Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of Amendment No. 1 and Order Granting Accelerated Approval of Proposed Rule Change, as Modified by Amendment No. 1, Relating to TRACE Reporting and Dissemination of Transactions in Asset-Backed Securities, 11481-11486 [2014-04390]
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Federal Register / Vol. 79, No. 40 / Friday, February 28, 2014 / Notices
Fund in the securities of the Fund
exceeds the limit of section
12(d)(1)(A)(i) of the Act, setting forth
from whom the securities were
acquired, the identity of the
underwriting syndicate’s members, the
terms of the purchase, and the
information or materials upon which
the Board’s determinations were made.
9. Before investing in a Fund in
excess of the limits in section
12(d)(1)(A), an Investing Fund will
execute a FOF Participation Agreement
with the Fund stating that their
respective boards of directors or trustees
and their investment advisers, or
Trustee and Sponsor, as applicable,
understand the terms and conditions of
the order, and agree to fulfill their
responsibilities under the order. At the
time of its investment in Shares of a
Fund in excess of the limit in section
12(d)(1)(A)(i), an Investing Fund will
notify the Fund of the investment. At
such time, the Investing Fund will also
transmit to the Fund a list of the names
of each Investing Fund Affiliate and
Underwriting Affiliate. The Investing
Fund will notify the Fund of any
changes to the list as soon as reasonably
practicable after a change occurs. The
Fund and the Investing Fund will
maintain and preserve a copy of the
order, the FOF Participation Agreement,
and the list with any updated
information for the duration of the
investment and for a period of not less
than six years thereafter, the first two
years in an easily accessible place.
10. Before approving any advisory
contract under section 15 of the Act, the
board of directors or trustees of each
Investing Management Company,
including a majority of the independent
directors or trustees, will find that the
advisory fees charged under such
contract are based on services provided
that will be in addition to, rather than
duplicative of, the services provided
under the advisory contract(s) of any
Fund in which the Investing
Management Company may invest.
These findings and their basis will be
recorded fully in the minute books of
the appropriate Investing Management
Company.
11. Any sales charges and/or service
fees charged with respect to shares of an
Investing Fund will not exceed the
limits applicable to a fund of funds as
set forth in NASD Conduct Rule 2830.
12. No Fund relying on the section
12(d)(1) relief will acquire securities of
any investment company or company
relying on section 3(c)(1) or 3(c)(7) of
the Act in excess of the limits contained
in section 12(d)(1)(A) of the Act, except
to the extent permitted by exemptive
relief from the Commission permitting
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the Fund to purchase shares of other
investment companies for short-term
cash management purposes.
For the Commission, by the Division of
Investment Management, under delegated
authority.
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2014–04391 Filed 2–27–14; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–71607; File No. SR–FINRA–
2013–046]
Self-Regulatory Organizations;
Financial Industry Regulatory
Authority, Inc.; Notice of Filing of
Amendment No. 1 and Order Granting
Accelerated Approval of Proposed
Rule Change, as Modified by
Amendment No. 1, Relating to TRACE
Reporting and Dissemination of
Transactions in Asset-Backed
Securities
February 24, 2014.
I. Introduction
On November 13, 2013, the Financial
Industry Regulatory Authority, Inc.
(‘‘FINRA’’) filed with the Securities and
Exchange Commission (‘‘Commission’’),
pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’) 1 and Rule 19b–4 thereunder,2 a
proposed rule change relating to TRACE
reporting and dissemination of
transactions in Asset-Backed
Securities.3 The proposed rule change
was published for comment in the
Federal Register on November 26,
2013.4 The Commission received one
comment on the proposal.5 On January
10, 2014, the Commission extended to
February 24, 2014, the time period in
which to approve the proposed rule
change, disapprove the proposed rule
change, or institute proceedings to
determine whether the proposed rule
change should be disapproved.6 On
February 14, 2014, FINRA responded to
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 The term ‘‘Asset-Backed Security’’ was
previously defined in FINRA Rule 6710(m). As a
result of this proposed rule change, the definition
has been revised and relocated to FINRA Rule
6710(cc).
4 See Securities Exchange Act Release No. 70906
(November 20, 2013), 78 FR 70602 (‘‘Notice’’).
5 See letter to Elizabeth M. Murphy, Secretary,
Commission, from Chris Killian, Managing Director,
Securitization, SIFMA, dated December 17, 2013
(‘‘SIFMA Letter’’).
6 See Securities Exchange Act Release No. 71287
(January 10, 2014), 79 FR 2924 (January 16, 2014).
2 17
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11481
the comment 7 and filed Amendment
No. 1 to the proposed rule change.8 On
February 21, 2014, FINRA submitted a
supplemental response to the
comment.9 The Commission is
publishing this notice to solicit
comments on Amendment No. 1 from
interested persons, and is approving the
proposed rule change, as modified by
Amendment No. 1, on an accelerated
basis.
II. Description of the Amended
Proposal
Historically, FINRA has utilized the
Trade Reporting and Compliance Engine
(‘‘TRACE’’) to collect from its members
and publicly disseminate information
on secondary over-the-counter
transactions in corporate debt securities,
Agency Debt Securities,10 and certain
primary market transactions. For certain
other asset types, FINRA utilized
TRACE to collect transaction
information, but until recently, did not
report such information publicly.
Recently, however, FINRA began to
phase-in dissemination of the
transaction information for these
previously non-disseminated asset
types. In the first two phases, FINRA
implemented dissemination of Agency
Pass-Through Mortgage-Backed
Securities and SBA-Backed ABS.11
7 See letter to Elizabeth M. Murphy, Secretary,
Commission, from Kathryn M. Moore, Associate
General Counsel, FINRA, dated February 14, 2014
(‘‘FINRA Letter I’’).
8 In Amendment No. 1, FINRA revised the types
of products that would be included in the definition
of ‘‘Asset-Backed Security’’ and that, under the
proposal, would be disseminated through TRACE
and subject to reduced reporting times. FINRA
initially proposed to include in the definition of
‘‘Asset-Backed Securities,’’ among other things,
collateralized debt obligations, collateralized loan
obligations, collateralized bond obligations, and
non-agency backed commercial mortgage-backed
securities. Amendment No. 1 removes these
securities from the defined ‘‘Asset-Backed
Securities’’ that would be subject to reduced
reporting times and disseminated under the
proposal. Amendment No. 1 also makes other
minor, technical revisions to the proposal.
9 See email to Michael Gaw, Assistant Director,
Division of Trading and Markets, Commission, from
Kathryn M. Moore, Associate General Counsel,
FINRA, dated February 21, 2014 (‘‘FINRA Letter
II’’).
10 The term ‘‘Agency Debt Security’’ is defined in
FINRA Rule 6710(l).
11 On November 12, 2012, FINRA began
disseminating transactions in Agency Pass-Though
Mortgage-Backed Securities traded TBA. See
Securities Exchange Act Release No. 66829 (April
18, 2012), 77 FR 24748 (April 25, 2012) (Order
Approving SR–FINRA–2012–020); FINRA’s
Regulatory Notice 12–26 (May 2012) and Regulatory
Notice 12–48 (November 2012). On July 22, 2013,
FINRA began disseminating Agency Pass-Through
Mortgage-Backed Securities traded in Specified
Pool Transactions and SBA-Backed ABS traded
TBA or in Specified Pool Transactions. See
Securities Exchange Act Release No. 68084 (October
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Federal Register / Vol. 79, No. 40 / Friday, February 28, 2014 / Notices
Next, FINRA sought, and the
Commission approved, public
dissemination of transactions in
TRACE-Eligible Securities effected as
Rule 144A transactions (provided that
such transactions were in securities of
the same type as are subject to
dissemination if effected in non-Rule
144A transactions).12 FINRA now has
proposed to provide for public
dissemination of a group of newly
defined Asset-Backed Securities and to
make certain related changes to its rules,
as described below.
Dissemination and Definitional
Amendments
FINRA has proposed to revise FINRA
Rule 6750 to include Asset-Backed
Securities among the TRACE-Eligible
Securities that FINRA will disseminate
publicly.13 In connection with this
change, FINRA has proposed to revise
certain existing definitions in its rules
and add other, new definitions in order
to delineate the specific Asset-Backed
Securities that would be subject to
dissemination pursuant to FINRA Rule
6750. Specifically, FINRA has proposed
to re-name as ‘‘Securitized Products’’
the broad group of securities currently
defined as ‘‘Asset-Backed Securities’’ in
FINRA Rule 6710(m) 14 and, in a
proposed new definition in FINRA Rule
6710(cc), to re-define the term ‘‘AssetBacked Security’’ more narrowly to
mean:
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a type of Securitized Product where the
Asset-Backed Security is collateralized by
any type of financial asset, such as a
23, 2012), 77 FR 65436 (October 26, 2012) (Order
Approving SR–FINRA–2012–042); FINRA’s
Regulatory Notice 12–56 (December 2012). The
terms ‘‘TBA,’’ ‘‘Agency Pass-Through MortgageBacked Security,’’ ‘‘Specified Pool Transaction,’’
and ‘‘SBA-Backed ABS’’ are defined in FINRA Rule
6710(u), (v), (x), and (bb), respectively.
12 See Securities Exchange Act Release No. 70345
(September 6, 2013), 78 FR 56251 (September 12,
2013) (Order Approving SR–FINRA–2013–029);
Securities Exchange Act Release No. 70691 (October
16, 2013), 78 FR 62788 (October 22, 2013) (SR–
FINRA–2013–043) (together, ‘‘Rule 144A
Dissemination Amendments’’); FINRA’s Regulatory
Notice 13–35 (announcing June 30, 2014 as the
effective date for SR–FINRA–2013–029 and SR–
FINRA–2013–043). Given the Rule 144A
Dissemination Amendments, the instant proposal
would result in the dissemination of Asset-Backed
Security transactions effected pursuant to Rule
144A (in addition to Asset-Backed Security
transactions not effected pursuant to Rule 144A).
