Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of a Proposed Rule Change To Increase Transparency for CMO Transactions, 44065-44073 [2016-15918]
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Federal Register / Vol. 81, No. 129 / Wednesday, July 6, 2016 / Notices
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and Redemption Instruments will be
valued in the same manner as those
investment positions currently held by
the Funds. Applicants also seek relief
from the prohibitions on affiliated
transactions in section 17(a) to permit a
Fund to sell its shares to and redeem its
shares from a Fund of Funds, and to
engage in the accompanying in-kind
transactions with the Fund of Funds.3
The purchase of Creation Units by a
Fund of Funds directly from a Fund will
be accomplished in accordance with the
policies of the Fund of Funds and will
be based on the NAVs of the Funds.
9. Applicants also request relief to
permit a Feeder Fund to acquire shares
of another registered investment
company managed by the Adviser
having substantially the same
investment objectives as the Feeder
Fund (‘‘Master Fund’’) beyond the
limitations in section 12(d)(1)(A) and
permit the Master Fund, and any
principal underwriter for the Master
Fund, to sell shares of the Master Fund
to the Feeder Fund beyond the
limitations in section 12(d)(1)(B).
10. Section 6(c) of the Act permits the
Commission to exempt any persons or
transactions from any provision of the
Act if such exemption is necessary or
appropriate in the public interest and
consistent with the protection of
investors and the purposes fairly
intended by the policy and provisions of
the Act. Section 12(d)(1)(J) of the Act
provides that the Commission may
exempt any person, security, or
transaction, or any class or classes of
persons, securities, or transactions, from
any provision of section 12(d)(1) if the
exemption is consistent with the public
interest and the protection of investors.
Section 17(b) of the Act authorizes the
Commission to grant an order
permitting a transaction otherwise
prohibited by section 17(a) if it finds
that (a) the terms of the proposed
transaction are fair and reasonable and
do not involve overreaching on the part
of any person concerned; (b) the
proposed transaction is consistent with
the policies of each registered
investment company involved; and (c)
the proposed transaction is consistent
with the general purposes of the Act.
3 The requested relief would apply to direct sales
of shares in Creation Units by a Fund to a Fund of
Funds and redemptions of those shares. Applicants,
moreover, are not seeking relief from section 17(a)
for, and the requested relief will not apply to,
transactions where a Fund could be deemed an
Affiliated Person, or a Second-Tier Affiliate, of a
Fund of Funds because an Adviser or an entity
controlling, controlled by or under common control
with an Adviser provides investment advisory
services to that Fund of Funds.
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For the Commission, by the Division of
Investment Management, under delegated
authority.
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016–15919 Filed 7–5–16; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–78196; File No. SR–FINRA–
2016–023]
Self-Regulatory Organizations;
Financial Industry Regulatory
Authority, Inc.; Notice of Filing of a
Proposed Rule Change To Increase
Transparency for CMO Transactions
June 29, 2016.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’) 1 and Rule 19b–4 thereunder,2
notice is hereby given that on June 27,
2016, Financial Industry Regulatory
Authority, Inc. (‘‘FINRA’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I, II, and
III below, which Items have been
prepared by FINRA. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
FINRA is proposing to to [sic] amend
the FINRA Rule 6700 Series and the
Trade Reporting and Compliance Engine
(‘‘TRACE’’) dissemination protocols to
provide for dissemination of
transactions in an additional type of
Securitized Products—specifically,
collateralized mortgage obligations
(‘‘CMOs’’). In addition, FINRA is
proposing a corresponding change to
Rule 6730 to reduce the reporting period
for CMOs from end-of-day to 60
minutes, and also to amend Rule 6730
to simplify the reporting requirements
for transactions in CMOs executed prior
to issuance. FINRA further proposes
technical and conforming changes to the
FINRA Rule 6700 Series and Rule 7730
in connection with the changes
referenced above.
The text of the proposed rule change
is available on FINRA’s Web site at
https://www.finra.org, at the principal
office of FINRA and at the
Commission’s Public Reference Room.
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1 15
2 17
U.S.C. 78s(b)(1).
CFR 240.19b–4.
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44065
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission,
FINRA included statements concerning
the purpose of and basis for the
proposed rule change and discussed any
comments it received on the proposed
rule change. The text of these statements
may be examined at the places specified
in Item IV below. FINRA has prepared
summaries, set forth in sections A, B,
and C below, of the most significant
aspects of such statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule
Change
1. Purpose
FINRA proposes to amend the Rule
6700 Series and the TRACE
dissemination protocols to: (1) Provide
for the dissemination of transactions in
CMOs,3 an additional group of
Securitized Products 4 not yet subject to
dissemination; (2) reduce the reporting
timeframe for CMOs from end-of-day to
60 minutes; and (3) simplify the
reporting requirements for pre-issuance
CMO transactions. FINRA also proposes
technical and conforming changes to the
Rule 6700 Series and Rule 7730.
Background
FINRA requires members to report
transactions in any security that meets
the definition of ‘‘TRACE-Eligible
Security’’ 5 to TRACE. Most transactions
3 The term ‘‘Collateralized Mortgage Obligation,’’
or CMO, is defined in FINRA Rule 6710(dd) to
mean a type of Securitized Product backed by
Agency Pass-Through Mortgage-Backed Securities
as defined in paragraph (v), mortgage loans,
certificates backed by project loans or construction
loans, other types of mortgage-backed securities or
assets derivative of mortgage-backed securities,
structured in multiple classes or tranches with each
class or tranche entitled to receive distributions of
principal and/or interest according to the
requirements adopted for the specific class or
tranche, and includes a real estate mortgage
investment conduit (‘‘REMIC’’).
4 The term ‘‘Securitized Product’’ is defined in
Rule 6710(m) to mean a security collateralized by
any type of financial asset, such as a loan, a lease,
a mortgage, or a secured or unsecured receivable,
and includes but is not limited to an asset-backed
security as defined in Section 3(a)(79)(A) of the
Exchange Act, a synthetic asset-backed security,
and any residual tranche or interest of any security
specified above, which tranche or interest is a debt
security for purposes of paragraph (a) and the Rule
6700 Series.
5 Rule 6710 generally defines a ‘‘TRACE-Eligible
Security’’ as: (1) A debt security that is U.S. dollardenominated and issued by a U.S. or foreign private
issuer (and, if a ‘‘restricted security’’ as defined in
Securities Act Rule 144(a)(3), sold pursuant to
Securities Act Rule 144A); or (2) a debt security that
is U.S. dollar-denominated and issued or
Continued
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must be reported to TRACE within 15
minutes of the time of execution and are
subsequently disseminated.
Securitized Products were the last
major group of fixed income securities
to become subject to TRACE reporting.
Initially, FINRA received reports of
transactions in these products for
regulatory audit trail purposes only and
did not disseminate transaction data.
FINRA used the transaction reports it
received to study the liquidity and
trading characteristics of various types
of Securitized Products. Based on its
study, FINRA then started a phased
approach to disseminating transaction
information for certain Securitized
Products.
For the first phase, on November 12,
2012, FINRA began disseminating
transactions in Agency Pass-Through
Mortgage-Backed Securities traded To
Be Announced (‘‘TBA’’) (‘‘MBS TBA’’
transactions), which are the most liquid
types of Securitized Products.6 Next, on
July 22, 2013, FINRA began
disseminating transactions in Agency
Pass-Through Mortgage-Backed
Securities and SBA-Backed ABS (as
defined in FINRA Rule 6710(bb)) traded
in Specified Pool Transactions.7 On
June 30, 2014, FINRA began to
disseminate information on transactions
in TRACE-Eligible Securities effected as
Rule 144A transactions, provided that
such transactions were in securities that
would be subject to dissemination if
effected in non-Rule 144A transactions.8
And most recently, on June 1, 2015,
FINRA began to disseminate
transactions in Asset-Backed
Securities.9 Today, the remaining types
of Securitized Products not yet subject
to dissemination are CMOs, commercial
mortgage-backed securities (‘‘CMBSs’’),
and collateralized debt obligations
(‘‘CDOs’’).10 CMOs are the largest and
guaranteed by an ‘‘Agency’’ as defined in Rule
6710(k) or a ‘‘Government-Sponsored Enterprise’’ as
defined in Rule 6710(n).
6 See Securities Exchange Act Release No. 66829
(April 18, 2012), 77 FR 24748 (April 25, 2012)
(Order Approving File No. SR–FINRA–2012–020);
Regulatory Notice 12–26 (May 2012) and Regulatory
Notice 12–48 (November 2012).
7 See Securities Exchange Act Release No. 68084
(October 23, 2012), 77 FR 65436 (October 26, 2012)
(Order Approving File No. SR–FINRA–2012–042)
and Regulatory Notice 12–56 (December 2012).
8 See Securities Exchange Act Release No. 70345
(September 6, 2013), 78 FR 56251 (September 12,
2013) (Order Approving File No. SR–FINRA–2013–
029) and Regulatory Notice 13–35 (October 2013).
9 See Securities Exchange Act Release No. 71607
(February 24, 2014), 79 FR 11481 (February 28,
2014) (Order Approving File No. SR–FINRA–2013–
046) and Regulatory Notice 14–34 (August 2014).
10 A ‘‘Collateralized Debt Obligation,’’ or CDO,
would be defined in proposed FINRA Rule 6710(ff)
to mean a type of Securitized Product backed by
fixed-income assets (such as bonds, receivables on
loans, or other debt) or derivatives of these fixed-
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most actively traded of these remaining
Securitized Products types. In addition,
CMOs typically have relatively smaller
transaction sizes than those for CMBSs
and CDOs.
Current Proposal
FINRA is proposing to expand the
dissemination of Securitized Products to
include CMOs. Under the proposal, a
CMO transaction will be subject either
to dissemination immediately upon
receipt of the TRACE transaction report,
or to aggregate, periodic dissemination,
depending on the size of the transaction
and the number of transactions in the
CMO security during a given period.
