pool number and
CUSIP information, regardless of size,
32 See
SIFMA Letter, p. 3.
BDA Letter, pp. 1 and 2. (See, for example,
the second commenter’s statements: ‘‘Much of the
market in the Agency Specified Pool Securities is
driven by institutional investors who take the time
to research the performance of pools, to develop a
strategy to generate a profit and ultimately to
execute on that strategy.’’; ‘‘* * * the pools can be
smaller in size and a single investor frequently
owns the entire pool * * *’’; regarding smaller
pools, ‘‘* * * the market easily knows who these
investors are and what pools they own.’’; ‘‘When a
single investor owns a large percentage of a
specified pool, if the FINRA proposal were finalized
in its current form, the market would be able to
know that this investor is buying or selling and the
market would then be able to track this investor’s
activity, and reverse engineer and capitalize on its
strategy.’’; and, ‘‘* * * a more fair approach to
investors is if broker-dealers are allowed to omit the
pool number and CUSIP information from TRACE
dissemination regardless of the size of the
transaction.’’).
mstockstill on DSK4VPTVN1PROD with NOTICES
33 See
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should be omitted.34 The other
commenter recommended that for pools
with an original face amount below $1
billion, the CUSIP information not be
shown on disseminated trade reports for
a three to six month period.35 This
commenter also recommended that
FINRA reduce the dissemination cap to
$1 million.36 In addition, one
commenter was concerned that brokerdealers affiliated with banks can effect
MBS Specified Pool and SBA-Backed
ABS transactions through the bank and
avoid reporting such transactions to
TRACE, giving such broker-dealers an
unfair advantage.37
FINRA withdrew the April 2012
Filing on July 12, 2012, prior to filing
a response to comments. Accordingly,
the comments to the April 2012 Filing
and FINRA’s responses are discussed
below.
After careful consideration of the
commenters’ concerns, in this proposed
rule change, FINRA proposes to modify
the transaction dissemination protocols
such that the disseminated information
regarding MBS and SBA-Backed ABS
Specified Pool transactions would not
include the CUSIP of such securities.
Instead, as detailed above, FINRA
proposes to disseminate specific
reference data elements, including
information widely used to project cash
flows and pre-payments, in specific
ranges. FINRA believes that this
approach would significantly limit the
ability to ‘‘reverse engineer’’ transaction
data to determine trading strategies and
identities while providing valuable
information about the mortgages/loans
that are in MBS and SBA-Backed ABS
Specified Pool transactions.
The information set forth above will
help provide meaningful price
transparency, by providing relevant
information commonly used to identify,
value and price MBS and SBA-Backed
ABS Specified Pool transactions. FINRA
believes that the proposed rule change
strikes the appropriate balance in
achieving meaningful transparency
while significantly reducing the
potential for ‘‘reverse engineering’’
transaction data to determine trading
strategies and/or participant
identification. If in the future, FINRA
identifies additional data elements that
would significantly improve
transparency, FINRA may add such data
elements to the dissemination protocols
for such securities (e.g., FICO).
In addition, FINRA believes that the
$10 million dissemination cap is
34 See
BDA letter, p. 1.
35 See SIFMA Letter, p. 3.
36 See SIFMA Letter, p. 3.
37 See BDA Letter, p. 2.
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56691
appropriate and does not propose to
reduce it. As noted in the proposed rule
change and the April 2012 Filing, the
size of MBS Specified Pool and SBABacked ABS transactions greater than
$10 million would be displayed in
disseminated data as ‘‘$10MM+.’’ At
this level, approximately nine percent of
transactions and approximately 80% of
par value traded would be subject to the
$10MM cap. FINRA believes this data is
consistent with respect to dissemination
caps for other securities.38
Finally, with respect to the
commenter’s concern that a brokerdealer affiliated with a bank may run
MBS Specified Pool and SBA-Backed
ABS transactions through the bank’s
balance sheet and avoid reporting such
transactions to TRACE, FINRA notes
that the statutory standard requires that
FINRA’s proposed rules not impose any
burden on competition not necessary or
appropriate in furtherance of the Act.
FINRA believes that increased
transparency in the securities trading
market appropriately furthers the
purposes the Act. As FINRA has
previously noted, it defeats the purposes
of the Act by referring to market
participants that may not be subject to
the Act (in whole or in part), as a basis
for not approving the proposed rule
change.39 Such a standard would undo
much, if not all, regulation of brokerdealers and markets necessary for the
protection of investors and the
efficiency, competitiveness and integrity
of securities markets. FINRA believes
that the fact that there may be market
participants that are not subject to the
Act should not delay the reporting and
dissemination of MBS Specified Pool
and SBA-Backed ABS transactions and
related changes regarding the reporting
of such transactions.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 45 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 or disapprove
such proposed rule change, or
38 See note 21 and note 23 of the Form 19b–4 and
Exhibit 1, respectively, in SR–FINRA–2012–021.
39 See Response to Comments on SR–FINRA–
2009–010 (Proposed Rule Change Relating to
Expansion of TRACE to Include Agency Debt
Securities and Primary Market Transactions).
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Federal Register / Vol. 77, No. 178 / Thursday, September 13, 2012 / Notices
(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 email to rulecomments@sec.gov. Please include File
Number SR–FINRA–2012–042 on the
subject line.
Paper Comments
mstockstill on DSK4VPTVN1PROD with NOTICES
• 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–2012–042. This file
number should be included on the
subject line if email 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 Web site viewing and
printing 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–2012–042 and
should be submitted on or before
October 4, 2012.
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For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.40
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2012–22555 Filed 9–12–12; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–67799; File No. SR–
NYSEArca–2012–86]
Self-Regulatory Organizations; NYSE
Arca, Inc.; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change Amending Certain NYSE
Arca Rules To Replace References to
‘‘NYSE Amex’’ With ‘‘NYSE MKT’’
Reflecting the Recent Name Change of
NYSE Amex LLC to NYSE MKT LLC
September 7, 2012.