13 See proposed Rule 6750 and Amendment
No. 1.
14 See proposed FINRA Rule 6710(m). Proposed
FINRA Rule 6710(m) also would replace the current
rule’s reference to Section 3(a)(77)(A) of the Act
with a reference to Section 3(a)(79)(A) of the Act.
This is a technical change to coincide with
renumbering to Section 3(a)(77) of the Act
implemented by Section 101(b)(1) of the Jumpstart
Our Business Startups act (‘‘JOBS Act’’). See Notice,
78 FR at 70604; see also Public Law 112–106, 126
Stat. 306 (2012).
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consumer or student loan, a lease, or a
secured or unsecured receivable, and
excludes: (i) a Securitized Product that is
backed by residential or commercial
mortgage loans, mortgage-backed securities,
or other financial assets derivative of
mortgage-backed securities; (ii) an SBABacked ABS as defined in paragraph (bb)
traded To Be Announced (‘‘TBA’’) as defined
in paragraph (u) or in a Specified Pool
Transaction as defined in paragraph (x); and
(iii) collateralized debt, loan and bond
obligations.15
In addition, FINRA has proposed to
provide further guidance regarding the
scope of this narrower definition of
‘‘Asset-Backed Security’’ in proposed
Supplementary Material .01 to FINRA
Rule 6710, which would state that the
term ‘‘Asset-Backed Security’’ includes,
but is not limited to:
securities collateralized by the following
types of assets and securities: credit card
receivables; automobile loans and leases;
student loans; home equity loans and home
equity lines of credit; aircraft leases;
automobile floorplan and wholesale loans;
motorcycle loans and leases; recreational
vehicle loans; manufactured housing loans;
commercial loans; tranches of other AssetBacked Securities; reinsurance; timeshare
obligations; and loans or other financial
instruments generating a stream of payments
and guaranteed as to principal or interest (or
both) by the Small Business Administration
(traded other than to be announced (‘‘TBA’’)
as defined in paragraph (u) or in a Specified
Pool Transaction as defined in paragraph
(x)).16
Transactions included in the redefined group of Asset-Backed
Securities, set forth in proposed Rule
6710(cc) (including Rule 144A
transactions in such securities) and
Supplementary Material .01 thereto,
will be publicly disseminated through
TRACE as a result of the proposed rule
change.17 Securities excluded from the
new definition of Asset-Backed Security
by subparts (i) through (iii) of proposed
Rule 6710(cc) would not be
disseminated under the proposal.
FINRA has represented that it will
observe trading in the newlydisseminated Asset-Backed Securities to
monitor the impact of price
transparency on the market for these
securities.18
FINRA also has proposed to define
‘‘Collateralized Mortgage Obligation’’ in
proposed new FINRA Rule 6710(dd).19
15 Proposed FINRA Rule 6710(cc); see also
Amendment No. 1. FINRA believes that this
proposed narrower definition is consistent with
industry usage. See Notice, 78 FR at 70603.
16 Proposed Supplementary Material .01 to
FINRA Rule 6710; see also Notice, 78 FR at 70603–
04 and Amendment No. 1.
17 See Notice, 78 FR at 70603–04.
18 See Notice, 78 FR at 70605.
19 See proposed Rule 6710(dd) and Amendment
No. 1.
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As defined, Collateralized Mortgage
Obligations would be excluded from the
definition of ‘‘Asset-Backed Security’’
by subpart (i) of proposed Rule 6710(cc),
and thus transactions in Collateralized
Mortgage Obligations would not be
publicly disseminated by TRACE
pursuant to this proposed rule change.20
Reduction of Reporting Period
In connection with its proposal to
publicly disseminate transactions in
certain Asset-Backed Securities,21
FINRA has proposed to amend FINRA
Rule 6730 to reduce the period for
reporting Asset-Backed Security
transactions to TRACE. The reduction
would occur in two stages. First, FINRA
would reduce the reporting period from
no later than the close of the TRACE
system on the date of execution to no
later than 45 minutes from the time of
execution.22 Second, after
approximately 180 days, the reporting
period would be further reduced from
no later than 45 minutes from the time
of execution to no later than 15 minutes
from the time of execution.23
List or Fixed Offering Price and
Takedown Transactions
According to FINRA, many AssetBacked Securities are underwritten
using a syndicated process that is
similar to the offering process for
corporate bonds.24 In syndicated
offerings, there may be a number of
transactions that occur at the list or
fixed offering price (or the takedown
price).25 Transactions in TRACEEligible Securities (except for
transactions in Securitized Products)
that are effected in accordance with the
requirements of a List or Fixed Offering
Price Transaction 26 or a Takedown
20 See
Amendment No. 1.
except where the context requires
otherwise, references to ‘‘Asset-Backed Security’’
and ‘‘Securitized Product’’ are to the new
definitions of those terms.
22 See proposed Rule 6730(a)(3)(B)(i)(b).
Exceptions for transactions that are executed within
45 minutes of the close of the TRACE system and
for transactions executed when it is closed are set
forth in subparts a., c., and d. of proposed Rule
6730(a)(3)(B)(i).
23 See proposed Rule 6730(a)(3)(B)(ii), which
incorporates by reference Rule 6730(a)(1). Rule
6730(a)(1) requires that transactions in TRACEEligible Securities be reported within 15 minutes of
the time of execution, and also provides exceptions
for transactions in TRACE-Eligible Securities that
are executed shortly before the TRACE system
closes and when it is closed.
24 See Notice, 78 FR at 70605.
25 See id. The terms ‘‘List or Fixed Offering Price
Transaction’’ and ‘‘Takedown Transaction’’ are
defined in FINRA Rules 6710(q) and 6710(r),
respectively.
26 The term ‘‘List or Fixed Offering Price
Transaction’’ is defined in FINRA Rule 6710(q).
21 Hereinafter,
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Federal Register / Vol. 79, No. 40 / Friday, February 28, 2014 / Notices
Transaction 27 may be reported as late as
T+1 during TRACE system hours, as
provided in FINRA Rule 6730(a)(2);
such transactions are not disseminated,
as provided in FINRA Rule 6750(b)(3);
and members are not charged a
reporting fee for such transactions, as
provided in FINRA Rule 7730(b)(1)(C).28
In light of the similarity of the offering
process for corporate bonds and many
Asset-Backed Securities, FINRA has
proposed to amend FINRA Rules
6710(q) and 6710(r) so that primary
market Asset-Backed Securities
transactions that meet all of the
requirements of a List or Fixed Offering
Price Transaction or a Takedown
Transaction may be treated in
accordance with FINRA Rules
6730(a)(2), 6750(b)(3), and
7730(b)(1)(C).29
Dissemination Caps
Currently, there are dissemination
caps in place for disseminated TRACE
data, such that the actual size (volume)
of a transaction over a certain par value
is not displayed.30 FINRA has proposed
a $10 million dissemination cap for
Asset-Backed Security transactions,
which would prevent the display in
disseminated TRACE data of the actual
size (volume) of Asset-Backed Security
transactions with an original par or
value over $10 million; rather, such
transactions will be displayed as
‘‘10MM+.’’ 31
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27 The
term ‘‘Takedown Transaction’’ is defined
in FINRA Rule 6710(r).
28 See Notice, 78 FR at 70605.
29 See proposed FINRA Rules 6710(q) and
6710(r); see also Notice, 78 FR at 70605. All primary
market transactions in other classes of Securitized
Products will continue to be specifically excluded
from the definitions of List or Fixed Offering Price
Transaction and Takedown Transaction, because, in
general, such Securitized Products are structured,
offered, and sold quite differently than corporate
bonds (i.e., a large number of Securitized Products
sales are for forward delivery, and most such
securities are not underwritten using a syndicated
process generating a large number of transactions
occurring at the same price). See Notice, 78 FR at
70605 n.28.
30 See Notice, 78 FR at 70605–06 and n.29. There
are $5 million and $1 million caps for TRACEEligible Securities that are rated Investment Grade
and Non-Investment Grade, respectively; a $25
million cap for Agency Pass-Through Mortgage
Backed Securities traded TBA for good delivery;
and a $10 million cap for Agency Pass-Through
Mortgage Backed Securities traded TBA not for
good delivery, Agency Pass-Through MortgageBacked Securities traded in Specified Pool
Transactions, and SBS-Backed ABS traded TBA and
in Specified Pool Transactions.
31 See Notice, 78 FR at 70606. In the Notice,
FINRA stated that—based on a sample period of
transactions reported from May 16, 2011 through
December 2012—approximately 17.6% of trades
and approximately 75.6% of original par or
principal value traded in Asset-Backed Securities
transactions (other than Rule 144A transactions)
would have been subject to the $10MM+
dissemination cap had these transactions been
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Other Dissemination Protocols
Currently, the standard data elements
that are disseminated for TRACEEligible securities include, among other
things, a dealer/customer indicator
(indicating the type of contra party) and
a buy/sell indicator.32 FINRA has stated
that the Asset-Backed Security market
differs from the corporate bond market
in that it has a smaller number of
participants that are largely
institutional. As a result, market
participants have raised concerns with
FINRA regarding protecting the
confidentiality of dealer and customer
trading strategies, identities, and
positions in certain types of AssetBacked Securities. To address these
concerns, FINRA has proposed not to
disseminate the dealer/customer and
buy/sell indicators for Asset-Backed
Security transactions.33
Data Availability
Currently, what is known as AssetBacked Securities data—organized as
the ABS Data Set for real-time data and
as the Historic ABS Data Set for Historic
TRACE Data 34—includes all Securitized
Products transactions that are
disseminated (i.e., TBA transactions and
Specified Pool Transactions). In light of
the proposed definitional amendments
discussed above, however, FINRA has
proposed to amend Rule 7730 to rename
those data sets as the ‘‘SP Data Set’’ and
‘‘Historic SP Data Set.’’ FINRA also has
proposed to include in these data sets
the transaction data for the newly
defined Asset-Backed Securities, which
would be disseminated under this
proposal.35 Asset-Backed Securities that
are traded in Rule 144A transactions
would be included in, respectively, the
Rule 144A Data Set, when available, and
subject to public dissemination. For Rule 144A
transactions in Asset-Backed Securities over that
same time period, approximately 28.5% of trades
and approximately 88.1% of original par or
principal value traded would have been
disseminated subject to the $10MM+ dissemination
cap. See id. at n. 30. The Commission notes that
these figures are based on the definition of ‘‘AssetBacked Securities’’ in the original proposal, not the
definition in Amendment No. 1.