Specifically, transactions in CMOs,
including transactions effected pursuant
to Securities Act Rule 144A, will be
subject to aggregate, periodic
dissemination on a weekly and monthly
basis where the transaction value is $1
million or more (calculated based upon
original principal balance) and where
there have been five or more
transactions of $1 million or more in the
reporting period reported by at least two
different market participant identifiers
(‘‘MPIDs’’).11 For the smaller-size
transactions—i.e., transactions valued
under $1 million (calculated based upon
original principal balance)—FINRA will
disseminate trade-by-trade information
immediately upon receipt by TRACE.12
income assets, structured in multiple classes or
tranches with each class or tranche entitled to
receive distributions of principal and/or interest in
accordance with the requirements adopted for the
specific class or tranche. A CDO includes, but is not
limited to, a collateralized loan obligation, or CLO,
and a collateralized bond obligation, or CBO.
11 For example, if five transactions occurred in a
particular CMO security during each of the four
weeks in a calendar month and were reported by
at least two unique MPIDs, then four weekly reports
would be disseminated; in addition, information on
those transactions would be included in the
aggregate monthly report for that calendar month.
If five transactions occurred over the course of a
calendar month, but did not occur during a single
week, then a weekly report would not be available
for that security (but the transaction information
would be included in the monthly report provided
the transactions were reported by at least two
unique MPIDs). For purposes of determining if a
CMO security has been reported by at least two
different MPIDs, FINRA notes that it would
consider an interdealer trade to be reported by one
MPID—the sell side dealer—even though the trade
is reported by both sides of the transaction.
12 Also in connection with the proposed
dissemination of information on CMO transactions,
FINRA proposes to amend Rule 7730 (fees for
TRACE) to reflect the addition of CMOs to the
applicable data sets. Disseminated periodic reports
will become available as part of the Securitized
Products Data Set and all CMO transactions—even
if not previously disseminated upon receipt or as
part of a periodic report—will become part of the
Historic Securitized Products Data Set in FINRA
Rule 7730. Similarly, disseminated periodic reports
for transactions in CMOs issued pursuant to Rule
144A will become part of the Rule 144A Data Set,
and all Rule 144A transactions in CMOs will
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The proposal will provide for this
approach to CMO dissemination by
amending FINRA Rule 6750
(Dissemination of Transaction
Information). Rule 6750 currently
contains two operative paragraphs—
paragraph (a), which provides generally
for the dissemination of TRACE-Eligible
Securities immediately upon receipt of
a transaction report, and paragraph (b),
which contains an exception to the
general dissemination provision in
paragraph (a) and which notes the
security or transaction types that are not
subject to dissemination. Currently, the
remaining Securitized Products—CMOs,
CMBSs, and CDOs, are found within
paragraph (b) and are therefore not
subject to dissemination.
Under the proposal, current paragraph
(b) will be replaced with a paragraph
that provides specifically for the
dissemination of larger-size ($1 million
or more) CMO transactions on a
periodic, rather than immediate, basis,
provided the transaction occurs in a
CMO security that meets the minimum
activity threshold described above (i.e.,
at least five transactions in the period
reported by at least two different
MPIDs). The exception paragraph,
which sets forth the transaction types
not subject to dissemination, will be
new paragraph (c). It will be revised to
note that the only Securitized Products
not subject to dissemination are CMBSs,
CDOs, and CMOs where the CMO
transaction value is $1 million or more
(calculated based upon original
principal balance) and the transaction
does not qualify for periodic
dissemination. However, as noted
above, all transactions in CMOs will
become part of the historic data sets
even if they were not subject to
dissemination upon receipt or periodic
dissemination.13
To facilitate the proposed
dissemination of CMOs, the proposal
will also amend Rule 6730(a)(3) to
reduce the time period for reporting to
TRACE transactions in CMOs to TRACE
executed on or after issuance.14
Currently, these CMO transactions must
be reported to TRACE no later than the
close of the TRACE system on the date
become part of the Historic Rule 144A Data Set. The
inclusion of this additional data in such data sets
will not affect the fees currently in effect.
13 See supra note 12.
14 As discussed in further detail below, reporting
requirements for transactions in a CMO prior to that
CMO’s issuance are addressed separately in FINRA
Rule 6730(a)(3)(C). FINRA notes that it will also
make a technical, clarifying edit to Rule 6730(a)(3)
that is otherwise unrelated to this proposal;
specifically, FINRA will delete language in Rule
6730(a)(3)(B) that describes the transitional
reporting phase for Asset-Backed Securities, since
the transitional phase is now complete.
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44067
FINRA rules must be designed to
prevent fraudulent and manipulative
acts and practices, to promote just and
equitable principles of trade, and, in
general, to protect investors and the
public interest. As discussed throughout
the filing, FINRA believes that the
proposed rule change will promote
greater transparency in the marketplace
for CMOs. Based on dialogue with a
variety of market participants, FINRA
believes the information it proposes to
disseminate would be valuable to assist
in price discovery, determination of
execution quality, and, in particular,
valuation of securities positions.
Furthermore, FINRA believes the
proposal strikes an appropriate balance
between promoting transparency and
preserving anonymity, which may
facilitate larger size trades and liquidity
provision. Based on FINRA’s ongoing
study of the trading characteristics of
Securitized Products, FINRA believes
this proposal is an important next phase
in dissemination that will position
FINRA to evaluate whether and how to
complete its expansion of dissemination
to cover all Securitized Product types.
FINRA further believes that the
proposed change to 60-minute trade
reporting will facilitate CMO
dissemination by ensuring that FINRA
is able to receive and disseminate CMO
transaction information in a timely
manner. Accordingly, FINRA believes
this element of the filing will help
promote transparency and enhance
investor protection and the public
interest.
Finally, FINRA believes the proposed
change to the reporting timeframe for
pre-issuance CMOs will further just and
equitable principles of trade by
providing greater clarity and promoting
compliance with applicable reporting
rules.
transparency in the markets for
additional Securitized Products. FINRA
believes the proposed dissemination of
transaction information for CMOs
would be valuable to assist in price
discovery, determination of execution
quality, and, in particular, valuation of
securities positions. FINRA believes the
proposed transition to 60-minute trade
reporting for transactions in CMOs
executed on or after issuance is
necessary to facilitate meaningful
dissemination of information for these
securities. Finally, FINRA believes the
proposed change to the reporting
timeframe for transactions in preissuance CMOs is necessary to simplify
the reporting process, given that some
firms, small and medium size firms in
particular, may have difficulty in
determining with accuracy and in a
timely manner when their reporting
obligations have been triggered.
2. Statutory Basis
FINRA believes that the proposed rule
change is consistent with the provisions
of Section 15A(b)(6) of the Act,17 which
requires, among other things, that
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of execution.15 Under the proposal,
paragraph (H) would be added to
require that transactions in these CMOs
must be reported to TRACE within 60
minutes of execution.16
Finally, FINRA proposes to modify
the reporting timeframe for pre-issuance
CMO transactions. FINRA is proposing
to amend Rule 6730(a)(3)(C) to provide
that transactions in CMOs that are
executed before the date of issuance of
the security must be reported no later
than the first settlement date of the
security. Under the current rule, firms
generally must report CMO transactions
that are executed prior to issuance on
the earlier of the business day that the
security is assigned a CUSIP, or the date
of issuance of the security. FINRA is
aware that some firms, particularly
small and mid-size firms, have had
difficulty in determining with accuracy
in a timely manner when the reporting
obligation has been triggered, due to
inconsistencies in communicating the
relevant information between
underwriters and trading parties. As a
result, these firms do not always report
trades in these instruments on the
earlier of the two dates specified in the
current rule. FINRA believes that,
because new issuances in CMOs
generally settle on the last business day
of the month, the amended proposal
would provide for a uniform reporting
deadline that can be easily ascertained
by all firms.
If the Commission approves the
proposed rule change, FINRA will
announce the operative date of the
proposed rule change in a Regulatory
Notice to be published no later than 90
days following Commission approval.
The operative date will be no later than
365 days following publication of the
Regulatory Notice announcing
Commission approval.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
FINRA does not believe that the
proposed rule change will result in any
burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act. FINRA has
undertaken an economic impact
assessment, as set forth below, to
analyze the regulatory need for the
proposed rule change, its potential
economic impacts, including
anticipated costs and benefits, and the
alternatives FINRA considered in
assessing how to best meet its regulatory
objectives.
(1) Dissemination of CMO Transactions
The proposed dissemination of CMO
transactions will enhance transparency,
which should benefit market
participants and clients via improved
market quality. However, while
enhanced transparency should provide
benefits broadly to the marketplace, it
may impose indirect costs on certain
market participants, like those whose
transaction information is subject to
dissemination. FINRA is cognizant of
the concern that the risk of information
leakage could potentially harm market
quality if it discourages liquidity
provision. Accordingly, FINRA staff
considered the potential for indirect
costs associated with providing
information publicly that might permit
competitors to reverse engineer the
disseminated data to produce private
15 See FINRA Rule 6730(a)(3)(A). As part of this
proposal, FINRA is proposing a technical, clarifying
change to Rule 6730(a)(3)(A). This paragraph
currently is titled ‘‘General Reporting
Requirements’’ for Securitized Products, but
because only CDOs and CMBSs will remain subject
to the paragraph after this proposal becomes
effective, FINRA will rename this paragraph to
make clear that applies specifically to CDOs and
CMBSs.
16 As with other TRACE-Eligible Securities that
are subject to 60-minute reporting, under proposed
Rules 6730(a)(3)(H)(iii)–(iv), transactions in CMOs,
CMBSs, and CDOs that are executed less than 60
minutes before the TRACE system closes, or after,
would need to be reported no later than 60 minutes
after TRACE opens the following business day.