Pursuant to Section 19(b)(1) 1 of the
Securities Exchange Act of 1934 (the
‘‘Act’’) 2 and Rule 19b–4 thereunder,3
notice is hereby given that, on August
28, 2012, NYSE Arca, Inc. (the
‘‘Exchange’’ or ‘‘NYSE Arca’’) filed with
the Securities and Exchange
Commission (the ‘‘Commission’’) the
proposed rule change as described in
Items I, II, and III below, which Items
have been prepared by the selfregulatory organization. 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 the Substance
of the Proposed Rule Change
The Exchange proposes to amend
certain NYSE Arca rules to replace
references to ‘‘NYSE Amex’’ with
‘‘NYSE MKT’’ to reflect the recent name
change of NYSE Amex LLC to NYSE
MKT LLC. The text of the proposed rule
change is available on the Exchange’s
Web site at www.nyse.com, at the
principal office of the Exchange, 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, the
self-regulatory organization included
statements concerning the purpose of,
and basis for, the proposed rule change
and discussed any comments it received
40 17
CFR 200.30–3(a)(12).
1 15 U.S.C.78s(b)(1).
2 15 U.S.C. 78a.
3 17 CFR 240.19b–4.
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on the proposed rule change. The text
of those statements may be examined at
the places specified in Item IV below.
The Exchange has prepared summaries,
set forth in sections A, B, and C below,
of the most significant parts of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange proposes to amend
certain NYSE Arca rules to replace
references to ‘‘NYSE Amex’’ with
‘‘NYSE MKT’’ to reflect the recent name
change of NYSE Amex LLC to NYSE
MKT LLC.4
The Exchange proposes to replace
references to NYSE Amex in NYSE Arca
Rule 6.96 with references to NYSE
MKT. The Exchange also proposes to
replace a reference to American Stock
Exchange, a predecessor of NYSE Amex,
in NYSE Arca Rule 5.25 with a reference
to NYSE MKT.
2. Statutory Basis
The Exchange believes that the
proposed rule change is consistent with
Section 6(b) of the Securities Exchange
Act of 1934 (the ‘‘Act’’),5 in general, and
Section 6(b)(5) of the Act,6 in particular,
in that it is designed to prevent
fraudulent and manipulative acts and
practices, to promote just and equitable
principles of trade, to foster cooperation
and coordination with persons engaged
in facilitating transactions in securities,
to remove impediments to and perfect
the mechanism of a free and open
market and a national market system
and, in general, to protect investors and
the public interest. The Exchange is
proposing to replace references to NYSE
Amex with NYSE MKT, which would
reflect the current name of NYSE MKT
and is, therefore, in the public interest.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act.
4 See Securities Exchange Act Release No. 67037
(May 21, 2012), 77 FR 31415 (May 25, 2012) (SR–
NYSEAmex–2012–32).
5 15 U.S.C. 78f(b).
6 15 U.S.C. 78f(b)(5).
E:\FR\FM\13SEN1.SGM
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]]>Agencies
[Federal Register Volume 77, Number 178 (Thursday, September 13, 2012)]
[Notices]
[Pages 56686-56692]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-22555]
[[Page 56686]]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-67798; File No. SR-FINRA-2012-042]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing of Proposed Rule Change Relating to
Post-Trade Transparency for Agency Pass-Through Mortgage-Backed
Securities Traded in Specified Pool Transactions and SBA-Backed Asset-
Backed Securities Transactions
September 7, 2012.
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 August 29, 2012, 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 and Trade
Reporting and Compliance Engine (``TRACE'') dissemination protocols
regarding the reporting and dissemination of transactions in TRACE-
Eligible Securities that are: (1) Agency Pass-Through Mortgage-Backed
Securities traded in Specified Pool Transactions (``MBS Specified Pool
transactions'') and (2) Asset-Backed Securities backed by loans
guaranteed as to principal and interest by the Small Business
Administration (``SBA-Backed ABS'') and traded either in Specified Pool
Transactions or to be announced (``TBA'') (collectively, ``SBA-Backed
ABS transactions'').\3\
---------------------------------------------------------------------------
\3\ The terms TRACE-Eligible Security, Agency Pass-Through
Mortgage-Backed Security, Specified Pool Transaction, Asset-Backed
Security and To Be Announced are defined in, respectively, Rule
6710(a), Rule 6710(v), Rule 6710(x), Rule 6710(m) and Rule 6710(u).
The definition of SBA-Backed ABS is proposed in Rule 6710(bb).
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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.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
On April 18, 2012, the SEC approved the TBA Amendments to provide
for the dissemination of MBS TBA transactions, subject to dissemination
caps, and concomitant reductions in the reporting periods for such
transactions, which will become effective November 5, 2012.\4\ FINRA is
proposing to expand transparency further in the market for Asset-Backed
Securities in the proposed rule change, which provides for the
dissemination of MBS Specified Pool and SBA-Backed ABS transactions,
subject to dissemination caps, and concomitant reductions in the
reporting periods for such transactions.
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\4\ The proposed rule text includes the amendments to the FINRA
Rule 6700 Series to provide for reduced reporting times and
dissemination of transactions in TRACE-Eligible Securities that are
Agency Pass-Through Mortgage-Backed Securities that are traded To Be
Announced (``TBA'') (``MBS TBA transactions''), which were approved
by the SEC and will become effective November 5, 2010. See
Securities Exchange Act Release No. 66829 (April 18, 2012), 77 FR
24748 (April 25, 2012) (Order Approving File No. SR-FINRA-2012-020)
and Regulatory Notice 12-26 (May 2012) (``TBA Amendments'').
The TBA Amendments distinguished between MBS TBA transactions
for good delivery (``MBS TBA transactions GD'') and not for good
delivery (``MBS TBA transactions NGD''). In response to comments,
FINRA proposed a longer period to timely report, and lower
dissemination caps for, MBS TBA transactions NGD than the
requirements proposed for MBS TBA transactions GD.
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FINRA proposes to amend Rule 6730 to reduce, in two stages, the
time frames to report MBS Specified Pool and SBA-Backed ABS
transactions. FINRA also proposes minor clarifying amendments to Rule
6730(a)(3)(D) and (E) to specify that the reporting requirements set
forth therein apply solely to MBS TBA transactions. In connection with
such changes, FINRA proposes amendments in Rule 6710 to the definitions
of ``Agency Pass-Through Mortgage-Backed Security,'' ``To Be Announced
(`TBA'),'' and ``Specified Pool Transaction,'' and a new defined term,
``SBA-Backed ABS.'' Finally FINRA proposes to amend Rule 6750 to
provide for the dissemination of MBS Specified Pool and SBA-Backed ABS
transactions, and proposes to establish, as part of TRACE dissemination
protocols, the specific data elements of the transactions that will be
disseminated as well as a $10 million dissemination cap for such
transactions.