32 Additional standard data elements include the
CUSIP, the time and date of the transaction, price,
and the size (subject to dissemination caps).
Specified Pool Transactions are disseminated
subject to modified dissemination protocols. See
Securities Exchange Act Release No. 68084 (October
23, 2012), 77 FR 65436 (October 26, 2012) (Order
Approving SR–FINRA–2012–042); FINRA
Regulatory Notice 12–56 (December 2012).
33 See Notice, 78 FR at 70606.
34 A transaction in a disseminated TRACEEligible Security becomes available as part of
Historic TRACE Data no earlier than 18 months
after the specific transaction is reported to TRACE.
See Notice, 78 FR at 70606 n.35.
35 See proposed FINRA Rule 7730; see also
Notice, 78 FR at 70606 and n. 35.
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11483
the Historic Rule 144A Data Set, when
available.36 FINRA does not propose to
amend the fees currently in effect for the
SP Data Set and the Historic SP Data
Set. Similarly, when the Rule 144A Data
Set and the Historic Rule 144A Data Set
become available, disseminated
information regarding Rule 144A
transactions in Asset-Backed Securities
would be included in such data sets
without any change to the applicable
fees.37
Other Technical Changes
FINRA has proposed to eliminate
certain provisions that have expired and
all cross-references thereto in FINRA
Rule 6730(a) and to make conforming
changes.38 FINRA also has proposed to
make conforming and technical changes
to the FINRA Rule 6700 Series and
FINRA Rule 7730 to incorporate the
proposed definitional amendments and
new data set names discussed above.39
Effective Date of Proposed Rule Change
FINRA has stated that it would
announce the effective date of the
proposed rule change in a Regulatory
Notice to be published no later than 60
days following Commission approval,
and that the effective date would be no
later than 270 days following
publication of that Regulatory Notice.
III. Summary of Comments
The Commission received one
comment on the proposal,40 and two
responses to the comment from
FINRA.41 The commenter argues that
the proposal ‘‘has the potential to
negatively impact liquidity, as previous
proposals have done in the TBA,
specified pool and the high-yield
markets.’’ 42 Therefore, the commenter
requests ‘‘that FINRA not implement
this proposal, and instead engage in
further discussion with the industry as
to how best to preserve ABS market
liquidity, and re-propose this proposal
after such discussions.’’ 43
According to the commenter, FINRA’s
prior implementation of post-trade
transparency in the high-yield bond
market, and more recently in the
markets for mortgage-backed securities
traded TBA and in specified pools,44
36 See
Notice, 78 FR at 70606.
id.; see also Rule 144A Dissemination
Amendments, supra note 12.
38 See proposed FINRA Rules 6730(a)(3)(D)
through 6730(a)(3)(G); see also Notice, 78 FR at
70606.
39 See Notice, 78 FR at 70606.
40 See SIFMA Letter.
41 See FINRA Letter I; FINRA Letter II.
42 SIFMA Letter at 1.
43 Id.
44 See supra notes 7 and 9.
37 See
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Federal Register / Vol. 79, No. 40 / Friday, February 28, 2014 / Notices
has contributed to liquidity decreases in
those markets; the commenter believes
that the result in the Asset-Backed
Security market would be the same.45
The commenter asserts that market
makers are less willing to take on large
trades from their buy-side
counterparties when the identity of their
position becomes immediately known.46
In addition, the commenter references a
recent study that, according to the
commenter, concluded that the
implementation of mandatory
transparency through TRACE in the
corporate bond market caused a
significant decrease in price dispersion
for all bonds and significant decrease in
trading activity for certain categories of
bonds.47 The commenter states that the
study’s results indicate that mandated
transparency may help some investors
and dealers through a decline in price
dispersion, while it harms others
through a reduction in trading activity.
According to the commenter, in the
markets where post-trade transparency
has already been implemented, the
benefits of improved price discovery
have been far outweighed by the costs
of decreased liquidity.48
In response, FINRA notes that TRACE
has been subject to extensive academic
interest since its inception, and that
studies have shown multiple benefits of
transparency, including a narrowing of
the bid-ask spread, reduction in trade
execution costs, and improved valuation
precision in mark-to-market
valuations.49 FINRA acknowledges the
study referenced by the commenter, and
notes that the study examined trading
volume and the dispersion of
transaction prices of corporate bonds
over the period July 1, 2002, through
December 31, 2006—a period during
which FINRA implemented post-trade
transparency in four stages. According
to FINRA, the Asquith et al. study
evaluated the change in dispersion of
transaction prices and trading volume
for windows of 90, 60, and 30 days
before and after the implementation of
each stage, and for the time frame
examined concluded that increases in
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45 See
SIFMA Letter at 2.
46 See id.
47 See id. (citing Asquith, Covert, and Pathak,
‘‘The Effects of Mandatory Transparency in
Financial Markets Design: Evidence from the
Corporate Bond Market’’ (2013) (the ‘‘Asquith et al.
study’’)).
48 See id.
49 See FINRA Letter I at 3 (citing, e.g., Goldstein,
Hotchkiss, and Sirri, ‘‘Transparency and Liquidity:
A Controlled Experiment on Corporate Bonds’’
(March 2006); Bessembinder, Maxwell, and
Venkataraman, ‘‘Optimal Market Transparency:
Evidence From the Initiation of Trade Reporting in
Corporate Bonds’’ (January 2005); and Cici, Gibson,
and Merrick, ‘‘Missing the Marks: Dispersion in
Corporate Bond Valuation’’ (May 2008)).
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post-trade transparency were associated
with a statistically significant decrease
in price dispersion in all stages,
generally benefitting investors. Further,
FINRA asserts that the study found no
negative impact on trading activity for
the first three stages of transparency
implementation, and it found a
statistically significant decrease in
trading activity only for the last stage of
dissemination, which was composed of
non-investment grade and inactivelytraded bonds. FINRA notes, however,
that the study captured only the
temporary adjustment in trading activity
for the 90 days after implementation of
dissemination, which FINRA states may
have been a time period when market
participants were adjusting to the new
information available.
Furthermore, FINRA states that,
during the time period beyond 90 days
from the last stage of dissemination, it
appears that the trading activity of such
bonds recovered to pre-dissemination
levels, while the reduction in price
dispersion was maintained. FINRA
asserts this based on its understanding
of the information and analysis
provided in the same study referenced
in the SIFMA Letter.50 Specifically,
FINRA notes that, for phase 3B bonds,
which the authors identified as the
bonds that have experienced a large and
significant reduction in trading activity,
Figure 1 on page 35 of the paper shows
that the average weekly daily trading
volume, which was in the $200,000 to
$400,000 range when the final stage of
transparency was implemented in
February 2005, declined below the
$200,000 level over the next several
months after dissemination, but then by
December and January 2006, recovered
to the $200,000 to $400,000 range.51
In addition, FINRA disputes the
commenter’s assertion that the
implementation of post-trade
transparency in the markets for
mortgage-backed securities traded TBA
and in specified pools has caused
decreased liquidity in these markets.
According to FINRA, while there has
been a decline in trading in these
markets, there is no direct evidence that
transparency has contributed to the
decline.52 FINRA states that TRACE
data and statistics published on
SIFMA’s Web site indicate that the
issuance of mortgage-related products
has declined to the same extent or
greater than trading volumes, affecting
both disseminated and non50 See
FINRA Letter II.
id. FINRA states that a similar trend is
shown in Figure 2 on page 36 of the Asquith et al.
study.
52 See FINRA Letter I at 3–4.
51 See
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Sfmt 4703
disseminated products.53 FINRA also
believes that market participants have
been focused on macro factors in
general, and in particular the current
and future impact of the Federal Reserve
buying program and any tapering
thereof.54
The commenter also states that its
members are ‘‘generally in agreement
with the re-definition of ABS that
includes securities backed by consumer
or student loans, a lease or a secured or
unsecured receivable but excludes
Agency Pass-MBS, Agency CMOs and
Agency and Non-Agency RMBS.’’ 55 The
commenter warns, however, that ‘‘the
inclusion of CDOs, CLOs and NonAgency-Backed CMBS is pressing the
revised definition of ABS beyond what
is appropriate.’’ 56 According to the
commenter, unlike the consumer AssetBacked Securities with which they are
grouped under the original proposal, the
credit analysis for CDOs, CLOs, and
Non-Agency CMBS require extensive
work and an in-depth study of the
underlying assets in order to formulate
an opinion on the value of the tranche.57
The commenter states, therefore, that
‘‘[i]f prices were disseminated to the
market on these securities without
appropriate consideration, it would
likely be the case that inexperienced
investors could use the trade print in
one junior bond as a proxy for a
nominally similar piece of paper.’’ 58
Furthermore, the commenter cautions
that disseminated prices for CMBS and
CDO tranches may be influenced by
technical factors and thus ‘‘TRACE
prices may not always reflect the
fundamental credit risk of a security.’’ 59
In its response, FINRA stated that it
‘‘agrees that the credit analysis for [these
securities] differs from those Securitized
Products backed by consumer or student
loans, a lease, or a secured or unsecured
receivable.’’ 60 Accordingly, in
Amendment No. 1, FINRA revised the
proposal to exclude these securities—as
well as collateralized bond obligations—
from the defined group of Asset-Backed
Securities that would be disseminated
53 See
id. at 4.
id.