17 15 U.S.C. 78o–3(b)(6).
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Need for the Rule
As discussed above, FINRA believes
this proposal is necessary and
appropriate to further promote
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Economic Impacts
FINRA believes that enhanced
transparency in CMOs will benefit
market participants, as discussed above,
by contributing to more efficient pricing
and better execution quality for market
participants and clients. However, the
proposed changes may impose direct
and indirect costs on market
participants; for example, the proposal
might impose direct costs associated
with more timely reporting of CMO
transactions and indirect costs
associated with the potential leakage of
proprietary information. In the analysis
below, we individually assess the
impact on market participants of each
proposed change—(1) dissemination of
CMO transactions, (2) reducing the
timeframe for reporting CMO
transactions, and (3) simplifying the
reporting requirements for pre-issuance
CMO transactions.
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information about trade participants,
their trade positions and possibly their
trading strategies.
To investigate whether dissemination,
as proposed, could potentially allow
market participants to reverse-engineer
the identities of broker-dealers or
positions, FINRA staff examined the
distribution of the number of MPIDs
reporting transactions in each CMO
CUSIP, over the time period spanning
May 13, 2011 to August 14, 2015. Table
1 suggests that trading activity in CMOs,
on a per-CUSIP basis, is quite
concentrated, with 32,200 CUSIPs—
33.3% of all CMO CUSIPs—in the
sample traded by only one MPID over
the sample period. These CUSIPs traded
by only one MPID are referred to as
‘‘concentrated’’ CUSIPs. There were
64,449 remaining CUSIPs in the sample
traded by two or more MPIDs, referred
to as ‘‘non-concentrated’’ CUSIPs.18
CUSIPs are classified as concentrated
and non-concentrated based on a
threshold of one MPID, as it represents
cases where the information about firm
activity is most concentrated.
TABLE 1—THE NUMBER OF DIFFERENT represents only 1.73% of transactions,
but 15.75% of the trading volume. This
MPIDS TRADING IN CMO CUSIPS
Number of
MPIDs
CUSIPs
1 ........................
2 ........................
3 ........................
4 ........................
5 ........................
6 ........................
7 ........................
8 ........................
9 ........................
10 ......................
11 ......................
12 ......................
13 ......................
14 ......................
15 ......................
15+ ....................
suggests that concentrated CUSIPs have
relatively larger trade sizes.
%
32,220
17,792
10,573
6,677
4,595
3,511
2,737
2,229
1,903
1,590
1,317
1,128
955
869
753
7,820
33.3
18.4
10.9
6.9
4.8
3.6
2.8
2.3
2.0
1.6
1.4
1.2
1.0
0.9
0.8
8.1
TABLE 2—AGGREGATE TRADING
ACTIVITY BY CONCENTRATION
Number of
transactions
Volume
($bil.)
HHI = 1 .............
HHI < 1 .............
50,714
2,879,089
$1,692
9,049
Total ...........
2,929,803
10,741
Table 3 reports that the typical
concentrated CUSIP trades only about
one to two times over the entire sample
period. For non-concentrated CUSIPs
reported by two or more MPIDs, the
Total ...........
96,669
100 typical CMO trades 44.67 times over the
sample period.19 In general,
Table 2 reports trading activity (the
concentrated CUSIPs have on average
number of transactions and trading
about half of the trading volume of nonvolume) for the sample by concentrated concentrated CUSIPs.
versus non-concentrated CUSIPs.
Trading activity in concentrated CUSIPs
TABLE 3—AVERAGE TRADING ACTIVITY PER CUSIP
Mean
Median
HHI = 1 ...............................................
Number of transactions/CUSIP ......................................................................
Transaction size ($mil.) ..................................................................................
Volume ($mil.) .................................................................................................
1.57
$33.37
$52.52
1.00
$10.60
$19.00
HHI < 1 ...............................................
Number of transactions/CUSIP ......................................................................
Transaction size ($mil.) ..................................................................................
Volume ($mil.) .................................................................................................
44.67
$3.14
$140.40
10.00
$0.03
$41.85
Overall ................................................
Number of transactions/CUSIP ......................................................................
Transaction size ($mil.) ..................................................................................
Volume ($mil.) .................................................................................................
30.31
$3.67
$111.11
5.00
$0.03
$30.67
FINRA staff also investigated the
trading activity above and below the
proposed threshold for immediate
dissemination upon receipt, $1 million
in original principal balance traded.
Table 4 reports the frequency of
transactions that would have fallen
above and below the proposed threshold
had they been in place during the
sample period, broken down by
concentrated and non-concentrated
CUSIPs. In the sample, 79.21% (0.36%
+ 78.85%) of transactions and 1.64%
(0.02% + 1.62%) of trading volume in
CMOs would have been below the
proposed threshold, and thus would
have been disseminated immediately
upon receipt to FINRA under the
proposal.
TABLE 4—DISTRIBUTION OF TRANSACTIONS ABOVE AND BELOW PROPOSED THRESHOLD
Number of
transactions
ehiers on DSK5VPTVN1PROD with NOTICES
HHI
HHI
HHI
HHI
=
=
<
<
1
1
1
1
Below Threshold ............................................................................
At/Above Threshold .......................................................................
Below Threshold ............................................................................
At/Above Threshold .......................................................................
18 Concentrated CUSIPs have a HerfindahlHirschman Index (HHI) of one, while nonconcentrated have an HHI that is less than one.
Algebraically, HHI is calculated as follows: HHI =
SNi = 1 si2 where si is the market share of firm i, and
there are N total firms in a market. HHI is a succinct
measure of market concentration, and it is widely
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10,526
40,188
2,310,110
568,979
used in analyses of monopoly power, antitrust
litigation, and other prominent issues in industrial
organization. The HHI of a market can range from
0 to 1 (some publications use 0 to 10,000, but the
interpretation is the same after adjusting for scale),
where HHI = 1 represents a perfectly concentrated
market (one firms controls the entire market) and
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Percent
0.36
1.37
78.85
19.42
Volume
($bil.)
$1.97
1,690.13
173.98
8,874.67
Percent
0.02
15.74
1.62
82.63
HHI = 0 represents a perfectly competitive market
(infinitely many firms have infinitesimally small
market share).
19 On average, CMOs trade in 10.74 days out of
1,071 days in the sample period.
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TABLE 4—DISTRIBUTION OF TRANSACTIONS ABOVE AND BELOW PROPOSED THRESHOLD—Continued
Number of
transactions
Total ......................................................................................................
The total number of transactions and
the trading volume that would be
disseminated under the $1 million
threshold and the minimum five-trade
2,929,803
per CUSIP requirement are presented in
Table 5. The table shows that
approximately 8.65% (6.24% + 2.41%)
of transactions and 28.63% (16.64% +
Percent
100.00
Volume
($bil.)
Percent
10,740.75
100.00
7.99%) of trading volume in CMOs
would be disseminated in weekly and
monthly reports.
TABLE 5—AGGREGATE PERCENTAGE OF TRANSACTIONS BY TYPE AND DISSEMINATION WITH MINIMUM TWO MPID
REQUIREMENT FOR PERIODIC REPORTS
Transactions
Volume
($bil.)
%
%
Immediate ........................................................................................................
Weekly .............................................................................................................
Monthly ............................................................................................................
Not dis. .............................................................................................................
2,320,636
182,893
70,528
355,746
79.21
6.24
2.41
12.14
176
1,787
858
7,919
1.64
16.64
7.99
73.73
Total ..........................................................................................................
2,929,803
100.00
10,741
100.00
Table 6 reports the average trade
characteristics by concentration at the
MPID level. As illustrated by the table,
79.29% of an MPID’s CMO transactions
would be disseminated immediately
upon receipt, with 0.18% in
concentrated CUSIPs and 79.11% in
non-concentrated CUSIPs. Similarly,
11.74% (9.19% + 2.55%) of CMO
transactions for the typical MPID would
be disseminated via weekly and
monthly periodic reports, with all
transactions in non-concentrated
CUSIPs. Finally, on average, 8.97% of
an MPID’s CMO transactions would not
be subject to any dissemination under
the proposal, with 0.36% of in
concentrated CUSIPs and 8.61% in nonconcentrated CUSIPs.
TABLE 6—AVERAGE TRADING ACTIVITY PER MPID BY DISSEMINATION FREQUENCY AND CONCENTRATION
(Number of MPIDs = 1,002)
% of transactions
HH = 1
ehiers on DSK5VPTVN1PROD with NOTICES
Immediate ........................................................................................................
Weekly .............................................................................................................
Monthly ............................................................................................................
Not dis. .............................................................................................................
This analysis suggests that
information leakage may not be a
significant issue based on the
concentration of trading activity in
certain CUSIPs. Tables 5 and 6 confirm
that it would be difficult to ascertain
significant information about a single
MPID’s trading strategy from both the
real time and periodic dissemination of
CMO trades, as less than 1% of trading
in concentrated CUSIPs is expected to
be disseminated. Moreover, there are no
concentrated CUSIPs where the
proposed rule would have led to
dissemination of all trades by any
individual MPID.20
20 463 MPIDs would have all of their CMO trades
disseminated immediately upon receipt; however,
none of those trades are in concentrated CUSIPs.
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The second proposed change,
reducing the reporting timeframe for
CMOs from end-of-day to 60 minutes is
intended to facilitate timely
dissemination of information for these
securities. However, FINRA is aware
that a narrower reporting window may
impose direct costs on firms to the
extent that the firms have to modify or
upgrade their reporting systems to
comply with the reduced time period
for transactions in CMOs executed on or
after issuance.