MBS Specified Pool Transactions
Generally, Agency Pass-Through Mortgage-Backed Securities are
traded either TBA or in Specified Pool Transactions as defined in Rule
6710(u) and (x), respectively. In MBS Specified Pool transactions, on
the date of trade (trade date), the seller agrees to deliver to the
buyer a specific Agency Pass-Through Mortgage-Backed Security
identifiable by a unique identification number, representing a specific
pool of mortgage loans. In an MBS TBA transaction, the mortgage pools
to be delivered are described (e.g., by program, interest rate, type of
residential mortgage, maturity) but are not specifically identified,
and will not be identified until shortly before settlement. While the
majority of Agency Pass-Through Mortgage-Backed Securities are traded
TBA, the daily volume of MBS Specified Pool transactions represents
significant economic activity in mortgage-related securities, and FINRA
believes that additional transparency in such securities is
appropriate. The reported transaction data shows that MBS Specified
Pool transaction pricing is strongly correlated to (and in general is
priced at a premium over) the pricing of similar mortgage pools traded
in the substantially larger MBS TBA market. Moreover, the two market
sectors exhibit similar trading characteristics, and the same programs
dominate both markets. For example, approximately 98 percent of the
total volume in MBS Specified Pool transactions, and approximately 95
percent of the total volume in MBS TBA transactions, occurs in
securities backed by single-family mortgage loans.\5\ Accordingly, the
TRACE data sets are complimentary and the dissemination of the
additional pricing information for MBS Specified Pool transactions will
further improve
[[Page 56687]]
transparency in the Agency Pass-Through Mortgage-Backed Securities
market.
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\5\ Over half of all transactions in MBS Specified Pool
transactions, and approximately 77 percent of all transactions in
MBS TBA transactions, occur in Federal National Mortgage Association
(``Fannie Mae'') program securities. The information is based on
FINRA staff's review of all Asset-Backed Securities transactions
reported to TRACE from May 16, 2011 through October 31, 2011.
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SBA-Backed ABS Transactions
SBA-Backed ABSs are Asset-Backed Securities created from pooling
loans made to small business by banks and other financial institutions
in conformity with the program requirements of the Small Business
Administration (``SBA''). Loans that meet the SBA's requirements are
guaranteed by SBA as to the timely payment of principal and interest,
and pools are then created to issue SBA-Backed Asset-Backed Securities.
SBA-Backed ABS also are traded TBA and in Specified Pool
Transactions.\6\ Like Agency Pass-Through Mortgage-Backed Securities
discussed above, such TBA trading may occur because market participants
may anticipate with some certainty the creation of loan pools and are
aware of the pool characteristics, and the extent to which such loan
pools are fungible with previously-settled SBA-Backed ABS. FINRA
proposes that both types of SBA-Backed ABS transactions be subject to
dissemination.
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\6\ SBA-Backed ABS transactions constitute a very minor portion
of all Specified Pool Transactions. SBA-Backed ABS Specified Pool
Transactions account for only 0.41 percent of the combined total
volume of all Specified Pool Transactions (i.e., the total volume of
Agency Pass-Through Mortgage Backed-Securities and SBA-Backed ABS
traded in Specified Pool Transactions).
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Amendments to Defined Terms
FINRA proposes to define ``SBA-Backed ABS'' in proposed Rule
6710(bb) as an Asset-Backed Security issued in conformity with a
program of the Small Business Administration (``SBA''), for which the
timely payment of principal and interest is guaranteed by the SBA,
representing ownership interest in a pool (or pools) of loans and
structured to ``pass through'' the principal and interest payments made
by the borrowers in such loans to the holders of the security on a pro
rata basis.
In connection with the proposed addition of the definition of SBA-
Backed ABS, FINRA also proposes amendments to the definitions of ``To
Be Announced (`TBA')'' and ``Specified Pool Transaction'' in Rule
6710(u) and Rule 6710(x), respectively. Both definitions currently
apply only to Agency Pass-Through Mortgage-Backed Securities. As
amended, both terms would include transactions in SBA-Backed ABS.\7\ In
addition, FINRA proposes amendments to the definition of ``Agency Pass-
Through Mortgage-Backed Security'' in Rule 6710(v) to incorporate
minor, technical changes to the defined term.\8\
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\7\ As revised, Rule 6710(u) would provide:
``To Be Announced'' (``TBA'') means a transaction in an Agency
Pass-Through Mortgage-Backed Security as defined in paragraph (v) or
an SBA-Backed ABS as defined in paragraph (bb) where the parties
agree that the seller will deliver to the buyer a pool or pool(s) of
a specified face amount and meeting certain other criteria but the
specific pool or pool(s) to be delivered at settlement is not
specified at the Time of Execution, and includes TBA transactions
``for good delivery'' (``GD'') and TBA transactions ``not for good
delivery'' (``NGD'').
As revised, Rule 6710(x) would provide:
``Specified Pool Transaction'' means a transaction in an Agency
Pass-Through Mortgage-Backed Security as defined in paragraph (v) or
an SBA-Backed ABS as defined in paragraph (bb) requiring the
delivery at settlement of a pool or pool(s) that is identified by a
unique pool identification number at the Time of Execution.
\8\ As revised, Rule 6710(v) would provide:
``Agency Pass-Through Mortgage-Backed Security'' means a type of
Asset-Backed Security issued in conformity with a program of an
Agency or a Government-Sponsored Enterprise (``GSE''), for which the
timely payment of principal and interest is guaranteed by the Agency
or GSE, representing ownership interest in a pool (or pools) of
mortgage loans structured to ``pass through'' the principal and
interest payments to the holders of the security on a pro rata
basis.