55 SIFMA Letter at 3.
56 Id.
57 See id.
58 Id.
59 Id. at 4 (stating, for example, that ‘‘it is not
uncommon in markets for deeply discounted legacy
CMBS credit that a party may seek to purchase a
specific tranche as a means of obtaining control
rights in a transaction. As a result, a bond can trade
at a pronounced premium to its fundamental value
because the control right is worth a significant
amount for a special servicer who can extract value
with special servicing and liquidation fees which
are not available to a typical investor’’).
60 FINRA Letter I at 2.
54 See
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under the proposal.61 FINRA states that,
instead, it will consider potential
additional transparency in these
securities in conjunction with other
tranched securities, such as
Collateralized Mortgage Obligations, as
appropriate.62
Finally, the commenter suggests an
increased reporting period for TRACEreportable Regulation S securities,
stating that they require a manual and
time-consuming booking process which
would be difficult if not impossible to
complete within the proposed
timeframes.63 In response, FINRA states
that it considers this suggestion to be
outside the scope of its proposal.64
IV. Discussion and Commission
Findings
After careful review, the Commission
finds that the proposed rule change is
consistent with the requirements of the
Act and the rules and regulations
thereunder applicable to a national
securities association.65 In particular,
the Commission finds that the proposed
rule change is consistent with Section
15A(b)(6) of the Act,66 which requires,
among other things, that FINRA’s rules
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.
In approving the original TRACE
rules, the Commission stated that price
transparency plays a fundamental role
in promoting the fairness and efficiency
of U.S. capital markets.67 The
Commission believes that real-time
dissemination of last-sale information
could aid dealers in deriving better
quotations, because they would know
the prices at which other market
participants had recently transacted in
the same or similar instruments. This
information also could aid all market
participants in evaluating current
quotations, because they could inquire
why dealer quotations might differ from
the prices of recently executed
transactions. Furthermore, post-trade
transparency affords market participants
61 See
id.; Amendment No. 1.
FINRA Letter I at 2.
63 See SIFMA Letter at 4.
64 See FINRA Letter I at 4. FINRA also reiterates
that the proposal is consistent with the Act and
should be approved for the reasons set forth in the
proposal. See id.
65 In approving this proposed rule change, the
Commission has considered the proposed rule’s
impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
66 15 U.S.C. 78o–3(b)(6).
67 See Securities Exchange Act Release No. 43873
(January 23, 2001), 66 FR 8131, 8136 (January 29,
2001) (approving SR–NASD–99–65) (‘‘2001 TRACE
Order’’).
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62 See
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a means of testing whether dealer
quotations before the last sale were
close to the price at which the last sale
was executed. In this manner, post-trade
transparency can promote price
competition between dealers and more
efficient price discovery, and ultimately
lower transaction costs. For similar
reasons, FINRA believes that
dissemination of Asset-Backed Security
transaction information may enhance
price discovery, allow investors to better
assess the quality of their executions,
assist broker-dealers in complying with
best execution obligations, and enable
broker-dealers and other institutional
investors to improve the accuracy of
their valuations of their Asset-Backed
Security positions.68 The Commission
agrees.69
The Commission has considered the
commenter’s argument that post-trade
transparency in the Asset-Backed
Security market has the potential to
negatively impact liquidity in that
market. The commenter references an
academic study that found that the
implementation of mandatory
transparency through TRACE in the
corporate bond market is associated
with a significant decrease in price
dispersion for all bonds and a
significant decrease in trading activity
for certain categories of bonds. FINRA
notes in response to the comment that
the study found a statistically
significant decrease in trading activity
only in the last of the four stages of
transparency implementation in highyield corporate bonds, and no impact on
trading activity in the first three
stages.70 FINRA also notes that,
according to the same study, trading
activity in those corporate bonds
eventually normalized to predissemination levels, while the
reduction in price dispersion
remained.71 The Commission notes that
both the commenter and the Asquith et
al. study believe that mandated posttrade transparency under TRACE has
caused a reduction in price dispersion
of the affected bonds. This feature
appears consistent with the view that
post-trade transparency reduces
information asymmetries and promotes
price competition in the market.
68 See Notice, 78 FR at 70607; see also FINRA
Letter I, at 4.
69 See Edwards, A. K., Harris, L. E. & Piwowar,
M. S., ‘‘Corporate Bond Market Transaction Costs
and Transparency’’ (June 2007); Goldstein,
Hotchkiss, and Sirri, ‘‘Transparency and Liquidity:
A Controlled Experiment on Corporate Bonds’’
(March 2006); and Bessembinder, Maxwell, and
Venkataraman, ‘‘Optimal Market Transparency:
Evidence From the Initiation of Trade Reporting in
Corporate Bonds’’ (January 2005).
70 See FINRA Letter I.
71 See FINRA Letters I and II.
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Frm 00096
Fmt 4703
Sfmt 4703
11485
Although the Asquith et al. study claims
that post-trade transparency may cause
a reduction in the level of trading of
illiquid bonds, the Commission also
notes that some question exists about
whether that feature—even if real in the
short term—persists over time or is
detrimental. The Commission believes
that the comment does not preclude
approval of the proposal at this time,
particularly in light of FINRA’s
representation that it will ‘‘observe the
trading in Asset-Backed Securities to
monitor the impact of price
transparency in the market for AssetBacked Securities.’’ 72
The Commission believes that the
proposed reduction in reporting times
for Asset-Backed Security transactions
(except those that are effected as
primary market List or Fixed Offering
Price Transactions or Takedown
Transactions) is an important corollary
to the expansion of post-trade
transparency for such transactions.
Reducing the reporting period for these
transactions as set forth in the proposal
will result in important trade
information reaching the market more
quickly, thus contributing to enhanced
price transparency for Asset-Backed
Securities. The Commission also
believes that FINRA’s two-stage phased
approach to implementing the reduced
reporting period is reasonably designed
to ease the compliance burdens on those
affected by the proposal without
significantly compromising FINRA’s
ability to disseminate more timely
transaction information. Further, the
Commission believes that it is
reasonable and appropriate to allow
members that effect primary market
Asset-Backed Security transactions as
List or Fixed Ordering Price
Transactions or Takedown Transactions
to continue to take advantage of the
more flexible treatment of those
transactions provided for in FINRA
Rules 6730(a)(2), 6750(b)(3), and
7730(b)(1)(C).
The Commission believes that the
proposed $10 million dissemination cap
for Asset-Backed Security transactions
is reasonable and consistent with the
Act. FINRA has represented that it will
observe the effects of the $10 million
dissemination cap on the market and
may propose modifications to the cap
size in the future if warranted. The
Commission expects FINRA to
periodically re-evaluate whether the
dissemination caps, including the caps
for Asset-Backed Security transactions
being approved today, continue to be
appropriate. Furthermore, the
Commission believes that the additional
72 Notice,
E:\FR\FM\28FEN1.SGM
78 FR at 70605.
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tkelley on DSK3SPTVN1PROD with NOTICES
proposed dissemination protocols for
Asset-Backed Security transactions,
pursuant to which the dealer/customer
and buy/sell indicators would not be
disseminated, strike an appropriate
balance between enhancing post-trade
transparency and protecting
counterparty confidentiality.
The Commission further believes that
including disseminated Asset-Backed
Security transaction data in the SP Data
Set and Historic SP Data Set (as
renamed under the proposal) while
maintaining the current fee levels in
effect for those data sets is reasonable
and consistent with the Act. The rules
that establish the existing data sets have
been approved by the Commission,73
and including the additional AssetBacked Securities to be disseminated
under the instant proposal in those data
sets does not appear to raise any issues.
Finally, the Commission believes that
the proposal’s minor, conforming, and
technical revisions to the FINRA Rule
6700 series and FINRA Rule 7730 are
consistent with the Act.
The Commission finds good cause to
approve the proposed rule change, as
amended by Amendment No. 1, prior to
the thirtieth day after the date of
publication of notice of filing thereof in
the Federal Register. The amendment
responds to an issue raised by one
commenter on the proposal by
excluding certain tranched securities
from the Asset-Backed Securities to be
disseminated. Thus, the scope of
proposal, as amended, is narrower than
the initial proposal. In addition, the
initial proposal underwent a full noticeand-comment period and generated no
comment from any other parties.
Accelerated approval would allow
FINRA to expand post-trade
transparency to transactions in the
Asset-Backed Securities set forth in the
amended proposal without delay.
Accordingly, the Commission believes
that good cause exists, consistent with
Sections 15A(b)(6) and 19(b) of the
Act,74 to approve the proposed rule
change, as amended by Amendment No.
1, on an accelerated basis.
73 See Securities Exchange Act Release No. 66829
(April 18, 2012), 77 FR 24748 (April 25, 2012)
(approving SR–FINRA–2012–020, which, among
other things, established real-time and historic
market data sets for certain Asset-Backed Securities
traded ‘‘To Be Announced’’); Securities Exchange
Act Release No. 68084 (October 23, 2012), 77 FR
65436 (October 26, 2012) (approving SR–FINRA–
2012–042, which, among other things, established
real-time and historic market data sets for certain
other Asset-Backed Securities).
74 15 U.S.C. 78o–3(b)(6); 15 U.S.C. 78s(b).
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V. Solicitation of Comments on
Amendment No. 1
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–2013–046 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–2013–046. 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
10:00 a.m. and 3:00 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–
2013–046 and should be submitted on
or before March 21, 2014.
VI. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,75 that the
75 15
PO 00000
U.S.C. 78s(b)(2).