In a sample of 2,476,666 transactions
reported on the day of the execution, the
average and median reporting time after
execution are approximately 19 minutes
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HH < 1
0.18
0.00
0.00
0.36
(2) Reducing the Timeframe for
Reporting CMO Transactions
% of volume
79.11
9.19
2.55
8.61
HH = 1
0.13
0.02
0.00
0.85
HH < 1
58.17
20.46
4.31
16.05
and 33 seconds, respectively.21
Approximately 92% of CMO
transactions are currently reported to
TRACE within 60 minutes. Reports
received 60 minutes or more after the
transaction execution are significantly
larger than those that are reported
within 60 minutes.22
Of the 974 market participants that
reported CMO trades during the sample
period, 417 reported all transactions
21 The sample for the analysis of the reporting
timeframes excludes 453,137 ‘‘as of’’ trades that
were in the original sample, since such trades are
reported at least a day after the transaction day and
are disseminated with a ‘‘late’’ flag and are subject
to a fine.
22 Trades that are reported after 60 minutes have
an average transaction size of approximately $9.76
million, whereas the same figure is approximately
$2.76 million for trades that are reported within 60
minutes. The difference of $7.00 million is
statistically significant at the 1% level.
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within 60 minutes. Another 400 market
participants reported at least 90%, but
less than 100% of their CMO
transactions within 60 minutes of
execution. Finally, 157 market
participants reported less than 90% of
their transactions within 60 minutes; of
these, only six reported all of their
transactions more than 60 minutes after
execution, but each of the six reported
fewer than five trades during the sample
period.
This analysis suggests that many
market participants will require no
change in behavior to meet the proposed
rule, and, as such, should face no
material costs. A second group of
market participants currently meet the
proposed reporting standards at least
90% of the time, suggesting that their
costs for compliance should also be low.
The data indicate that there are a small
but material number of market
participants that currently do not report
in a manner consistent with the
proposed rule, but these firms engage in
small numbers of transactions in CMO
securities. The cost that these firms
would be expected to incur as a result
of the shorter reporting timeframe
would depend on the extent of the
modification or upgrade to the reporting
systems to stay in compliance with the
proposed rule.
ehiers on DSK5VPTVN1PROD with NOTICES
(3) Simplifying the Reporting
Requirements for Pre-Issuance CMO
Transactions
The final proposed change would
impact the reporting timeframe for preissuance CMO transactions and is
expected to benefit firms, since it is
intended to eliminate potential
confusion about when the reporting
obligation has been triggered. The
proposed requirement that transactions
in CMOs that are executed before the
issuance of the security must be
reported no later than the first
settlement date provides firms with
more time to report the transactions
than they have today.
Alternatives Considered
As discussed in detail below, FINRA
staff also considered the dissemination
of CMBSs and CDOs in addition to
CMOs. Likely due to differences in the
customers that trade Securitized
Products, CMOs typically have
relatively smaller transactions sizes than
those for CMBSs and CDOs and thus
would be more likely disseminated
under the thresholds applied in this
rule. For example, Table 5 above
demonstrates that 79.21% (0.36% +
78.85%) of CMO transactions would
have been below the proposed
threshold, and thus would have been
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disseminated immediately upon receipt
under the proposal, whereas, FINRA
staff found that, under the same
thresholds, only 29.51% and 37.92% of
CDO and CMBS transactions would
have been disseminated, respectively,
upon receipt. This observation suggests
that differences in average trade
characteristics may lead to different
outcomes for dissemination across
security types. Therefore, FINRA
believes that proceeding with CMO
dissemination is a sensible next step,
and it will continue to analyze the
potential for enhanced transparency for
the remaining Securitized Product
types.
FINRA staff also assessed whether the
five-transaction requirement for
periodic dissemination of trades in
weekly and monthly reports is
reasonable and appropriate based on
trading frequency. The staff found that
increasing the requirement from five to
ten transactions creates a significant
shift of transactions from aggregate,
periodic dissemination to no
dissemination. If the threshold were
increased to a minimum of 20
transactions, then approximately 96% of
trading volume would not be
disseminated.
A higher minimum transaction
number threshold may also result in
aggregate, periodic dissemination for
transactions reported by far fewer
market participants. For example, based
on the sample data referenced above
and assuming a five-transaction
threshold for periodic dissemination, 14
MPIDs would have had all of their
transactions disseminated weekly and
an additional three MPIDs would have
had all of their transactions
disseminated monthly. However, if the
minimum trade threshold were
increased to ten, there would only be a
single MPID whose transactions would
be consistently disseminated in weekly
reports, and another single MPID whose
transactions would be consistently
disseminated via monthly reports.
The analysis implies that increasing
the minimum transaction number
threshold for periodic dissemination
would dramatically reduce the amount
of information that is disseminated. In
addition, it may actually increase the
risk of reverse-engineering the identity
or trading strategies of the single or few
MPIDs whose trades would be subject to
dissemination under a higher minimum
transaction number threshold.
Another alternative that FINRA
considered was a 15-minute reporting
requirement for CMO transactions,
rather than the 60-minute requirement
that FINRA proposes in this filing. As
noted above, based on sample data that
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FINRA has analyzed, the median
reporting time for CMO transactions is
just under 20 minutes. Accordingly,
FINRA believes that a 15-minute
reporting requirement may impose
significantly greater costs than a 60minute requirement. Notably, FINRA
believes that the 60 minute requirement
is still expected to provide sufficiently
timely transparency to the market.
FINRA also notes that the proposed 60minute requirement for CMOs mirrors
the 60-minute requirement currently in
place for another type of Securitized
Product—agency pass-through
mortgage-backed securities traded to be
announced not good for delivery.
Finally, with respect to the reporting
process for pre-issuance CMOs, FINRA
considered requiring that transactions
be reported no later than two days prior
to the first settlement date. However,
FINRA understands that in many cases,
particularly for private label securities,
the characteristics of a new issue may
not be finalized until the first settlement
date of the securities. As a result, FINRA
is instead proposing that pre-issuance
CMO transactions be reported by the
first settlement date.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
The proposed rule change was
published for comment in Regulatory
Notice 15–04 (February 2015). Five
comments were received in response to
the Regulatory Notice.23 A copy of the
Regulatory Notice is attached as Exhibit
2a. Copies of the comment letters
received in response to the Regulatory
Notice are attached as Exhibit 2c. The
comments are summarized below.
As an initial step, prior to issuing
Regulatory Notice 15–04, FINRA staff
solicited industry input from several of
its industry advisory committees. At
this stage, as in the Regulatory Notice,
FINRA was contemplating expanding
dissemination to all remaining
Securitized Products, including CMOs,
CMBSs, and CDOs. FINRA was also
considering reducing the reporting
timeframe for these remaining
Securitized Products to 15 minutes. The
committees were generally supportive.
To the extent the committees raised
concerns, they were focused primarily
23 See Letters from Letters from the Financial
Information Forum, dated April 7, 2015 (‘‘FIF
Letter’’); Bond Dealers of America, dated April 9,
2015 (‘‘BDA Letter’’); Association of Institutional
INVESTORS, dated April 10, 2015 (‘‘INVESTORS
Letter’’); Bloomberg’s Valuation Service, dated
April 10, 2015 (‘‘BVAL Letter’’); and the Securities
Industry and Financial Markets Association, dated
April 13, 2015 (‘‘SIFMA Letter’’).
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on what an appropriate threshold would
be to determine whether transactions
are subject to immediate or periodic
dissemination. At the time FINRA
raised this proposal with the
committees, it was proposing immediate
dissemination for transactions below a
threshold of $1 million in transaction
size, and aggregate periodic reporting
for transactions greater than $1 million,
provided there were at least five trade
reports in the same security during the
applicable reporting period. FINRA
committed to vetting these proposed
thresholds more completely through the
Regulatory Notice comment process.
FINRA then published Regulatory
Notice 15–04 in February 2015 and
received five comments in response.
Like the industry advisory committees,
commenters focused primarily on the
merits of disseminating transaction
information for the remaining
Securitized Products, as well as the
thresholds proposed for immediate
versus aggregate, periodic reporting.
Some of the commenters also discussed
the elements of the proposal that would
have reduced the reporting timeframe
for the remaining Securities Products to
15 minutes.
Two of the commenters took different
views on the merits of expanding
dissemination to include the remaining
Securitized Products. The Association
of Institutional INVESTORS
(‘‘INVESTORS’’) strongly favored
dissemination because ‘‘transparency
will be extremely beneficial to all
market participants and greatly assist in
price discovery and in decreasing price
dispersion.’’ 24 In contrast, the
Securities Industry and Financial
Markets Association (‘‘SIFMA’’)
acknowledged that dissemination may
contribute to better price formation for
additional Securitized Products but
expressed its belief that dissemination
may negatively impact market liquidity.
In SIFMA’s view, liquidity should be
prioritized over enhancing price
discovery.25
With respect to the specific items of
transaction information FINRA
proposed in the Regulatory Notice to
disseminate, the Financial Information
Forum (‘‘FIF’’) argued that the
information disseminated for the
remaining Securitized Products should
align with the information disseminated
for Asset-Backed Securities. FIF
specifically recommended suppressing
the contra-party indicator and
identifying transactions that meet the
definition of a List or Fixed Offering
24 INVESTORS
25 See
Letter at 1.
SIFMA Letter at 1–2.
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Price Transaction.26 SIFMA similarly
argued that only secondary trades in
CMOs should be disseminated, to align
dissemination for additional Securitized
Products with dissemination for
corporate and agency debt and AssetBacked Securities. SIFMA also
expressed concerns about the ability to
reverse engineer transactions more
easily if last sale price and last sale date
information were included in the
periodic reports.27
Four of the commenters disagreed
with the $1 million real-time
dissemination threshold that FINRA
proposed in the Regulatory Notice,
although they took opposing views as to
whether the threshold would result in
too many or too few transactions being
subject to real-time dissemination.