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Reduction of Reporting Period
Currently, Asset-Backed Securities transactions (except certain
pre-issuance transactions in collateralized mortgage obligations
(``CMOs'') and real estate mortgage investment conduits (``REMICs''))
that are executed on a business day through 5:00:00 p.m. Eastern Time
must be reported to TRACE on the Trade Date during TRACE System Hours,
as provided in Rule 6730(a)(3)(A)(i), subject to the exceptions for
transactions executed after 5:00:00 p.m. and during times when the
TRACE System is not open in Rule 6730(a)(3)(A)(ii) and (iii). In
contrast, secondary market transactions in all other TRACE-Eligible
Securities must be reported within 15 minutes of the Time of
Execution.\9\ With certain exceptions, transaction information on such
TRACE-Eligible Securities is disseminated as soon as the transaction is
reported, and the 15-minute reporting requirement results in meaningful
price transparency for market participants trading such securities.\10\
In addition, effective November 5, 2012, MBS TBA transactions will be
disseminated, and, in connection with their dissemination, the
timeframes for timely reporting such transactions will be reduced to
provide market participants meaningful and timely price information
about MBS TBA transactions.\11\
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\9\ The term Time of Execution is defined in Rule 6710(d).
\10\ See Rule 6750(b) for exceptions to dissemination. See also
supra note 4 regarding the TBA Amendments and dissemination of MBS
TBA transactions.
\11\ See supra note 4. Under the TBA Amendments, which become
effective November 5, 2012, MBS TBA transactions GD must be reported
generally within 45 minutes of the Time of Execution until May 10,
2013 (reduced to 15 minutes after May 10, 2013), and MBS TBA
transactions NGD be reported within 120 minutes until May 10, 2013
(reduced to 60 minutes after May 10, 2013). Both reporting
requirements are subject to exceptions for transactions executed
close to the end of the business day or when the TRACE system is not
open.
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In connection with proposing that MBS Specified Pool and SBA-Backed
ABS transactions be disseminated, FINRA proposes to reduce the
reporting timeframes for such transactions for the same reasons. The
proposed reduction of the reporting timeframes would occur in two
stages to permit industry participants time to adjust policies and
procedures and to make required technological changes, as also done in
connection with the TBA Amendments.
The requirements to report MBS Specified Pool and SBA-Backed ABS
transactions are set forth in, respectively, proposed Rule
6730(a)(3)(F) and proposed Rule 6730(a)(3)(G). First, FINRA proposes to
reduce the reporting period for MBS Specified Pool and SBA-Backed ABS
transactions from no later than the close of the TRACE system on Trade
Date to no later than two hours (i.e., 120 minutes) from the Time of
Execution for the duration of the proposed MBS Specified Pool Pilot
Program and the proposed SBA-Backed ABS Pilot Program in, respectively,
proposed Rule 6730(a)(3)(F)(i) and proposed Rule 6730(a)(3)(G)(i).\12\
Like the reporting requirements currently in effect for other TRACE-
Eligible Securities, FINRA also proposes exceptions to the 120-minute
timeframe for transactions executed near the end of the business day or
when the TRACE system is not open.\13\ Second, after the pilot programs
[[Page 56688]]
expire, the reporting periods for MBS Specified Pool and SBA-Backed ABS
transactions would be reduced from no later than two hours (120
minutes) from the Time of Execution to no later than one hour (60
minutes) from the Time of Execution, as set forth in, respectively,
proposed Rule 6730(a)(3)(F)(ii) and proposed Rule
6730(a)(3)(G)(ii).\14\ Currently, approximately 84 percent of MBS
Specified Pool and SBA-Backed ABS transactions are reported within two
hours of execution, and approximately 75 percent are reported within
one hour of execution.
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\12\ Proposed Rule 6730(a)(3)(F)(i) and proposed Rule
6730(a)(3)(G)(i) each incorporate by reference Rule
6730(a)(3)(E)(i)a. through d., which provides for a 120-minute
reporting timeframe in Rule 6730(a)(3)(E)(i)b.
Each of the pilot programs would expire after approximately 180
days. To accommodate member requests that, if possible, rule changes
requiring technology changes occur on a Friday, proposed Rule
6730(a)(3)(F)(i) and proposed Rule 6730(a)(3)(G)(i) provide that the
MBS Specified Pool Pilot Program and the SBA-Backed ABS Pilot
Program each would expire on a Friday (i.e., on the 180th day, if a
Friday, or, if the 180th day is not a Friday, on the Friday next
occurring that the TRACE system is open).
\13\ See proposed Rule 6730(a)(3)(F)(i) and proposed Rule
6730(a)(3)(G)(i), which incorporate by reference Rule
6730(a)(3)(E)(i)a., c., and d., which apply to transactions executed
near the end of the business day or when the TRACE system is not
open. Under Rule 6730(a)(3)(E)(i)a., transactions executed on a
business day at or after 12:00:00 a.m. Eastern Time through 7:59:59
a.m. Eastern Time must be reported the same day no later than 120
minutes after the TRACE system opens. Under Rule 6730(a)(3)(E)(i)c.,
transactions executed on a business day less than 120 minutes before
6:30:00 p.m. Eastern Time (the time the TRACE system closes) must be
reported no later than 120 minutes after the TRACE system opens the
next business day (T + 1), and if reported on T + 1, designated
``as/of'' and include the date of execution. Under Rule
6730(a)(3)(E)(i)d., transactions executed on a business day at or
after 6:30:00 p.m. Eastern Time through 11:59:59 p.m. Eastern Time
or on a Saturday, a Sunday, a federal or religious holiday or other
day on which the TRACE system is not open at any time during that
day (determined using Eastern Time) must be reported the next
business day (T + 1), no later than 120 minutes after the TRACE
system opens, designated ``as/of'' and include the date of
execution.
\14\ Proposed Rule 6730(a)(3)(F)(ii) and proposed Rule
6730(a)(3)(G)(ii)--the ``post-pilot program'' reporting provisions--
incorporate by reference the reporting requirements set forth in
Rule 6730(a)(3)(E)(ii)a. through d., including the exceptions to the
requirement to report within 60 minutes that apply to transactions
executed near the end of the business day or when the TRACE system
is not open in Rule 6730(a)(3)(E)(ii)a., c., and d.
---------------------------------------------------------------------------
After the 60-minute reporting requirement is implemented, FINRA
will continue to review the reporting of MBS Specified Pool and SBA-
Backed ABS transactions and may recommend further reductions in the
reporting period.