Frm 00097
Fmt 4703
Sfmt 4703
proposed rule change (SR–FINRA–
2013–046), as modified by Amendment
No. 1, be, and it hereby is, approved on
an accelerated basis.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.76
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2014–04390 Filed 2–27–14; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–71606; File No. SR–
NYSEArca–2013–122]
Self-Regulatory Organizations; NYSE
Arca, Inc.; Order Instituting
Proceedings To Determine Whether To
Approve or Disapprove Proposed Rule
Change Relating to the Use of
Derivative Instruments by PIMCO Total
Return Exchange Traded Fund
February 24, 2014.
I. Introduction
On November 6, 2013, NYSE Arca,
Inc. (‘‘Exchange’’ or ‘‘NYSE Arca’’) filed
with the Securities and Exchange
Commission (‘‘Commission’’), pursuant
to Section 19(b)(1) of the Securities
Exchange Act of 1934 (‘‘Act’’ or
‘‘Exchange Act’’) 1 and Rule 19b–4
thereunder,2 a proposed rule change
relating to the use of derivative
instruments by the PIMCO Total Return
Exchange Traded Fund (‘‘Fund’’). The
proposed rule change was published for
comment in the Federal Register on
November 26, 2013.3 The Commission
received no comment letters on the
proposed rule change. On January 9,
2014, pursuant to Section 19(b)(2) of the
Act,4 the Commission designated a
longer period within which to either
approve the proposed rule change,
disapprove the proposed rule change, or
institute proceedings to determine
whether to disapprove the proposed
rule change.5 This order institutes
76 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 See Securities Exchange Act Release No. 70905
(November 20, 2013), 78 FR 70610 (‘‘Notice’’).
4 15 U.S.C. 78s(b)(2).
5 Securities Exchange Act Release No. 71271
(January 9, 2014), 79 FR 2736 (January 15, 2014).
The Commission determined that it was appropriate
to designate a longer period within which to take
action on the proposed rule change so that it has
sufficient time to consider the proposed rule
change. Accordingly, the Commission designated
February 24, 2014 as the date by which it should
approve, disapprove, or institute proceedings to
determine whether to disapprove the proposed rule
change.
1 15
E:\FR\FM\28FEN1.SGM
28FEN1
]]>Agencies
[Federal Register Volume 79, Number 40 (Friday, February 28, 2014)]
[Notices]
[Pages 11481-11486]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-04390]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-71607; File No. SR-FINRA-2013-046]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing of Amendment No. 1 and Order Granting
Accelerated Approval of Proposed Rule Change, as Modified by Amendment
No. 1, Relating to TRACE Reporting and Dissemination of Transactions in
Asset-Backed Securities
February 24, 2014.
I. Introduction
On November 13, 2013, the Financial Industry Regulatory Authority,
Inc. (``FINRA'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change relating to TRACE reporting and dissemination of
transactions in Asset-Backed Securities.\3\ The proposed rule change
was published for comment in the Federal Register on November 26,
2013.\4\ The Commission received one comment on the proposal.\5\ On
January 10, 2014, the Commission extended to February 24, 2014, the
time period in which to approve the proposed rule change, disapprove
the proposed rule change, or institute proceedings to determine whether
the proposed rule change should be disapproved.\6\ On February 14,
2014, FINRA responded to the comment \7\ and filed Amendment No. 1 to
the proposed rule change.\8\ On February 21, 2014, FINRA submitted a
supplemental response to the comment.\9\ The Commission is publishing
this notice to solicit comments on Amendment No. 1 from interested
persons, and is approving the proposed rule change, as modified by
Amendment No. 1, on an accelerated basis.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ The term ``Asset-Backed Security'' was previously defined in
FINRA Rule 6710(m). As a result of this proposed rule change, the
definition has been revised and relocated to FINRA Rule 6710(cc).
\4\ See Securities Exchange Act Release No. 70906 (November 20,
2013), 78 FR 70602 (``Notice'').
\5\ See letter to Elizabeth M. Murphy, Secretary, Commission,
from Chris Killian, Managing Director, Securitization, SIFMA, dated
December 17, 2013 (``SIFMA Letter'').
\6\ See Securities Exchange Act Release No. 71287 (January 10,
2014), 79 FR 2924 (January 16, 2014).
\7\ See letter to Elizabeth M. Murphy, Secretary, Commission,
from Kathryn M. Moore, Associate General Counsel, FINRA, dated
February 14, 2014 (``FINRA Letter I'').
\8\ In Amendment No. 1, FINRA revised the types of products that
would be included in the definition of ``Asset-Backed Security'' and
that, under the proposal, would be disseminated through TRACE and
subject to reduced reporting times. FINRA initially proposed to
include in the definition of ``Asset-Backed Securities,'' among
other things, collateralized debt obligations, collateralized loan
obligations, collateralized bond obligations, and non-agency backed
commercial mortgage-backed securities. Amendment No. 1 removes these
securities from the defined ``Asset-Backed Securities'' that would
be subject to reduced reporting times and disseminated under the
proposal. Amendment No. 1 also makes other minor, technical
revisions to the proposal.
\9\ See email to Michael Gaw, Assistant Director, Division of
Trading and Markets, Commission, from Kathryn M. Moore, Associate
General Counsel, FINRA, dated February 21, 2014 (``FINRA Letter
II'').
---------------------------------------------------------------------------
II. Description of the Amended Proposal
Historically, FINRA has utilized the Trade Reporting and Compliance
Engine (``TRACE'') to collect from its members and publicly disseminate
information on secondary over-the-counter transactions in corporate
debt securities, Agency Debt Securities,\10\ and certain primary market
transactions. For certain other asset types, FINRA utilized TRACE to
collect transaction information, but until recently, did not report
such information publicly. Recently, however, FINRA began to phase-in
dissemination of the transaction information for these previously non-
disseminated asset types. In the first two phases, FINRA implemented
dissemination of Agency Pass-Through Mortgage-Backed Securities and
SBA-Backed ABS.\11\
[[Page 11482]]
Next, FINRA sought, and the Commission approved, public dissemination
of transactions in TRACE-Eligible Securities effected as Rule 144A
transactions (provided that such transactions were in securities of the
same type as are subject to dissemination if effected in non-Rule 144A
transactions).\12\ FINRA now has proposed to provide for public
dissemination of a group of newly defined Asset-Backed Securities and
to make certain related changes to its rules, as described below.
---------------------------------------------------------------------------
\10\ The term ``Agency Debt Security'' is defined in FINRA Rule
6710(l).
\11\ On November 12, 2012, FINRA began disseminating
transactions in Agency Pass-Though Mortgage-Backed Securities traded
TBA. See Securities Exchange Act Release No. 66829 (April 18, 2012),
77 FR 24748 (April 25, 2012) (Order Approving SR-FINRA-2012-020);
FINRA's Regulatory Notice 12-26 (May 2012) and Regulatory Notice 12-
48 (November 2012). On July 22, 2013, FINRA began disseminating
Agency Pass-Through Mortgage-Backed Securities traded in Specified
Pool Transactions and SBA-Backed ABS traded TBA or in Specified Pool
Transactions. See Securities Exchange Act Release No. 68084 (October
23, 2012), 77 FR 65436 (October 26, 2012) (Order Approving SR-FINRA-
2012-042); FINRA's Regulatory Notice 12-56 (December 2012). The
terms ``TBA,'' ``Agency Pass-Through Mortgage-Backed Security,''
``Specified Pool Transaction,'' and ``SBA-Backed ABS'' are defined
in FINRA Rule 6710(u), (v), (x), and (bb), respectively.
\12\ See Securities Exchange Act Release No. 70345 (September 6,
2013), 78 FR 56251 (September 12, 2013) (Order Approving SR-FINRA-
2013-029); Securities Exchange Act Release No. 70691 (October 16,
2013), 78 FR 62788 (October 22, 2013) (SR-FINRA-2013-043) (together,
``Rule 144A Dissemination Amendments''); FINRA's Regulatory Notice
13-35 (announcing June 30, 2014 as the effective date for SR-FINRA-
2013-029 and SR-FINRA-2013-043). Given the Rule 144A Dissemination
Amendments, the instant proposal would result in the dissemination
of Asset-Backed Security transactions effected pursuant to Rule 144A
(in addition to Asset-Backed Security transactions not effected
pursuant to Rule 144A).
---------------------------------------------------------------------------
Dissemination and Definitional Amendments
FINRA has proposed to revise FINRA Rule 6750 to include Asset-
Backed Securities among the TRACE-Eligible Securities that FINRA will
disseminate publicly.\13\ In connection with this change, FINRA has
proposed to revise certain existing definitions in its rules and add
other, new definitions in order to delineate the specific Asset-Backed
Securities that would be subject to dissemination pursuant to FINRA
Rule 6750. Specifically, FINRA has proposed to re-name as ``Securitized
Products'' the broad group of securities currently defined as ``Asset-
Backed Securities'' in FINRA Rule 6710(m) \14\ and, in a proposed new
definition in FINRA Rule 6710(cc), to re-define the term ``Asset-Backed
Security'' more narrowly to mean:
---------------------------------------------------------------------------
\13\ See proposed Rule 6750 and Amendment No. 1.