According to INVESTORS, $1 million is
too low given that the market for
Securitized Products is primarily
institutional, so INVESTORS
recommended a $5 million threshold
instead.28 Another commenter,
Bloomberg’s Valuation Service
(‘‘BVAL’’) also stated that the $1 million
threshold is too low to provide relevant
pricing information to the market, since
less than 1% of the market trades below
$1 million, and the trades that do occur
below the threshold involve a different
buyer base and pricing model.29
On the other hand, two of the
commenters believed that the proposed
$1 million threshold was too high.
SIFMA stated that the threshold should
be lowered from $1 million to $100,000
‘‘to ensure only truly retail-sized
transactions’’ are subject to real-time
dissemination. According SIFMA,
setting the threshold at $1 million
would include inter-dealer trades as
well as retail, and disseminating
information on both types of
transactions could be ‘‘misleading’’ to
retail investors. Additionally, SIFMA
expressed its belief that disseminating
larger-size trades could harm liquidity
in an already illiquid marketplace.30
The Bond Dealers of America (‘‘BDA’’)
26 See FIF Letter at 2. The term ‘‘List or Fixed
Price Transaction’’ is defined in Rule 6710(q) to
mean a primary market sale transaction sold on the
first day of trading of a security, including an AssetBacked Security as defined in paragraph (cc), but
excluding any other Securitized Product as defined
in paragraph (m): (i) By a sole underwriter,
syndicate manager, syndicate member or selling
group member at the published or stated list or
fixed offering price, or (ii) in the case of a primary
market sale transaction effected pursuant to
Securities Act Rule 144A, by an initial purchaser,
syndicate manager, syndicate member or selling
group member at the published or stated fixed
offering price.
27 See SIFMA Letter at 3.
28 See INVESTORS Letter at 2–3.
29 See BVAL Letter at 1.
30 See SIFMA Letter at 2.
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44071
echoed the concern that disseminating
trades up to $1 million in value could
impact market pricing and liquidity and
impact trading strategies.31
Three of the commenters provided
views on the proposed five transaction
threshold for the dissemination of
aggregate periodic reports for larger-size
transactions. INVESTORS and BVAL
did not believe that there should be any
minimum number of transactions
required per reporting period to qualify
for dissemination, and that such a
minimum would restrict the proposal’s
usefulness.32 In contrast, SIFMA argued
that the five transaction minimum was
too low, and believed that it should be
raised from five to 20, because
‘‘[l]iquidity in the securitized products
markets will be least impacted by price
dissemination if only truly actively
traded CUSIPs are captured in the
weekly and monthly reports.’’ 33
One commenter also addressed the
proposed reduction of the reporting
timeframe to 15 minutes for transactions
in the remaining Securitized Products.
BDA expressed concern that a reduced
reporting timeframe could have a
disproportionate impact on smaller
dealers and may result in these products
being traded less by dealers and more by
banking institutions that do not have to
comply with TRACE reporting
requirements. BDA stated that
additional Securitized Products
typically trade in ‘‘odd lot’’ sizes, where
liquidity has traditionally been
provided by small to medium size
dealers, who would face ‘‘significant
challenges’’ complying with a 15minute reporting requirement.34
Finally, three of the commenters
addressed the element of the proposal
that would simplify the reporting
process for pre-issuance CMOs, which
in the Regulatory Notice would have
required reporting no later than two
days prior to the first settlement date,
with varying levels of support. SIFMA
strongly supported the change as
proposed.35 BDA expressed support for
the proposed change, but recommended
that the reporting deadline be moved
back further, to settlement minus one
day.36 FIF recommended greater
relaxation of the reporting timeframe,
proposing a settlement date deadline,
rather than settlement minus two.
31 See
32 See
BDA Letter at 3.
INVESTORS Letter at 2–3 and BVAL Letter
at 1.
33 See SIFMA Letter at 2–3. This commenter
further asked that the proposed aggregate periodic
reports not include last price and trade date, to
minimize the potential for reverse engineering.
34 See BDA Letter at 2–3.
35 See SIFMA Letter at 3.
36 See BDA Letter at 4.
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According to FIF, information for preissuance CMOs ‘‘is not consistently
available two days prior to the first
settlement date.’’ 37
FINRA carefully considered the
committee views and written comments.
After analyzing this feedback, FINRA
believes it is appropriate to proceed
with the proposal as described and
explained above in the filing, which has
been modified from what FINRA
proposed in Regulatory Notice 15–04.
Based on FINRA’s continued study of
the impact of dissemination on TRACEEligible Securities, and Securitized
Products in particular, in addition to
dialogue with a variety of market
participants and the feedback received
on Regulatory Notice 15–04, FINRA
believes the proposed dissemination of
transaction information for CMOs
would be valuable to assist in price
discovery, determination of execution
quality, and, in particular, valuation of
securities positions. FINRA recognizes,
however, that CMOs generally are more
complex and less fungible than the
securities that are currently subject to
dissemination. As a result, FINRA
believes it is important to calibrate its
proposal to provide for tiered
dissemination of these products in a
way that promotes transparency while
minimizing potential negative impacts
on liquidity. Importantly, while FINRA
has decided not to expand
dissemination to CMBSs and CDOs at
this time, FINRA believes this proposal
is a careful step towards enhanced
transparency for these remaining
Securitized Product types, and that it
will allow FINRA and market
participants to consider how best to
approach the final phase of
dissemination expansion.
In an effort to further calibrate the
proposal to provide additional
safeguards against the risk of reverseengineering, FINRA modified the
minimum security activity threshold
first proposed in Regulatory Notice 15–
04 for periodic reporting. The
Regulatory Notice proposed to
disseminate larger-size transactions ($1
million or more) on an aggregate
periodic basis provided there were five
or more transactions in the security
during the reporting period. In response
to the feedback FINRA received, FINRA
is now proposing to disseminate
aggregate periodic reports for larger-size
transactions provided there are five or
more transactions in the security during
the reporting period, and further that
the transactions must be reported by at
least two different MPIDs. FINRA
believes that this modified threshold for
37 See
FIF Letter at 2.
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aggregate periodic reporting will further
the interests of transparency while being
sensitive to the confidentiality of
positions or trading strategies,
particularly in securities that trade in a
concentrated market made by just one
dealer.
Concerning the specific items of
transaction information that FINRA
would disseminate for CMOs, FINRA
has modified the proposal in part to
reflect the input it received from
commenters. Specifically, FINRA will
remove counterparty information from
transactions that are disseminated and
will also remove the data fields that it
proposed in Regulatory Notice 15–04 for
the periodic reports that would have
conveyed last sale price, last sale date,
customer buy, customer sell, and
interdealer prices. FINRA believes these
modifications are appropriate to address
commenters’ concerns about reverse
engineering. FINRA has not modified
the proposal, however, in response to
commenters’ suggestion to suppress
new issue transactions in CMOs. The
definition of List or Fixed Price
Transaction does not apply to CMOs.
FINRA believes that redefining the term
List or Fixed Price Transaction to
include CMOs would result in a
significantly less effective proposal,
according to input FINRA has received
from various market participants.
Concerning the reporting timeframe
for transactions in CMOs executed on or
after issuance, FINRA modified its
proposal to allow for 60-minute
reporting rather than 15-minute
reporting. FINRA believes this change is
appropriate to minimize firms’ reporting
burdens while improving the timeliness
in the receipt and dissemination of
CMO transaction information. FINRA
notes that the proposed 60-minute
timeframe is the same as the reporting
requirement for other Securitized
Products, namely, agency pass-through
mortgage-backed securities traded to be
announced not for good delivery.
Finally, FINRA has modified its
approach to simplifying the reporting
process for pre-issuance CMOs from
what it proposed in its Regulatory
Notice. As noted above, FINRA
understands that in many cases,
particularly for private label securities,
the characteristics of a new issue may
not be finalized until the first settlement
date of the securities. As a result, FINRA
is no longer proposing a reporting
deadline two days prior to the first
settlement date, but is instead proposing
that pre-issuance CMO transactions be
reported by the first settlement date.
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III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of
publication of this notice in the Federal
Register or within such longer period (i)
as the Commission may designate up to
90 days of such date if it finds such
longer period to be appropriate and
publishes its reasons for so finding or
(ii) as to which the self-regulatory
organization consents, the Commission
will:
(A) By order approve or disapprove
such proposed rule change, or
(B) institute proceedings to determine
whether the proposed rule change
should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
FINRA–2016–023 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Brent J. Fields, Secretary, Securities
and Exchange Commission, 100 F Street
NE., Washington, DC 20549–1090.
All submissions should refer to File
Number SR–FINRA–2016–023. 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 such
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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–
2016–023, and should be submitted on
or before July 27, 2016.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.38
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016–15918 Filed 7–5–16; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–78194; File No. SR–
BatsBYX–2016–16]
Self-Regulatory Organizations; Bats
BYX Exchange, Inc.; Notice of Filing
and Immediate Effectiveness of a
Proposed Rule Change To Remove
Interpretation and Policy .01 From Rule
11.13, Order Execution and Routing
June 29, 2016.
Pursuant to section 19(b)(1) of the
Securities Exchange Act of 1934 (the
‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on June 23,
2016, Bats BYX Exchange, Inc. (the
‘‘Exchange’’ or ‘‘BYX’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I and II
below, which Items have been prepared
by the Exchange. The Exchange has
designated this proposal as a ‘‘noncontroversial’’ proposed rule change
pursuant to section 19(b)(3)(A) of the
Act 3 and Rule 19b–4(f)(6) thereunder,4
which renders it effective upon filing
with the Commission. The Commission
is publishing this notice to solicit
comments on the proposed rule change
from interested persons.
ehiers on DSK5VPTVN1PROD with NOTICES
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange filed a proposal to
remove Interpretation & Policy .01 from
Exchange Rule 11.13, as further
described below.
38 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 15 U.S.C. 78s(b)(3)(A).
4 17 CFR 240.19b–4(f)(6).