FINRA also proposes minor clarifying amendments to Rule
6730(a)(3)(D) and (E) to specify that the reporting requirements set
forth therein apply solely to MBS TBA transactions.
Dissemination
Amendment to Rule 6750
Although members began reporting transactions in Asset-Backed
Securities to TRACE on May 16, 2011, FINRA currently does not
disseminate publicly Asset-Backed Securities transaction data reported
to TRACE as provided in Rule 6750(b)(4). However, on November 5, 2012,
transparency in Asset-Backed Securities transactions will increase
significantly with the dissemination of MBS TBA transactions, which
represent approximately 87 percent of the average daily volume traded
in all Asset-Backed Securities.\15\ After obtaining the SEC's approval
to disseminate such transaction information, FINRA continued to examine
transactions in Asset-Backed Securities to determine if FINRA should
propose to disseminate additional Asset-Backed Securities. The SEC has
been supportive of such efforts.\16\
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\15\ See supra note 4.
\16\ See Securities Exchange Act Release No. 61566 (February 22,
2010), 75 FR 9262, 9265 (March 1, 2010) (Order Approving File No.
SR-FINRA-2009-065).
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FINRA has reviewed the data reported for Asset-Backed Securities
other than MBS TBA transactions, including MBS Specified Pool and SBA-
Backed ABS transactions, and studied the total volume of MBS Specified
Pool and SBA-Backed ABS transactions, the concentration of trading in
such securities, and the pricing disparity among various types of MBS
Specified Pool and SBA-Backed ABS transactions to understand their
liquidity and fungibility. The market activity reported and reviewed
reveals that for MBS Specified Pool transactions, the market is
generally active and liquid, and with liquidity comparable to that of
corporate bonds.\17\ Based on the review, FINRA believes that it is
appropriate to amend Rule 6750 to provide for the immediate
dissemination of MBS Specified Pool and SBA-Backed ABS transaction
information, and that such dissemination will benefit market
participants by improving transparency in both market segments.
Specifically, Rule 6750(b)(4) would be amended to provide that FINRA
will not disseminate information on a transaction in a TRACE-Eligible
Security that is an Asset-Backed Security, except: (A) An Agency Pass-
Through Mortgage-Backed Security; and (B) an SBA-Backed ABS.\18\ Thus,
information would be disseminated on MBS Specified Pool and SBA-Backed
ABS transactions immediately upon receipt of the transaction report and
no later than 120 minutes, or, after the expiration of the applicable
pilot program, no later than 60 minutes, from the Time of
Execution.\19\
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\17\ Liquidity as measured by par value traded is comparable to
corporate bonds. Although MBS TBA transactions account for
approximately 93 percent of all trading in Agency Pass-Through
Mortgage-Backed Securities, the average daily volume of MBS
Specified Pool transactions is significant--approximately $17.5
billion is traded daily on average, in approximately 3,000 trades
per day. The information is based on FINRA staff's review of all
Asset-Backed Securities transactions reported to TRACE from May 16,
2011 through October 31, 2011.
\18\ See supra, note 4.
\19\ FINRA continues to review Asset-Backed Security transaction
information in other sectors of the Asset-Backed Securities market
and, at a later date, may propose that transactions in other Asset-
Backed Securities be disseminated.
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Dissemination Protocols
SBA-Backed ABS Transactions Traded TBA. The dissemination protocols
applicable to SBA-Backed ABS transactions traded TBA would be the same
as the dissemination protocols for MBS TBA transactions NGD and subject
to the dissemination cap discussed below. Generally, such securities
will be disseminated immediately upon receipt of transaction
information, and the standard data elements will be displayed.\20\
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\20\ Standard data elements include, among other things, CUSIP,
time of transaction, size (subject to dissemination caps), price,
counterparty type (customer or dealer), and buy/sell indicator.
FINRA has represented that the CUSIP for a TBA transaction
identifies the issuer and the characteristics of the pools of
mortgages that can be delivered to satisfy a TBA transaction but
differs from a standard CUSIP in that it is not unique to a security
and will be re-assigned to future TBA transactions requiring
delivery of the same type of pools on the same month of delivery.
See email dated September 4, 2012 from Sharon Zackula of FINRA to
Geoffrey Pemble, Special Counsel, Commission and Michael Bradley,
Attorney-Advisor, Commission.
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MBS and SBA-Backed ABS Specified Pool Transactions. FINRA proposes
to modify the dissemination protocols for MBS Specified Pool
transactions and SBA-Backed ABS traded in Specified Pool Transactions
(collectively ``MBS and SBA-Backed ABS Specified Pool transactions'')
from those initially proposed by FINRA, to strike a balance between
certain anonymity concerns and providing meaningful transparency.\21\
Unlike the dissemination protocols for other disseminated TRACE-
Eligible Securities, including MBS TBA transactions, FINRA proposes not
to disseminate the CUSIP of the MBS or the SBA-Backed ABS Specified
Pool transaction.\22\ Instead, certain specified data elements that are
integral to describing and valuing the security traded, with numeric
values expressed within specific ranges (i.e., the information will be
truncated and, depending on the data element, rounded up or down) would
be disseminated. Although FINRA has determined not to disseminate the
specific CUSIP of the
[[Page 56689]]
security, FINRA believes that investor [sic] must be provided
sufficient information such that the investor can appropriately
interpret the price transparency provided by the TRACE data. Part of
the valuation analysis of any Asset-Backed Security includes a
projection of its cash flow which in turn relies on assumptions about
prepayment rates. FINRA believes that the data elements outlined below
provide information that will allow market participants to perform such
analysis.
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\21\ See Item C of this filing for a discussion of SR-FINRA-
2012-021.
\22\ FINRA notes that notwithstanding the proposed changes to
dissemination protocols, FINRA is not proposing to change any of the
reporting requirements applicable to such securities, including the
requirement to report the CUSIP number.