\14\ See proposed FINRA Rule 6710(m). Proposed FINRA Rule
6710(m) also would replace the current rule's reference to Section
3(a)(77)(A) of the Act with a reference to Section 3(a)(79)(A) of
the Act. This is a technical change to coincide with renumbering to
Section 3(a)(77) of the Act implemented by Section 101(b)(1) of the
Jumpstart Our Business Startups act (``JOBS Act''). See Notice, 78
FR at 70604; see also Public Law 112-106, 126 Stat. 306 (2012).
a type of Securitized Product where the Asset-Backed Security is
collateralized by any type of financial asset, such as a consumer or
student loan, a lease, or a secured or unsecured receivable, and
excludes: (i) a Securitized Product that is backed by residential or
commercial mortgage loans, mortgage-backed securities, or other
financial assets derivative of mortgage-backed securities; (ii) an
SBA-Backed ABS as defined in paragraph (bb) traded To Be Announced
(``TBA'') as defined in paragraph (u) or in a Specified Pool
Transaction as defined in paragraph (x); and (iii) collateralized
debt, loan and bond obligations.\15\
---------------------------------------------------------------------------
\15\ Proposed FINRA Rule 6710(cc); see also Amendment No. 1.
FINRA believes that this proposed narrower definition is consistent
with industry usage. See Notice, 78 FR at 70603.
In addition, FINRA has proposed to provide further guidance
regarding the scope of this narrower definition of ``Asset-Backed
Security'' in proposed Supplementary Material .01 to FINRA Rule 6710,
which would state that the term ``Asset-Backed Security'' includes, but
---------------------------------------------------------------------------
is not limited to:
securities collateralized by the following types of assets and
securities: credit card receivables; automobile loans and leases;
student loans; home equity loans and home equity lines of credit;
aircraft leases; automobile floorplan and wholesale loans;
motorcycle loans and leases; recreational vehicle loans;
manufactured housing loans; commercial loans; tranches of other
Asset-Backed Securities; reinsurance; timeshare obligations; and
loans or other financial instruments generating a stream of payments
and guaranteed as to principal or interest (or both) by the Small
Business Administration (traded other than to be announced (``TBA'')
as defined in paragraph (u) or in a Specified Pool Transaction as
defined in paragraph (x)).\16\
---------------------------------------------------------------------------
\16\ Proposed Supplementary Material .01 to FINRA Rule 6710; see
also Notice, 78 FR at 70603-04 and Amendment No. 1.
Transactions included in the re-defined group of Asset-Backed
Securities, set forth in proposed Rule 6710(cc) (including Rule 144A
transactions in such securities) and Supplementary Material .01
thereto, will be publicly disseminated through TRACE as a result of the
proposed rule change.\17\ Securities excluded from the new definition
of Asset-Backed Security by subparts (i) through (iii) of proposed Rule
6710(cc) would not be disseminated under the proposal. FINRA has
represented that it will observe trading in the newly-disseminated
Asset-Backed Securities to monitor the impact of price transparency on
the market for these securities.\18\
---------------------------------------------------------------------------
\17\ See Notice, 78 FR at 70603-04.
\18\ See Notice, 78 FR at 70605.
---------------------------------------------------------------------------
FINRA also has proposed to define ``Collateralized Mortgage
Obligation'' in proposed new FINRA Rule 6710(dd).\19\ As defined,
Collateralized Mortgage Obligations would be excluded from the
definition of ``Asset-Backed Security'' by subpart (i) of proposed Rule
6710(cc), and thus transactions in Collateralized Mortgage Obligations
would not be publicly disseminated by TRACE pursuant to this proposed
rule change.\20\
---------------------------------------------------------------------------
\19\ See proposed Rule 6710(dd) and Amendment No. 1.
\20\ See Amendment No. 1.
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Reduction of Reporting Period
In connection with its proposal to publicly disseminate
transactions in certain Asset-Backed Securities,\21\ FINRA has proposed
to amend FINRA Rule 6730 to reduce the period for reporting Asset-
Backed Security transactions to TRACE. The reduction would occur in two
stages. First, FINRA would reduce the reporting period from no later
than the close of the TRACE system on the date of execution to no later
than 45 minutes from the time of execution.\22\ Second, after
approximately 180 days, the reporting period would be further reduced
from no later than 45 minutes from the time of execution to no later
than 15 minutes from the time of execution.\23\
---------------------------------------------------------------------------
\21\ Hereinafter, except where the context requires otherwise,
references to ``Asset-Backed Security'' and ``Securitized Product''
are to the new definitions of those terms.
\22\ See proposed Rule 6730(a)(3)(B)(i)(b). Exceptions for
transactions that are executed within 45 minutes of the close of the
TRACE system and for transactions executed when it is closed are set
forth in subparts a., c., and d. of proposed Rule 6730(a)(3)(B)(i).
\23\ See proposed Rule 6730(a)(3)(B)(ii), which incorporates by
reference Rule 6730(a)(1). Rule 6730(a)(1) requires that
transactions in TRACE-Eligible Securities be reported within 15
minutes of the time of execution, and also provides exceptions for
transactions in TRACE-Eligible Securities that are executed shortly
before the TRACE system closes and when it is closed.
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List or Fixed Offering Price and Takedown Transactions
According to FINRA, many Asset-Backed Securities are underwritten
using a syndicated process that is similar to the offering process for
corporate bonds.\24\ In syndicated offerings, there may be a number of
transactions that occur at the list or fixed offering price (or the
takedown price).\25\ Transactions in TRACE-Eligible Securities (except
for transactions in Securitized Products) that are effected in
accordance with the requirements of a List or Fixed Offering Price
Transaction \26\ or a Takedown
[[Page 11483]]
Transaction \27\ may be reported as late as T+1 during TRACE system
hours, as provided in FINRA Rule 6730(a)(2); such transactions are not
disseminated, as provided in FINRA Rule 6750(b)(3); and members are not
charged a reporting fee for such transactions, as provided in FINRA
Rule 7730(b)(1)(C).\28\
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\24\ See Notice, 78 FR at 70605.
\25\ See id. The terms ``List or Fixed Offering Price
Transaction'' and ``Takedown Transaction'' are defined in FINRA
Rules 6710(q) and 6710(r), respectively.
\26\ The term ``List or Fixed Offering Price Transaction'' is
defined in FINRA Rule 6710(q).
\27\ The term ``Takedown Transaction'' is defined in FINRA Rule
6710(r).
\28\ See Notice, 78 FR at 70605.
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In light of the similarity of the offering process for corporate
bonds and many Asset-Backed Securities, FINRA has proposed to amend
FINRA Rules 6710(q) and 6710(r) so that primary market Asset-Backed
Securities transactions that meet all of the requirements of a List or
Fixed Offering Price Transaction or a Takedown Transaction may be
treated in accordance with FINRA Rules 6730(a)(2), 6750(b)(3), and
7730(b)(1)(C).\29\
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\29\ See proposed FINRA Rules 6710(q) and 6710(r); see also
Notice, 78 FR at 70605. All primary market transactions in other
classes of Securitized Products will continue to be specifically
excluded from the definitions of List or Fixed Offering Price
Transaction and Takedown Transaction, because, in general, such
Securitized Products are structured, offered, and sold quite
differently than corporate bonds (i.e., a large number of
Securitized Products sales are for forward delivery, and most such
securities are not underwritten using a syndicated process
generating a large number of transactions occurring at the same
price). See Notice, 78 FR at 70605 n.28.
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Dissemination Caps
Currently, there are dissemination caps in place for disseminated
TRACE data, such that the actual size (volume) of a transaction over a
certain par value is not displayed.\30\ FINRA has proposed a $10
million dissemination cap for Asset-Backed Security transactions, which
would prevent the display in disseminated TRACE data of the actual size
(volume) of Asset-Backed Security transactions with an original par or
value over $10 million; rather, such transactions will be displayed as
``10MM+.'' \31\
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\30\ See Notice, 78 FR at 70605-06 and n.29. There are $5
million and $1 million caps for TRACE-Eligible Securities that are
rated Investment Grade and Non-Investment Grade, respectively; a $25
million cap for Agency Pass-Through Mortgage Backed Securities
traded TBA for good delivery; and a $10 million cap for Agency Pass-
Through Mortgage Backed Securities traded TBA not for good delivery,
Agency Pass-Through Mortgage-Backed Securities traded in Specified
Pool Transactions, and SBS-Backed ABS traded TBA and in Specified
Pool Transactions.
\31\ See Notice, 78 FR at 70606. In the Notice, FINRA stated
that--based on a sample period of transactions reported from May 16,
2011 through December 2012--approximately 17.6% of trades and
approximately 75.6% of original par or principal value traded in
Asset-Backed Securities transactions (other than Rule 144A
transactions) would have been subject to the $10MM+ dissemination
cap had these transactions been subject to public dissemination. For
Rule 144A transactions in Asset-Backed Securities over that same
time period, approximately 28.5% of trades and approximately 88.1%
of original par or principal value traded would have been
disseminated subject to the $10MM+ dissemination cap. See id. at n.
30. The Commission notes that these figures are based on the
definition of ``Asset-Backed Securities'' in the original proposal,
not the definition in Amendment No. 1.
---------------------------------------------------------------------------
Other Dissemination Protocols
Currently, the standard data elements that are disseminated for
TRACE-Eligible securities include, among other things, a dealer/
customer indicator (indicating the type of contra party) and a buy/sell
indicator.\32\ FINRA has stated that the Asset-Backed Security market
differs from the corporate bond market in that it has a smaller number
of participants that are largely institutional. As a result, market
participants have raised concerns with FINRA regarding protecting the
confidentiality of dealer and customer trading strategies, identities,
and positions in certain types of Asset-Backed Securities. To address
these concerns, FINRA has proposed not to disseminate the dealer/
customer and buy/sell indicators for Asset-Backed Security
transactions.\33\
---------------------------------------------------------------------------
\32\ Additional standard data elements include the CUSIP, the
time and date of the transaction, price, and the size (subject to
dissemination caps). Specified Pool Transactions are disseminated
subject to modified dissemination protocols. See Securities Exchange
Act Release No. 68084 (October 23, 2012), 77 FR 65436 (October 26,
2012) (Order Approving SR-FINRA-2012-042); FINRA Regulatory Notice
12-56 (December 2012).
\33\ See Notice, 78 FR at 70606.