15:04 Jul 05, 2016
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant parts of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule
Change
1. Purpose
Introduction
In 2011, the Exchange identified an
inefficiency in its handling of certain
non-displayed orders resting on the
Exchange at a price equal to the
Exchange’s best displayed orders on the
opposite side of the market (‘‘Locking
Price’’) (the non-displayed orders at the
Locking Price, ‘‘Non-Displayed
Orders’’). Similarly, the Exchange
identified an inefficiency in its handling
of certain displayed orders that were
ranked at the Locking Price and
displayed at a permissible price one
minimum price variation away from the
Locking Price (such orders ‘‘Resting
Order Subject to NMS Price Sliding’’).
In order to avoid an apparent issue
under its then-existing priority rule, the
Exchange was rejecting incoming orders
that were otherwise marketable against
the Non-Displayed Orders or the Resting
Orders Subject to NMS Price Sliding. In
order to optimize available liquidity for
incoming orders and to provide price
improvement for market participants,
the Exchange proposed in May of 2011
to execute a resting Non-Displayed
Order or Resting Order Subject to NMS
Price Sliding at one-half minimum price
variation less than the Locking Price in
the case of a bid and one-half minimum
price variation more than the Locking
Price in the case of an offer.5
5 See Securities Exchange Act Release No. 64476
(May 12, 2011), 76 FR 28826 (May 18, 2011) (SR–
BYX–2011–009) (‘‘2011 Proposal’’). The reference to
the most ‘‘aggressive’’ price, as used in that filing,
means for bids the highest price the User is willing
1 15
VerDate Sep<11>2014
The text of the proposed rule change
is available at the Exchange’s Web site
at www.batstrading.com, at the
principal office of the Exchange, and at
the Commission’s Public Reference
Room.
Jkt 238001
PO 00000
Frm 00088
Fmt 4703
Sfmt 4703
44073
To ease concerns that these new
order-handling procedures could be
abused solely for the purpose of
obtaining executions at one-half
minimum price variations—although
there was no evidence to suggest this
might occur—the Exchange included
Interpretation and Policy .01 to Rule
11.13 stating:
The Exchange will consider it inconsistent
with just and equitable principles of trade to
engage in a pattern or practice of using NonDisplayed Orders or orders subject to price
sliding solely for the purpose of executing
such orders at one-half minimum price
variation from the locking price. Evidence of
such behavior may include, but is not limited
to, a User’s pattern of entering orders at a
price that would lock or be ranked at the
price of a displayed quotation and cancelling
orders when they no longer lock the
displayed quotation.
The Exchange also stated in the 2011
Proposal that it would conduct
surveillance to monitor for such
potential abuse.6
The Commission approved the 2011
Proposal,7 and the Exchange has
conducted nearly five years of
surveillance as it promised in the 2011
Proposal. After this lengthy period of
surveillance, the Exchange has
determined that there is no evidence
that market participants attempt to use
the Exchange’s order handling
procedures in Rule 11.13 solely to
obtain executions at one-half minimum
price variations. Further, the Exchange
has found no way in which a market
participant could abuse these order
handling procedures. It is the
Exchange’s position, therefore, that
Interpretation and Policy .01 and its
corollary surveillance is now
unnecessary. The Exchange proposes to
remove the unnecessary Interpretation
and Policy and to discontinue the
corollary surveillance.
Background
Prior to the implementation of the
2011 Proposal, consistent with the
Exchange’s rule regarding priority of
orders, Rule 11.12, in order to avoid an
apparent priority issue under the
Exchange’s rules Non-Displayed Orders
and Resting Orders Subject to NMS
Price Sliding were not executed by the
Exchange pursuant to Rule 11.13 when
such orders would be executed at a
Locking Price. Specifically, if incoming
to pay, and for offers the lowest price at which the
User is willing to sell.
6 See 2011 Proposal, supra note 5, at 28829.
7 See Securities Exchange Act Release No. 64753
(June 27, 2011), 76 FR 38714 (July 1, 2011) (SR–
BYX–2011–009) (Order Approving a Proposed Rule
Change To Amend BYX Rule 11.9, Entitled ‘‘Orders
and Modifiers’’ and BYX Rule 11.13, Entitled
‘‘Order Execution’’) (‘‘2011 Approval’’).
E:\FR\FM\06JYN1.SGM
06JYN1
]]>Agencies
[Federal Register Volume 81, Number 129 (Wednesday, July 6, 2016)]
[Notices]
[Pages 44065-44073]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-15918]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-78196; File No. SR-FINRA-2016-023]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing of a Proposed Rule Change To Increase
Transparency for CMO Transactions
June 29, 2016.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on June 27, 2016, Financial Industry Regulatory Authority, Inc.
(``FINRA'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been prepared by FINRA. The Commission
is publishing this notice to solicit comments on the proposed rule
change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
FINRA is proposing to to [sic] amend the FINRA Rule 6700 Series and
the Trade Reporting and Compliance Engine (``TRACE'') dissemination
protocols to provide for dissemination of transactions in an additional
type of Securitized Products--specifically, collateralized mortgage
obligations (``CMOs''). In addition, FINRA is proposing a corresponding
change to Rule 6730 to reduce the reporting period for CMOs from end-
of-day to 60 minutes, and also to amend Rule 6730 to simplify the
reporting requirements for transactions in CMOs executed prior to
issuance. FINRA further proposes technical and conforming changes to
the FINRA Rule 6700 Series and Rule 7730 in connection with the changes
referenced above.
The text of the proposed rule change is available on FINRA's Web
site at https://www.finra.org, at the principal office of FINRA and at
the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, FINRA included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. FINRA has prepared summaries, set forth in sections A,
B, and C below, of the most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule Change
1. Purpose
FINRA proposes to amend the Rule 6700 Series and the TRACE
dissemination protocols to: (1) Provide for the dissemination of
transactions in CMOs,\3\ an additional group of Securitized Products
\4\ not yet subject to dissemination; (2) reduce the reporting
timeframe for CMOs from end-of-day to 60 minutes; and (3) simplify the
reporting requirements for pre-issuance CMO transactions. FINRA also
proposes technical and conforming changes to the Rule 6700 Series and
Rule 7730.
---------------------------------------------------------------------------
\3\ The term ``Collateralized Mortgage Obligation,'' or CMO, is
defined in FINRA Rule 6710(dd) to mean a type of Securitized Product
backed by Agency Pass-Through Mortgage-Backed Securities as defined
in paragraph (v), mortgage loans, certificates backed by project
loans or construction loans, other types of mortgage-backed
securities or assets derivative of mortgage-backed securities,
structured in multiple classes or tranches with each class or
tranche entitled to receive distributions of principal and/or
interest according to the requirements adopted for the specific
class or tranche, and includes a real estate mortgage investment
conduit (``REMIC'').
\4\ The term ``Securitized Product'' is defined in Rule 6710(m)
to mean a security collateralized by any type of financial asset,
such as a loan, a lease, a mortgage, or a secured or unsecured
receivable, and includes but is not limited to an asset-backed
security as defined in Section 3(a)(79)(A) of the Exchange Act, a
synthetic asset-backed security, and any residual tranche or
interest of any security specified above, which tranche or interest
is a debt security for purposes of paragraph (a) and the Rule 6700
Series.
---------------------------------------------------------------------------
Background
FINRA requires members to report transactions in any security that
meets the definition of ``TRACE-Eligible Security'' \5\ to TRACE. Most
transactions
[[Page 44066]]
must be reported to TRACE within 15 minutes of the time of execution
and are subsequently disseminated.
---------------------------------------------------------------------------
\5\ Rule 6710 generally defines a ``TRACE-Eligible Security''
as: (1) A debt security that is U.S. dollar-denominated and issued
by a U.S. or foreign private issuer (and, if a ``restricted
security'' as defined in Securities Act Rule 144(a)(3), sold
pursuant to Securities Act Rule 144A); or (2) a debt security that
is U.S. dollar-denominated and issued or guaranteed by an ``Agency''
as defined in Rule 6710(k) or a ``Government-Sponsored Enterprise''
as defined in Rule 6710(n).
---------------------------------------------------------------------------
Securitized Products were the last major group of fixed income
securities to become subject to TRACE reporting. Initially, FINRA
received reports of transactions in these products for regulatory audit
trail purposes only and did not disseminate transaction data. FINRA
used the transaction reports it received to study the liquidity and
trading characteristics of various types of Securitized Products. Based
on its study, FINRA then started a phased approach to disseminating
transaction information for certain Securitized Products.
For the first phase, on November 12, 2012, FINRA began
disseminating transactions in Agency Pass-Through Mortgage-Backed
Securities traded To Be Announced (``TBA'') (``MBS TBA'' transactions),
which are the most liquid types of Securitized Products.\6\ Next, on
July 22, 2013, FINRA began disseminating transactions in Agency Pass-
Through Mortgage-Backed Securities and SBA-Backed ABS (as defined in
FINRA Rule 6710(bb)) traded in Specified Pool Transactions.\7\ On June
30, 2014, FINRA began to disseminate information on transactions in
TRACE-Eligible Securities effected as Rule 144A transactions, provided
that such transactions were in securities that would be subject to
dissemination if effected in non-Rule 144A transactions.\8\ And most
recently, on June 1, 2015, FINRA began to disseminate transactions in
Asset-Backed Securities.\9\ Today, the remaining types of Securitized
Products not yet subject to dissemination are CMOs, commercial
mortgage-backed securities (``CMBSs''), and collateralized debt
obligations (``CDOs'').\10\ CMOs are the largest and most actively
traded of these remaining Securitized Products types. In addition, CMOs
typically have relatively smaller transaction sizes than those for
CMBSs and CDOs.