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MBS Specified Pool Transactions
In lieu of a CUSIP, the following information would be disseminated
for each MBS Specified Pool transaction reported to TRACE: Product
type; amortization type; issuing agency; coupon; original maturity;
weighted average coupon (``WAC''); weighted average maturity (``WAM'');
weighted average loan age (``WALA''); average loan size (``ALS''); and
original loan-to-value (``original LTV'') information. Each data
element (except issuing agency, product type and amortization type)
would be provided in ranges (truncated and disseminated after rounding)
to further reduce the potential for ``reverse engineering'' transaction
data to determine the identification of a market participant and/or the
participant's trading strategies. FINRA believes that these data
elements will permit investors to meaningfully assess the value and
price of the security. If in the future, FINRA identifies additional
data elements that would significantly improve transparency using this
approach, FINRA may add such data elements to the dissemination
protocol for MBS Specified Pool transactions discussed herein.
Product type, amortization type, issuing agency, coupon and
original maturity would be disseminated to permit identification of the
security type traded. Product type refers to the type of properties (or
real-estate related projects) subject to the mortgages underlying the
Agency-Pass Through Mortgage-Backed Security (e.g., single family
residential dwelling mortgage loans, multi-family residential dwelling
mortgage loans, or project loans). Amortization type identifies the
underlying mortgage types (e.g., level payment, adjustable rate
mortgages (``ARMs'') or balloons). Issuing agency refers to the Agency
or Government-Sponsored Enterprise (GSE) that issues the certificate
and guarantees the payment of principal and interest of the Agency
Pass-Through Mortgage-Backed Security (e.g., Fannie Mae, the Federal
Home Loan Mortgage Corporation (``Freddie Mac'') and the Government
National Mortgage Association (``Ginnie Mae'')). Coupon refers to the
stated annual percentage rate of interest paid on the Agency-Pass
Through Mortgage-Backed Security, and would be disseminated after
rounding down to the nearest quarter percentage point (e.g., an
interest rate of 5.12 percent would be disseminated at 5.00 percent).
Original maturity refers to the original stated term after which the
principal amount of the security is due to be repaid in full, or the
end of the life of the Agency-Pass Through Mortgage-Backed Security
(e.g., 30 years (expressed as 360 months)). Original maturity would be
disseminated after rounding up to the nearest 10 (e.g., an original
maturity of 358 months would be disseminated at 360).
In addition, FINRA will disseminate WAC, WAM, WALA, ALS, and
original LTV to provide information on recent and historic cash flows
and prepayments, and permit investors to develop projections or
assumptions regarding future payments, prepayments, and cash flows. WAC
is the weighted average interest rate of the underlying mortgage loans
or pools that serve as collateral for a mortgage security, weighted by
the size of the principal loan balances.\23\ WAC would be disseminated
after truncating to a single decimal (e.g., WAC of 7.13% would be
disseminated as 7.1). WAM is the weighted average number of months to
the final payment of each loan backing an Agency Pass-Through Mortgage-
Backed Security (or other mortgage-backed security), weighted by the
size of the principal loan balances.\24\ WAM would be disseminated
rounded down to the nearest 10 (e.g., WAM of 87 months would be
disseminated as 80). WALA is the weighted average number of months
since the date of the loan origination of the mortgages (i.e., the age
of the loans) backing an Agency Pass-Through Mortgage Security (or
other mortgage-backed security), weighted by the size of the principal
loan balances. WALA would be disseminated rounded up to the nearest 10
(e.g., WALA of 163 months would be disseminated as 170). Current ALS is
obtained by dividing the current mortgage loan outstanding principal
balance by the number of loans that remain outstanding. ALS would be
rounded down to the nearest 25 (e.g., an ALS of 113 (i.e., $113,000
average loan size) would be disseminated as 100). Original LTV ratio
expresses the amount of a first mortgage lien as a percentage of the
total appraised value of real property, and also would be disseminated
rounded down to the nearest 25 (e.g., an original LTV of 92 (i.e., 92
percent) would be disseminated as 75).
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\23\ WAC is calculated by weighting the interest rate of each
mortgage loan in the pool by the amount of the mortgage outstanding.
\24\ WAM is calculated by weighting the remaining number of
months to maturity for each mortgage loan in the pool by the amount
of the mortgage outstanding.
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The data elements are publicly available as they are published on a
monthly basis by the issuing agency. Upon receipt of a transaction
report, the TRACE system will automatically disseminate the above data
elements corresponding to the CUSIP reported in lieu of disseminating
the CUSIP number.
Dissemination of SBA-Backed ABS Traded in Specified Pool Transactions
For Specified Pool transactions in SBA-Backed ABS, FINRA generally
proposes that dissemination protocols be established that are
substantially similar to those discussed above for MBS Specified Pool
transactions. The dissemination protocols would result in the
dissemination of substantially the same data elements for SBA-Backed
ABS Specified Pool transactions as those disseminated for MBS Specified
Pool transactions, in lieu of the dissemination of the specific CUSIP.
Specifically, upon receipt of a transaction report, FINRA would
disseminate amortization type; coupon; original maturity; WAC; WAM; and
WALA, except that such values would be based on SBA-backed pooled
loans. The values, like those for MBS Specified Pool transactions,
would be rounded and truncated prior to dissemination to reduce the
possibility of potential identification of a market participant by
``reverse engineering'' of a transaction. In addition, if in the
future, FINRA identifies additional data elements that would
significantly improve transparency using this approach, FINRA may add
such data elements to the dissemination protocol for SBA-Backed ABS
Specified Pool transactions.
FINRA believes that, in the absence of disseminating CUSIP data,
disseminating the information set forth above will help ensure
meaningful price transparency, by providing relevant information
commonly used to identify, value and price MBS and SBA-Backed ABS
Specified Pool transactions. FINRA believes that its proposal strikes
the appropriate balance in achieving meaningful transparency while
significantly reducing the potential to ``reverse engineer''
transaction data to
[[Page 56690]]
identify a market participant and/or determine its trading
strategies.\25\
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\25\ As noted above, with respect to both MBS and SBA-Backed ABS
Specified Pool transactions, if FINRA identifies additional data
elements that would significantly improve transparency, FINRA may
add such data elements to the dissemination protocols for such
securities.(e.g., FICO).