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Data Availability
Currently, what is known as Asset-Backed Securities data--organized
as the ABS Data Set for real-time data and as the Historic ABS Data Set
for Historic TRACE Data \34\--includes all Securitized Products
transactions that are disseminated (i.e., TBA transactions and
Specified Pool Transactions). In light of the proposed definitional
amendments discussed above, however, FINRA has proposed to amend Rule
7730 to rename those data sets as the ``SP Data Set'' and ``Historic SP
Data Set.'' FINRA also has proposed to include in these data sets the
transaction data for the newly defined Asset-Backed Securities, which
would be disseminated under this proposal.\35\ Asset-Backed Securities
that are traded in Rule 144A transactions would be included in,
respectively, the Rule 144A Data Set, when available, and the Historic
Rule 144A Data Set, when available.\36\ FINRA does not propose to amend
the fees currently in effect for the SP Data Set and the Historic SP
Data Set. Similarly, when the Rule 144A Data Set and the Historic Rule
144A Data Set become available, disseminated information regarding Rule
144A transactions in Asset-Backed Securities would be included in such
data sets without any change to the applicable fees.\37\
---------------------------------------------------------------------------
\34\ A transaction in a disseminated TRACE-Eligible Security
becomes available as part of Historic TRACE Data no earlier than 18
months after the specific transaction is reported to TRACE. See
Notice, 78 FR at 70606 n.35.
\35\ See proposed FINRA Rule 7730; see also Notice, 78 FR at
70606 and n. 35.
\36\ See Notice, 78 FR at 70606.
\37\ See id.; see also Rule 144A Dissemination Amendments, supra
note 12.
---------------------------------------------------------------------------
Other Technical Changes
FINRA has proposed to eliminate certain provisions that have
expired and all cross-references thereto in FINRA Rule 6730(a) and to
make conforming changes.\38\ FINRA also has proposed to make conforming
and technical changes to the FINRA Rule 6700 Series and FINRA Rule 7730
to incorporate the proposed definitional amendments and new data set
names discussed above.\39\
---------------------------------------------------------------------------
\38\ See proposed FINRA Rules 6730(a)(3)(D) through
6730(a)(3)(G); see also Notice, 78 FR at 70606.
\39\ See Notice, 78 FR at 70606.
---------------------------------------------------------------------------
Effective Date of Proposed Rule Change
FINRA has stated that it would announce the effective date of the
proposed rule change in a Regulatory Notice to be published no later
than 60 days following Commission approval, and that the effective date
would be no later than 270 days following publication of that
Regulatory Notice.
III. Summary of Comments
The Commission received one comment on the proposal,\40\ and two
responses to the comment from FINRA.\41\ The commenter argues that the
proposal ``has the potential to negatively impact liquidity, as
previous proposals have done in the TBA, specified pool and the high-
yield markets.'' \42\ Therefore, the commenter requests ``that FINRA
not implement this proposal, and instead engage in further discussion
with the industry as to how best to preserve ABS market liquidity, and
re-propose this proposal after such discussions.'' \43\
---------------------------------------------------------------------------
\40\ See SIFMA Letter.
\41\ See FINRA Letter I; FINRA Letter II.
\42\ SIFMA Letter at 1.
\43\ Id.
---------------------------------------------------------------------------
According to the commenter, FINRA's prior implementation of post-
trade transparency in the high-yield bond market, and more recently in
the markets for mortgage-backed securities traded TBA and in specified
pools,\44\
[[Page 11484]]
has contributed to liquidity decreases in those markets; the commenter
believes that the result in the Asset-Backed Security market would be
the same.\45\ The commenter asserts that market makers are less willing
to take on large trades from their buy-side counterparties when the
identity of their position becomes immediately known.\46\ In addition,
the commenter references a recent study that, according to the
commenter, concluded that the implementation of mandatory transparency
through TRACE in the corporate bond market caused a significant
decrease in price dispersion for all bonds and significant decrease in
trading activity for certain categories of bonds.\47\ The commenter
states that the study's results indicate that mandated transparency may
help some investors and dealers through a decline in price dispersion,
while it harms others through a reduction in trading activity.
According to the commenter, in the markets where post-trade
transparency has already been implemented, the benefits of improved
price discovery have been far outweighed by the costs of decreased
liquidity.\48\
---------------------------------------------------------------------------
\44\ See supra notes 7 and 9.
\45\ See SIFMA Letter at 2.
\46\ See id.
\47\ See id. (citing Asquith, Covert, and Pathak, ``The Effects
of Mandatory Transparency in Financial Markets Design: Evidence from
the Corporate Bond Market'' (2013) (the ``Asquith et al. study'')).
\48\ See id.
---------------------------------------------------------------------------
In response, FINRA notes that TRACE has been subject to extensive
academic interest since its inception, and that studies have shown
multiple benefits of transparency, including a narrowing of the bid-ask
spread, reduction in trade execution costs, and improved valuation
precision in mark-to-market valuations.\49\ FINRA acknowledges the
study referenced by the commenter, and notes that the study examined
trading volume and the dispersion of transaction prices of corporate
bonds over the period July 1, 2002, through December 31, 2006--a period
during which FINRA implemented post-trade transparency in four stages.
According to FINRA, the Asquith et al. study evaluated the change in
dispersion of transaction prices and trading volume for windows of 90,
60, and 30 days before and after the implementation of each stage, and
for the time frame examined concluded that increases in post-trade
transparency were associated with a statistically significant decrease
in price dispersion in all stages, generally benefitting investors.
Further, FINRA asserts that the study found no negative impact on
trading activity for the first three stages of transparency
implementation, and it found a statistically significant decrease in
trading activity only for the last stage of dissemination, which was
composed of non-investment grade and inactively-traded bonds. FINRA
notes, however, that the study captured only the temporary adjustment
in trading activity for the 90 days after implementation of
dissemination, which FINRA states may have been a time period when
market participants were adjusting to the new information available.
---------------------------------------------------------------------------
\49\ See FINRA Letter I at 3 (citing, e.g., Goldstein,
Hotchkiss, and Sirri, ``Transparency and Liquidity: A Controlled
Experiment on Corporate Bonds'' (March 2006); Bessembinder, Maxwell,
and Venkataraman, ``Optimal Market Transparency: Evidence From the
Initiation of Trade Reporting in Corporate Bonds'' (January 2005);
and Cici, Gibson, and Merrick, ``Missing the Marks: Dispersion in
Corporate Bond Valuation'' (May 2008)).
---------------------------------------------------------------------------
Furthermore, FINRA states that, during the time period beyond 90
days from the last stage of dissemination, it appears that the trading
activity of such bonds recovered to pre-dissemination levels, while the
reduction in price dispersion was maintained. FINRA asserts this based
on its understanding of the information and analysis provided in the
same study referenced in the SIFMA Letter.\50\ Specifically, FINRA
notes that, for phase 3B bonds, which the authors identified as the
bonds that have experienced a large and significant reduction in
trading activity, Figure 1 on page 35 of the paper shows that the
average weekly daily trading volume, which was in the $200,000 to
$400,000 range when the final stage of transparency was implemented in
February 2005, declined below the $200,000 level over the next several
months after dissemination, but then by December and January 2006,
recovered to the $200,000 to $400,000 range.\51\
---------------------------------------------------------------------------
\50\ See FINRA Letter II.
\51\ See id. FINRA states that a similar trend is shown in
Figure 2 on page 36 of the Asquith et al. study.
---------------------------------------------------------------------------
In addition, FINRA disputes the commenter's assertion that the
implementation of post-trade transparency in the markets for mortgage-
backed securities traded TBA and in specified pools has caused
decreased liquidity in these markets. According to FINRA, while there
has been a decline in trading in these markets, there is no direct
evidence that transparency has contributed to the decline.\52\ FINRA
states that TRACE data and statistics published on SIFMA's Web site
indicate that the issuance of mortgage-related products has declined to
the same extent or greater than trading volumes, affecting both
disseminated and non-disseminated products.\53\ FINRA also believes
that market participants have been focused on macro factors in general,
and in particular the current and future impact of the Federal Reserve
buying program and any tapering thereof.\54\
---------------------------------------------------------------------------
\52\ See FINRA Letter I at 3-4.
\53\ See id. at 4.
\54\ See id.
---------------------------------------------------------------------------
The commenter also states that its members are ``generally in
agreement with the re-definition of ABS that includes securities backed
by consumer or student loans, a lease or a secured or unsecured
receivable but excludes Agency Pass-MBS, Agency CMOs and Agency and
Non-Agency RMBS.'' \55\ The commenter warns, however, that ``the
inclusion of CDOs, CLOs and Non-Agency-Backed CMBS is pressing the
revised definition of ABS beyond what is appropriate.'' \56\ According
to the commenter, unlike the consumer Asset-Backed Securities with
which they are grouped under the original proposal, the credit analysis
for CDOs, CLOs, and Non-Agency CMBS require extensive work and an in-
depth study of the underlying assets in order to formulate an opinion
on the value of the tranche.\57\ The commenter states, therefore, that
``[i]f prices were disseminated to the market on these securities
without appropriate consideration, it would likely be the case that
inexperienced investors could use the trade print in one junior bond as
a proxy for a nominally similar piece of paper.'' \58\ Furthermore, the
commenter cautions that disseminated prices for CMBS and CDO tranches
may be influenced by technical factors and thus ``TRACE prices may not
always reflect the fundamental credit risk of a security.'' \59\
---------------------------------------------------------------------------
\55\ SIFMA Letter at 3.
\56\ Id.
\57\ See id.
\58\ Id.
\59\ Id. at 4 (stating, for example, that ``it is not uncommon
in markets for deeply discounted legacy CMBS credit that a party may
seek to purchase a specific tranche as a means of obtaining control
rights in a transaction. As a result, a bond can trade at a
pronounced premium to its fundamental value because the control
right is worth a significant amount for a special servicer who can
extract value with special servicing and liquidation fees which are
not available to a typical investor'').