---------------------------------------------------------------------------
\6\ See Securities Exchange Act Release No. 66829 (April 18,
2012), 77 FR 24748 (April 25, 2012) (Order Approving File No. SR-
FINRA-2012-020); Regulatory Notice 12-26 (May 2012) and Regulatory
Notice 12-48 (November 2012).
\7\ See Securities Exchange Act Release No. 68084 (October 23,
2012), 77 FR 65436 (October 26, 2012) (Order Approving File No. SR-
FINRA-2012-042) and Regulatory Notice 12-56 (December 2012).
\8\ See Securities Exchange Act Release No. 70345 (September 6,
2013), 78 FR 56251 (September 12, 2013) (Order Approving File No.
SR-FINRA-2013-029) and Regulatory Notice 13-35 (October 2013).
\9\ See Securities Exchange Act Release No. 71607 (February 24,
2014), 79 FR 11481 (February 28, 2014) (Order Approving File No. SR-
FINRA-2013-046) and Regulatory Notice 14-34 (August 2014).
\10\ A ``Collateralized Debt Obligation,'' or CDO, would be
defined in proposed FINRA Rule 6710(ff) to mean a type of
Securitized Product backed by fixed-income assets (such as bonds,
receivables on loans, or other debt) or derivatives of these fixed-
income assets, structured in multiple classes or tranches with each
class or tranche entitled to receive distributions of principal and/
or interest in accordance with the requirements adopted for the
specific class or tranche. A CDO includes, but is not limited to, a
collateralized loan obligation, or CLO, and a collateralized bond
obligation, or CBO.
---------------------------------------------------------------------------
Current Proposal
FINRA is proposing to expand the dissemination of Securitized
Products to include CMOs. Under the proposal, a CMO transaction will be
subject either to dissemination immediately upon receipt of the TRACE
transaction report, or to aggregate, periodic dissemination, depending
on the size of the transaction and the number of transactions in the
CMO security during a given period.
Specifically, transactions in CMOs, including transactions effected
pursuant to Securities Act Rule 144A, will be subject to aggregate,
periodic dissemination on a weekly and monthly basis where the
transaction value is $1 million or more (calculated based upon original
principal balance) and where there have been five or more transactions
of $1 million or more in the reporting period reported by at least two
different market participant identifiers (``MPIDs'').\11\ For the
smaller-size transactions--i.e., transactions valued under $1 million
(calculated based upon original principal balance)--FINRA will
disseminate trade-by-trade information immediately upon receipt by
TRACE.\12\
---------------------------------------------------------------------------
\11\ For example, if five transactions occurred in a particular
CMO security during each of the four weeks in a calendar month and
were reported by at least two unique MPIDs, then four weekly reports
would be disseminated; in addition, information on those
transactions would be included in the aggregate monthly report for
that calendar month. If five transactions occurred over the course
of a calendar month, but did not occur during a single week, then a
weekly report would not be available for that security (but the
transaction information would be included in the monthly report
provided the transactions were reported by at least two unique
MPIDs). For purposes of determining if a CMO security has been
reported by at least two different MPIDs, FINRA notes that it would
consider an interdealer trade to be reported by one MPID--the sell
side dealer--even though the trade is reported by both sides of the
transaction.
\12\ Also in connection with the proposed dissemination of
information on CMO transactions, FINRA proposes to amend Rule 7730
(fees for TRACE) to reflect the addition of CMOs to the applicable
data sets. Disseminated periodic reports will become available as
part of the Securitized Products Data Set and all CMO transactions--
even if not previously disseminated upon receipt or as part of a
periodic report--will become part of the Historic Securitized
Products Data Set in FINRA Rule 7730. Similarly, disseminated
periodic reports for transactions in CMOs issued pursuant to Rule
144A will become part of the Rule 144A Data Set, and all Rule 144A
transactions in CMOs will become part of the Historic Rule 144A Data
Set. The inclusion of this additional data in such data sets will
not affect the fees currently in effect.
---------------------------------------------------------------------------
The proposal will provide for this approach to CMO dissemination by
amending FINRA Rule 6750 (Dissemination of Transaction Information).
Rule 6750 currently contains two operative paragraphs--paragraph (a),
which provides generally for the dissemination of TRACE-Eligible
Securities immediately upon receipt of a transaction report, and
paragraph (b), which contains an exception to the general dissemination
provision in paragraph (a) and which notes the security or transaction
types that are not subject to dissemination. Currently, the remaining
Securitized Products--CMOs, CMBSs, and CDOs, are found within paragraph
(b) and are therefore not subject to dissemination.
Under the proposal, current paragraph (b) will be replaced with a
paragraph that provides specifically for the dissemination of larger-
size ($1 million or more) CMO transactions on a periodic, rather than
immediate, basis, provided the transaction occurs in a CMO security
that meets the minimum activity threshold described above (i.e., at
least five transactions in the period reported by at least two
different MPIDs). The exception paragraph, which sets forth the
transaction types not subject to dissemination, will be new paragraph
(c). It will be revised to note that the only Securitized Products not
subject to dissemination are CMBSs, CDOs, and CMOs where the CMO
transaction value is $1 million or more (calculated based upon original
principal balance) and the transaction does not qualify for periodic
dissemination. However, as noted above, all transactions in CMOs will
become part of the historic data sets even if they were not subject to
dissemination upon receipt or periodic dissemination.\13\
---------------------------------------------------------------------------
\13\ See supra note 12.
---------------------------------------------------------------------------
To facilitate the proposed dissemination of CMOs, the proposal will
also amend Rule 6730(a)(3) to reduce the time period for reporting to
TRACE transactions in CMOs to TRACE executed on or after issuance.\14\
Currently, these CMO transactions must be reported to TRACE no later
than the close of the TRACE system on the date
[[Page 44067]]
of execution.\15\ Under the proposal, paragraph (H) would be added to
require that transactions in these CMOs must be reported to TRACE
within 60 minutes of execution.\16\
---------------------------------------------------------------------------
\14\ As discussed in further detail below, reporting
requirements for transactions in a CMO prior to that CMO's issuance
are addressed separately in FINRA Rule 6730(a)(3)(C). FINRA notes
that it will also make a technical, clarifying edit to Rule
6730(a)(3) that is otherwise unrelated to this proposal;
specifically, FINRA will delete language in Rule 6730(a)(3)(B) that
describes the transitional reporting phase for Asset-Backed
Securities, since the transitional phase is now complete.
\15\ See FINRA Rule 6730(a)(3)(A). As part of this proposal,
FINRA is proposing a technical, clarifying change to Rule
6730(a)(3)(A). This paragraph currently is titled ``General
Reporting Requirements'' for Securitized Products, but because only
CDOs and CMBSs will remain subject to the paragraph after this
proposal becomes effective, FINRA will rename this paragraph to make
clear that applies specifically to CDOs and CMBSs.
\16\ As with other TRACE-Eligible Securities that are subject to
60-minute reporting, under proposed Rules 6730(a)(3)(H)(iii)-(iv),
transactions in CMOs, CMBSs, and CDOs that are executed less than 60
minutes before the TRACE system closes, or after, would need to be
reported no later than 60 minutes after TRACE opens the following
business day.
---------------------------------------------------------------------------
Finally, FINRA proposes to modify the reporting timeframe for pre-
issuance CMO transactions. FINRA is proposing to amend Rule
6730(a)(3)(C) to provide that transactions in CMOs that are executed
before the date of issuance of the security must be reported no later
than the first settlement date of the security. Under the current rule,
firms generally must report CMO transactions that are executed prior to
issuance on the earlier of the business day that the security is
assigned a CUSIP, or the date of issuance of the security. FINRA is
aware that some firms, particularly small and mid-size firms, have had
difficulty in determining with accuracy in a timely manner when the
reporting obligation has been triggered, due to inconsistencies in
communicating the relevant information between underwriters and trading
parties. As a result, these firms do not always report trades in these
instruments on the earlier of the two dates specified in the current
rule. FINRA believes that, because new issuances in CMOs generally
settle on the last business day of the month, the amended proposal
would provide for a uniform reporting deadline that can be easily
ascertained by all firms.
If the Commission approves the proposed rule change, FINRA will
announce the operative date of the proposed rule change in a Regulatory
Notice to be published no later than 90 days following Commission
approval. The operative date will be no later than 365 days following
publication of the Regulatory Notice announcing Commission approval.
2. Statutory Basis
FINRA believes that the proposed rule change is consistent with the
provisions of Section 15A(b)(6) of the Act,\17\ which requires, among
other things, that FINRA rules must be designed to prevent fraudulent
and manipulative acts and practices, to promote just and equitable
principles of trade, and, in general, to protect investors and the
public interest. As discussed throughout the filing, FINRA believes
that the proposed rule change will promote greater transparency in the
marketplace for CMOs. Based on dialogue with a variety of market
participants, FINRA believes the information it proposes to disseminate
would be valuable to assist in price discovery, determination of
execution quality, and, in particular, valuation of securities
positions. Furthermore, FINRA believes the proposal strikes an
appropriate balance between promoting transparency and preserving
anonymity, which may facilitate larger size trades and liquidity
provision. Based on FINRA's ongoing study of the trading
characteristics of Securitized Products, FINRA believes this proposal
is an important next phase in dissemination that will position FINRA to
evaluate whether and how to complete its expansion of dissemination to
cover all Securitized Product types.
---------------------------------------------------------------------------
\17\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------
FINRA further believes that the proposed change to 60-minute trade
reporting will facilitate CMO dissemination by ensuring that FINRA is
able to receive and disseminate CMO transaction information in a timely
manner. Accordingly, FINRA believes this element of the filing will
help promote transparency and enhance investor protection and the
public interest.
Finally, FINRA believes the proposed change to the reporting
timeframe for pre-issuance CMOs will further just and equitable
principles of trade by providing greater clarity and promoting
compliance with applicable reporting rules.