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Dissemination Caps
FINRA has established TRACE dissemination caps for disseminated
TRACE data generally, such that the actual size of a transaction over a
certain par value is not displayed in disseminated TRACE transaction
data. For TRACE-Eligible Securities that are rated Investment Grade,
the dissemination cap is $5 million (``$5MM''), and the size of
transactions in excess of $5MM is displayed as ``$5MM+.'' For TRACE-
Eligible Securities that are rated Non-Investment Grade, the
dissemination cap is $1 million (``$1MM''), and the size of a
transaction in excess of $1MM is displayed as ``$1MM+.'' \26\ As of
November 5, 2012, a $25 million (``$25MM'') dissemination cap will
apply to MBS TBA transactions GD (with the size of a transaction in
excess of $25MM displayed as ``$25MM+'') and a $10 million (``$10MM'')
dissemination cap will apply to MBS TBA transactions NGD (with the size
of a transaction in excess of $10MM displayed as ``$10MM+'').\27\
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\26\ The dissemination caps for Investment Grade corporate bonds
limit the display of actual size for approximately 1.6 percent of
trades representing approximately 48 percent of total par value
traded, and, for Agency Debt Securities, approximately 6 percent of
trades representing approximately 74 percent of total par value
traded. The dissemination cap for Non-Investment Grade corporate
bonds limits the display of actual size for approximately 15 percent
of trades representing approximately 84 percent of total par value
traded. The information is based on a review of all transactions in
Investment Grade corporate bonds, Agency Debt Securities and Non-
Investment Grade corporate bonds reported to TRACE from May 16, 2011
through January 4, 2012.
The terms Investment Grade, Non-Investment Grade and Agency Debt
Security are defined in, respectively, Rule 6710(h), Rule 6710(i)
and Rule 6710(l).
\27\ See supra note 4.
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FINRA has analyzed the distribution of MBS Specified Pool and SBA-
Backed ABS transactions to determine an appropriate dissemination cap,
and proposes a $10 million (``$10MM'') dissemination cap for MBS
Specified Pool and SBA-Backed ABS transactions initially. Accordingly,
the size of MBS Specified Pool and SBA-Backed ABS transactions greater
than $10 million would be displayed in disseminated data as ``$10MM+.''
In setting the dissemination caps, FINRA took into account the
liquidity and trading activity in these segments, and at $10 million,
approximately nine percent of transactions and approximately 80 percent
of par value traded would be disseminated subject to the $10MM cap.\28\
FINRA believes that the proposed dissemination caps will allow the
marketplace time to adjust to the new levels of transparency.
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\28\ See supra note 4. The proposed dissemination caps for MBS
TBA transactions GD would limit display of actual size for
approximately 20 percent of trades representing approximately 84
percent of par value traded and for MBS TBA transactions NGD would
limit the display of actual size for approximately 42 percent of
trades representing approximately 85 percent of par value traded.
The information is based on a review of all MBS TBA, MBS Specified
Pool and SBA-Backed ABS transactions reported to TRACE from May 16,
2011 through January 4, 2012.
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As dissemination of MBS Specified Pool and SBA-Backed ABS
transactions is implemented, FINRA will continue to review the volume
of and liquidity in these securities, and may recommend that such
dissemination caps be set at higher levels to provide additional
transparency to market participants.
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,\29\ 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. FINRA believes that the proposed rule change to
increase fixed income market transparency is designed to prevent
fraudulent and manipulative acts and practices, to promote just and
equitable principles of trade, and, generally to protect investors and
the public because transparency in MBS Specified Pool and SBA-Backed
ABS transactions will enhance the ability of investors and other market
participants to identify and negotiate fair and competitive prices for
these securities, and because the dissemination of price and other
information publicly will promote just and equitable principles of
trade among participants in the more transparent market, and will aid
in the prevention of fraudulent and manipulative acts and practices in
the Asset-Backed Securities market.
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\29\ 15 U.S.C. 78o-3(b)(6).
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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
On April 2, 2012, FINRA filed with the Commission SR-FINRA-2012-021
(``April 2012 Filing''), a proposed rule change to amend the Rule 6700
Series and TRACE dissemination protocols regarding the reporting and
dissemination of (1) MBS Specified Pool transactions and (2) SBA-Backed
ABS traded either in Specified Pool Transactions or to be announced
(``TBA'') (collectively, ``SBA-Backed ABS transactions'').
Specifically, FINRA proposed to amend Rule 6730 to reduce, in two
stages, the time frames to report MBS Specified Pool and SBA-Backed ABS
transactions. FINRA also proposed minor clarifying amendments to Rule
6730(a)(3)(D) and (E) to specify that the reporting requirements set
forth therein apply solely to MBS TBA transactions. In connection with
such changes, FINRA proposed amendments to the definitions of ``To Be
Announced (`TBA'),'' ``Specified Pool Transaction,'' and ``Agency Pass-
Through Mortgage-Backed Security'' and a new defined term, ``SBA-Backed
ABS.'' Finally, FINRA proposed to amend Rule 6750 to provide for the
dissemination of MBS Specified Pool and SBA-Backed ABS transactions,
and proposed to establish, as part of TRACE dissemination protocols, a
$10 million dissemination cap for such transactions. A copy of the Form
19b-4 and original Exhibit 5 of the April 2012 Filing is attached as
Exhibit 2a.
On April 19, 2012, the April 2012 Filing was published for comment
in the Federal Register.\30\ A copy of the Federal Register release is
attached as Exhibit 2b. SEC received two comment letters in
response.\31\ A list of the comment letters received in response to
[[Page 56691]]
the April 2012 Filing is attached as Exhibit 2c. Copies of the comment
letters received in response to the April 2012 Filing are attached as
Exhibit 2d.
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\30\ See Securities Exchange Act Release No. 66804 (April 13,
2012), 77 FR 23524 (April 19, 2012) (Notice of Filing of File No.
SR-FINRA-2012-021).
\31\ See Letter from Chris Killian, Managing Director,
Securities Industry and Financial Markets Association (``SIFMA''),
to Elizabeth M. Murphy, Secretary, SEC, dated May 10, 2012 (``SIFMA
Letter'') and Letter from Michael Nicholas, Chief Executive Officer,
Bond Dealers of America (``BDA''), to Elizabeth M. Murphy,
Secretary, SEC, dated May 10, 2012 (``BDA Letter'').