---------------------------------------------------------------------------
In its response, FINRA stated that it ``agrees that the credit
analysis for [these securities] differs from those Securitized Products
backed by consumer or student loans, a lease, or a secured or unsecured
receivable.'' \60\ Accordingly, in Amendment No. 1, FINRA revised the
proposal to exclude these securities--as well as collateralized bond
obligations--from the defined group of Asset-Backed Securities that
would be disseminated
[[Page 11485]]
under the proposal.\61\ FINRA states that, instead, it will consider
potential additional transparency in these securities in conjunction
with other tranched securities, such as Collateralized Mortgage
Obligations, as appropriate.\62\
---------------------------------------------------------------------------
\60\ FINRA Letter I at 2.
\61\ See id.; Amendment No. 1.
\62\ See FINRA Letter I at 2.
---------------------------------------------------------------------------
Finally, the commenter suggests an increased reporting period for
TRACE-reportable Regulation S securities, stating that they require a
manual and time-consuming booking process which would be difficult if
not impossible to complete within the proposed timeframes.\63\ In
response, FINRA states that it considers this suggestion to be outside
the scope of its proposal.\64\
---------------------------------------------------------------------------
\63\ See SIFMA Letter at 4.
\64\ See FINRA Letter I at 4. FINRA also reiterates that the
proposal is consistent with the Act and should be approved for the
reasons set forth in the proposal. See id.
---------------------------------------------------------------------------
IV. Discussion and Commission Findings
After careful review, the Commission finds that the proposed rule
change is consistent with the requirements of the Act and the rules and
regulations thereunder applicable to a national securities
association.\65\ In particular, the Commission finds that the proposed
rule change is consistent with Section 15A(b)(6) of the Act,\66\ which
requires, among other things, that FINRA's rules 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.
---------------------------------------------------------------------------
\65\ In approving this proposed rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
\66\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------
In approving the original TRACE rules, the Commission stated that
price transparency plays a fundamental role in promoting the fairness
and efficiency of U.S. capital markets.\67\ The Commission believes
that real-time dissemination of last-sale information could aid dealers
in deriving better quotations, because they would know the prices at
which other market participants had recently transacted in the same or
similar instruments. This information also could aid all market
participants in evaluating current quotations, because they could
inquire why dealer quotations might differ from the prices of recently
executed transactions. Furthermore, post-trade transparency affords
market participants a means of testing whether dealer quotations before
the last sale were close to the price at which the last sale was
executed. In this manner, post-trade transparency can promote price
competition between dealers and more efficient price discovery, and
ultimately lower transaction costs. For similar reasons, FINRA believes
that dissemination of Asset-Backed Security transaction information may
enhance price discovery, allow investors to better assess the quality
of their executions, assist broker-dealers in complying with best
execution obligations, and enable broker-dealers and other
institutional investors to improve the accuracy of their valuations of
their Asset-Backed Security positions.\68\ The Commission agrees.\69\
---------------------------------------------------------------------------
\67\ See Securities Exchange Act Release No. 43873 (January 23,
2001), 66 FR 8131, 8136 (January 29, 2001) (approving SR-NASD-99-65)
(``2001 TRACE Order'').
\68\ See Notice, 78 FR at 70607; see also FINRA Letter I, at 4.
\69\ See Edwards, A. K., Harris, L. E. & Piwowar, M. S.,
``Corporate Bond Market Transaction Costs and Transparency'' (June
2007); Goldstein, Hotchkiss, and Sirri, ``Transparency and
Liquidity: A Controlled Experiment on Corporate Bonds'' (March
2006); and Bessembinder, Maxwell, and Venkataraman, ``Optimal Market
Transparency: Evidence From the Initiation of Trade Reporting in
Corporate Bonds'' (January 2005).
---------------------------------------------------------------------------
The Commission has considered the commenter's argument that post-
trade transparency in the Asset-Backed Security market has the
potential to negatively impact liquidity in that market. The commenter
references an academic study that found that the implementation of
mandatory transparency through TRACE in the corporate bond market is
associated with a significant decrease in price dispersion for all
bonds and a significant decrease in trading activity for certain
categories of bonds. FINRA notes in response to the comment that the
study found a statistically significant decrease in trading activity
only in the last of the four stages of transparency implementation in
high-yield corporate bonds, and no impact on trading activity in the
first three stages.\70\ FINRA also notes that, according to the same
study, trading activity in those corporate bonds eventually normalized
to pre-dissemination levels, while the reduction in price dispersion
remained.\71\ The Commission notes that both the commenter and the
Asquith et al. study believe that mandated post-trade transparency
under TRACE has caused a reduction in price dispersion of the affected
bonds. This feature appears consistent with the view that post-trade
transparency reduces information asymmetries and promotes price
competition in the market. Although the Asquith et al. study claims
that post-trade transparency may cause a reduction in the level of
trading of illiquid bonds, the Commission also notes that some question
exists about whether that feature--even if real in the short term--
persists over time or is detrimental. The Commission believes that the
comment does not preclude approval of the proposal at this time,
particularly in light of FINRA's representation that it will ``observe
the trading in Asset-Backed Securities to monitor the impact of price
transparency in the market for Asset-Backed Securities.'' \72\
---------------------------------------------------------------------------
\70\ See FINRA Letter I.
\71\ See FINRA Letters I and II.
\72\ Notice, 78 FR at 70605.
---------------------------------------------------------------------------
The Commission believes that the proposed reduction in reporting
times for Asset-Backed Security transactions (except those that are
effected as primary market List or Fixed Offering Price Transactions or
Takedown Transactions) is an important corollary to the expansion of
post-trade transparency for such transactions. Reducing the reporting
period for these transactions as set forth in the proposal will result
in important trade information reaching the market more quickly, thus
contributing to enhanced price transparency for Asset-Backed
Securities. The Commission also believes that FINRA's two-stage phased
approach to implementing the reduced reporting period is reasonably
designed to ease the compliance burdens on those affected by the
proposal without significantly compromising FINRA's ability to
disseminate more timely transaction information. Further, the
Commission believes that it is reasonable and appropriate to allow
members that effect primary market Asset-Backed Security transactions
as List or Fixed Ordering Price Transactions or Takedown Transactions
to continue to take advantage of the more flexible treatment of those
transactions provided for in FINRA Rules 6730(a)(2), 6750(b)(3), and
7730(b)(1)(C).
The Commission believes that the proposed $10 million dissemination
cap for Asset-Backed Security transactions is reasonable and consistent
with the Act. FINRA has represented that it will observe the effects of
the $10 million dissemination cap on the market and may propose
modifications to the cap size in the future if warranted. The
Commission expects FINRA to periodically re-evaluate whether the
dissemination caps, including the caps for Asset-Backed Security
transactions being approved today, continue to be appropriate.
Furthermore, the Commission believes that the additional
[[Page 11486]]
proposed dissemination protocols for Asset-Backed Security
transactions, pursuant to which the dealer/customer and buy/sell
indicators would not be disseminated, strike an appropriate balance
between enhancing post-trade transparency and protecting counterparty
confidentiality.
The Commission further believes that including disseminated Asset-
Backed Security transaction data in the SP Data Set and Historic SP
Data Set (as renamed under the proposal) while maintaining the current
fee levels in effect for those data sets is reasonable and consistent
with the Act. The rules that establish the existing data sets have been
approved by the Commission,\73\ and including the additional Asset-
Backed Securities to be disseminated under the instant proposal in
those data sets does not appear to raise any issues. Finally, the
Commission believes that the proposal's minor, conforming, and
technical revisions to the FINRA Rule 6700 series and FINRA Rule 7730
are consistent with the Act.
---------------------------------------------------------------------------
\73\ See Securities Exchange Act Release No. 66829 (April 18,
2012), 77 FR 24748 (April 25, 2012) (approving SR-FINRA-2012-020,
which, among other things, established real-time and historic market
data sets for certain Asset-Backed Securities traded ``To Be
Announced''); Securities Exchange Act Release No. 68084 (October 23,
2012), 77 FR 65436 (October 26, 2012) (approving SR-FINRA-2012-042,
which, among other things, established real-time and historic market
data sets for certain other Asset-Backed Securities).
---------------------------------------------------------------------------
The Commission finds good cause to approve the proposed rule
change, as amended by Amendment No. 1, prior to the thirtieth day after
the date of publication of notice of filing thereof in the Federal
Register. The amendment responds to an issue raised by one commenter on
the proposal by excluding certain tranched securities from the Asset-
Backed Securities to be disseminated. Thus, the scope of proposal, as
amended, is narrower than the initial proposal. In addition, the
initial proposal underwent a full notice-and-comment period and
generated no comment from any other parties. Accelerated approval would
allow FINRA to expand post-trade transparency to transactions in the
Asset-Backed Securities set forth in the amended proposal without
delay. Accordingly, the Commission believes that good cause exists,
consistent with Sections 15A(b)(6) and 19(b) of the Act,\74\ to approve
the proposed rule change, as amended by Amendment No. 1, on an
accelerated basis.
---------------------------------------------------------------------------
\74\ 15 U.S.C. 78o-3(b)(6); 15 U.S.C. 78s(b).
---------------------------------------------------------------------------
V. Solicitation of Comments on Amendment No. 1
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-2013-046 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-2013-046. 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
10:00 a.m. and 3:00 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-2013-046 and should be
submitted on or before March 21, 2014.
VI. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\75\ that the proposed rule change (SR-FINRA-2013-046), as modified
by Amendment No. 1, be, and it hereby is, approved on an accelerated
basis.
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\75\ 15 U.S.C. 78s(b)(2).
\76\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\76\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-04390 Filed 2-27-14; 8:45 am]
BILLING CODE 8011-01-P