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One commenter focuses its comments solely on the aspects of the
proposal relating to MBS Specified Pool transactions. The commenter
states that a pool traded on a specified basis (i.e., by CUSIP) may not
trade frequently, that most trades in pools--or at least those for
smaller pools--are trades of the whole pool, which means that most
pools are owned by a single investor, or two or three investors,
instead of being widely held, and that most market participants track
which pools they trade to and from their various counterparties. As a
result, the commenter is concerned that FINRA's proposal to disseminate
such a security's CUSIP as part of disseminated transaction information
will compromise sensitive information regarding investors' trading
strategies, volumes, identities and positions, and, over time, market
participants will be able to ``reverse engineer'' and develop quite
detailed and precise estimates of other participants strategies and
positions. The commenter expresses concern that the impact of ``such
diminution of confidentiality,'' especially regarding positions and
strategy, may be quite negative and impair participation and liquidity
in the market for such instruments.\32\ The second commenter discusses
the same issues raised by the first,--though the second commenter
raises such issues in connection with SBA-Backed TBA transactions as
well as MBS and SBA-Backed Specified Pool transactions.\33\ Both
commenters recommend that certain information be withheld from
dissemination. One commenter recommended that pool number and CUSIP
information, regardless of size, should be omitted.\34\ The other
commenter recommended that for pools with an original face amount below
$1 billion, the CUSIP information not be shown on disseminated trade
reports for a three to six month period.\35\ This commenter also
recommended that FINRA reduce the dissemination cap to $1 million.\36\
In addition, one commenter was concerned that broker-dealers affiliated
with banks can effect MBS Specified Pool and SBA-Backed ABS
transactions through the bank and avoid reporting such transactions to
TRACE, giving such broker-dealers an unfair advantage.\37\
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\32\ See SIFMA Letter, p. 3.
\33\ See BDA Letter, pp. 1 and 2. (See, for example, the second
commenter's statements: ``Much of the market in the Agency Specified
Pool Securities is driven by institutional investors who take the
time to research the performance of pools, to develop a strategy to
generate a profit and ultimately to execute on that strategy.''; ``*
* * the pools can be smaller in size and a single investor
frequently owns the entire pool * * *''; regarding smaller pools,
``* * * the market easily knows who these investors are and what
pools they own.''; ``When a single investor owns a large percentage
of a specified pool, if the FINRA proposal were finalized in its
current form, the market would be able to know that this investor is
buying or selling and the market would then be able to track this
investor's activity, and reverse engineer and capitalize on its
strategy.''; and, ``* * * a more fair approach to investors is if
broker-dealers are allowed to omit the pool number and CUSIP
information from TRACE dissemination regardless of the size of the
transaction.'').
\34\ See BDA letter, p. 1.
\35\ See SIFMA Letter, p. 3.
\36\ See SIFMA Letter, p. 3.
\37\ See BDA Letter, p. 2.
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FINRA withdrew the April 2012 Filing on July 12, 2012, prior to
filing a response to comments. Accordingly, the comments to the April
2012 Filing and FINRA's responses are discussed below.
After careful consideration of the commenters' concerns, in this
proposed rule change, FINRA proposes to modify the transaction
dissemination protocols such that the disseminated information
regarding MBS and SBA-Backed ABS Specified Pool transactions would not
include the CUSIP of such securities. Instead, as detailed above, FINRA
proposes to disseminate specific reference data elements, including
information widely used to project cash flows and pre-payments, in
specific ranges. FINRA believes that this approach would significantly
limit the ability to ``reverse engineer'' transaction data to determine
trading strategies and identities while providing valuable information
about the mortgages/loans that are in MBS and SBA-Backed ABS Specified
Pool transactions.
The information set forth above will help provide meaningful price
transparency, by providing relevant information commonly used to
identify, value and price MBS and SBA-Backed ABS Specified Pool
transactions. FINRA believes that the proposed rule change strikes the
appropriate balance in achieving meaningful transparency while
significantly reducing the potential for ``reverse engineering''
transaction data to determine trading strategies and/or participant
identification. If in the future, FINRA identifies additional data
elements that would significantly improve transparency, FINRA may add
such data elements to the dissemination protocols for such securities
(e.g., FICO).
In addition, FINRA believes that the $10 million dissemination cap
is appropriate and does not propose to reduce it. As noted in the
proposed rule change and the April 2012 Filing, the size of MBS
Specified Pool and SBA-Backed ABS transactions greater than $10 million
would be displayed in disseminated data as ``$10MM+.'' At this level,
approximately nine percent of transactions and approximately 80% of par
value traded would be subject to the $10MM cap. FINRA believes this
data is consistent with respect to dissemination caps for other
securities.\38\
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\38\ See note 21 and note 23 of the Form 19b-4 and Exhibit 1,
respectively, in SR-FINRA-2012-021.
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Finally, with respect to the commenter's concern that a broker-
dealer affiliated with a bank may run MBS Specified Pool and SBA-Backed
ABS transactions through the bank's balance sheet and avoid reporting
such transactions to TRACE, FINRA notes that the statutory standard
requires that FINRA's proposed rules not impose any burden on
competition not necessary or appropriate in furtherance of the Act.
FINRA believes that increased transparency in the securities trading
market appropriately furthers the purposes the Act. As FINRA has
previously noted, it defeats the purposes of the Act by referring to
market participants that may not be subject to the Act (in whole or in
part), as a basis for not approving the proposed rule change.\39\ Such
a standard would undo much, if not all, regulation of broker-dealers
and markets necessary for the protection of investors and the
efficiency, competitiveness and integrity of securities markets. FINRA
believes that the fact that there may be market participants that are
not subject to the Act should not delay the reporting and dissemination
of MBS Specified Pool and SBA-Backed ABS transactions and related
changes regarding the reporting of such transactions.
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\39\ See Response to Comments on SR-FINRA-2009-010 (Proposed
Rule Change Relating to Expansion of TRACE to Include Agency Debt
Securities and Primary Market Transactions).
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III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 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 or disapprove such proposed rule change, or
[[Page 56692]]
(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 email to rule-comments@sec.gov. Please include
File Number SR-FINRA-2012-042 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-2012-042. This
file number should be included on the subject line if email 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 Web site viewing and
printing 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-2012-042 and should be
submitted on or before October 4, 2012.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\40\
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\40\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-22555 Filed 9-12-12; 8:45 am]
BILLING CODE 8011-01-P