B. Self-Regulatory Organization's Statement on Burden on Competition
FINRA does not believe that the proposed rule change will result in
any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act. FINRA has undertaken an
economic impact assessment, as set forth below, to analyze the
regulatory need for the proposed rule change, its potential economic
impacts, including anticipated costs and benefits, and the alternatives
FINRA considered in assessing how to best meet its regulatory
objectives.
Need for the Rule
As discussed above, FINRA believes this proposal is necessary and
appropriate to further promote transparency in the markets for
additional Securitized Products. FINRA believes the proposed
dissemination of transaction information for CMOs would be valuable to
assist in price discovery, determination of execution quality, and, in
particular, valuation of securities positions. FINRA believes the
proposed transition to 60-minute trade reporting for transactions in
CMOs executed on or after issuance is necessary to facilitate
meaningful dissemination of information for these securities. Finally,
FINRA believes the proposed change to the reporting timeframe for
transactions in pre-issuance CMOs is necessary to simplify the
reporting process, given that some firms, small and medium size firms
in particular, may have difficulty in determining with accuracy and in
a timely manner when their reporting obligations have been triggered.
Economic Impacts
FINRA believes that enhanced transparency in CMOs will benefit
market participants, as discussed above, by contributing to more
efficient pricing and better execution quality for market participants
and clients. However, the proposed changes may impose direct and
indirect costs on market participants; for example, the proposal might
impose direct costs associated with more timely reporting of CMO
transactions and indirect costs associated with the potential leakage
of proprietary information. In the analysis below, we individually
assess the impact on market participants of each proposed change--(1)
dissemination of CMO transactions, (2) reducing the timeframe for
reporting CMO transactions, and (3) simplifying the reporting
requirements for pre-issuance CMO transactions.
(1) Dissemination of CMO Transactions
The proposed dissemination of CMO transactions will enhance
transparency, which should benefit market participants and clients via
improved market quality. However, while enhanced transparency should
provide benefits broadly to the marketplace, it may impose indirect
costs on certain market participants, like those whose transaction
information is subject to dissemination. FINRA is cognizant of the
concern that the risk of information leakage could potentially harm
market quality if it discourages liquidity provision. Accordingly,
FINRA staff considered the potential for indirect costs associated with
providing information publicly that might permit competitors to reverse
engineer the disseminated data to produce private
[[Page 44068]]
information about trade participants, their trade positions and
possibly their trading strategies.
To investigate whether dissemination, as proposed, could
potentially allow market participants to reverse-engineer the
identities of broker-dealers or positions, FINRA staff examined the
distribution of the number of MPIDs reporting transactions in each CMO
CUSIP, over the time period spanning May 13, 2011 to August 14, 2015.
Table 1 suggests that trading activity in CMOs, on a per-CUSIP basis,
is quite concentrated, with 32,200 CUSIPs--33.3% of all CMO CUSIPs--in
the sample traded by only one MPID over the sample period. These CUSIPs
traded by only one MPID are referred to as ``concentrated'' CUSIPs.
There were 64,449 remaining CUSIPs in the sample traded by two or more
MPIDs, referred to as ``non-concentrated'' CUSIPs.\18\ CUSIPs are
classified as concentrated and non-concentrated based on a threshold of
one MPID, as it represents cases where the information about firm
activity is most concentrated.
---------------------------------------------------------------------------
\18\ Concentrated CUSIPs have a Herfindahl-Hirschman Index (HHI)
of one, while non-concentrated have an HHI that is less than one.
Algebraically, HHI is calculated as follows: HHI =
[Sigma]Ni = 1 si2 where si is the market share
of firm i, and there are N total firms in a market. HHI is a
succinct measure of market concentration, and it is widely used in
analyses of monopoly power, antitrust litigation, and other
prominent issues in industrial organization. The HHI of a market can
range from 0 to 1 (some publications use 0 to 10,000, but the
interpretation is the same after adjusting for scale), where HHI = 1
represents a perfectly concentrated market (one firms controls the
entire market) and HHI = 0 represents a perfectly competitive market
(infinitely many firms have infinitesimally small market share).
Table 1--The Number of Different MPIDs Trading in CMO CUSIPs
------------------------------------------------------------------------
Number of MPIDs CUSIPs %
------------------------------------------------------------------------
1............................................. 32,220 33.3
2............................................. 17,792 18.4
3............................................. 10,573 10.9
4............................................. 6,677 6.9
5............................................. 4,595 4.8
6............................................. 3,511 3.6
7............................................. 2,737 2.8
8............................................. 2,229 2.3
9............................................. 1,903 2.0
10............................................ 1,590 1.6
11............................................ 1,317 1.4
12............................................ 1,128 1.2
13............................................ 955 1.0
14............................................ 869 0.9
15............................................ 753 0.8
15+........................................... 7,820 8.1
-------------------------
Total..................................... 96,669 100
------------------------------------------------------------------------
Table 2 reports trading activity (the number of transactions and
trading volume) for the sample by concentrated versus non-concentrated
CUSIPs. Trading activity in concentrated CUSIPs represents only 1.73%
of transactions, but 15.75% of the trading volume. This suggests that
concentrated CUSIPs have relatively larger trade sizes.
Table 2--Aggregate Trading Activity by Concentration
------------------------------------------------------------------------
Number of Volume
transactions ($bil.)
------------------------------------------------------------------------
HHI = 1...................................... 50,714 $1,692
HHI < 1...................................... 2,879,089 9,049
--------------------------
Total.................................... 2,929,803 10,741
------------------------------------------------------------------------
Table 3 reports that the typical concentrated CUSIP trades only
about one to two times over the entire sample period. For non-
concentrated CUSIPs reported by two or more MPIDs, the typical CMO
trades 44.67 times over the sample period.\19\ In general, concentrated
CUSIPs have on average about half of the trading volume of non-
concentrated CUSIPs.
---------------------------------------------------------------------------
\19\ On average, CMOs trade in 10.74 days out of 1,071 days in
the sample period.
Table 3--Average Trading Activity per CUSIP
------------------------------------------------------------------------
Mean Median
------------------------------------------------------------------------
HHI = 1...................... Number of 1.57 1.00
transactions/
CUSIP.
Transaction $33.37 $10.60
size ($mil.).
Volume ($mil.). $52.52 $19.00
------------------------------------------------------------------------
HHI < 1...................... Number of 44.67 10.00
transactions/
CUSIP.
Transaction $3.14 $0.03
size ($mil.).
Volume ($mil.). $140.40 $41.85
------------------------------------------------------------------------
Overall...................... Number of 30.31 5.00
transactions/
CUSIP.
Transaction $3.67 $0.03
size ($mil.).
Volume ($mil.). $111.11 $30.67
------------------------------------------------------------------------
FINRA staff also investigated the trading activity above and below
the proposed threshold for immediate dissemination upon receipt, $1
million in original principal balance traded. Table 4 reports the
frequency of transactions that would have fallen above and below the
proposed threshold had they been in place during the sample period,
broken down by concentrated and non-concentrated CUSIPs. In the sample,
79.21% (0.36% + 78.85%) of transactions and 1.64% (0.02% + 1.62%) of
trading volume in CMOs would have been below the proposed threshold,
and thus would have been disseminated immediately upon receipt to FINRA
under the proposal.
Table 4--Distribution of Transactions Above and Below Proposed Threshold
----------------------------------------------------------------------------------------------------------------
Number of
transactions Percent Volume ($bil.) Percent
----------------------------------------------------------------------------------------------------------------
HHI = 1 Below Threshold......................... 10,526 0.36 $1.97 0.02
HHI = 1 At/Above Threshold...................... 40,188 1.37 1,690.13 15.74
HHI < 1 Below Threshold......................... 2,310,110 78.85 173.98 1.62
HHI < 1 At/Above Threshold...................... 568,979 19.42 8,874.67 82.63
---------------------------------------------------------------
[[Page 44069]]
Total....................................... 2,929,803 100.00 10,740.75 100.00
----------------------------------------------------------------------------------------------------------------
The total number of transactions and the trading volume that would
be disseminated under the $1 million threshold and the minimum five-
trade per CUSIP requirement are presented in Table 5. The table shows
that approximately 8.65% (6.24% + 2.41%) of transactions and 28.63%
(16.64% + 7.99%) of trading volume in CMOs would be disseminated in
weekly and monthly reports.
Table 5--Aggregate Percentage of Transactions by Type and Dissemination With Minimum Two MPID Requirement for
Periodic Reports
----------------------------------------------------------------------------------------------------------------
Transactions % Volume ($bil.) %
----------------------------------------------------------------------------------------------------------------
Immediate....................................... 2,320,636 79.21 176 1.64
Weekly.......................................... 182,893 6.24 1,787 16.64
Monthly......................................... 70,528 2.41 858 7.99
Not dis......................................... 355,746 12.14 7,919 73.73
---------------------------------------------------------------
Total....................................... 2,929,803 100.00 10,741 100.00
----------------------------------------------------------------------------------------------------------------
Table 6 reports the average trade characteristics by concentration
at the MPID level. As illustrated by the table, 79.29% of an MPID's CMO
transactions would be disseminated immediately upon receipt, with 0.18%
in concentrated CUSIPs and 79.11% in non-concentrated CUSIPs.
Similarly, 11.74% (9.19% + 2.55%) of CMO transactions for the typical
MPID would be disseminated via weekly and monthly periodic reports,
with all transactions in non-concentrated CUSIPs. Finally, on average,
8.97% of an MPID's CMO transactions would not be subject to any
dissemination under the proposal, with 0.36% of in concentrated CUSIPs
and 8.61% in non-concentrated CUSIPs.
Table 6--Average Trading Activity per MPID by Dissemination Frequency and Concentration
----------------------------------------------------------------------------------------------------------------
(Number of MPIDs = 1,002)
---------------------------------------------------------------
% of transactions % of volume
---------------------------------------------------------------
HH = 1 HH < 1 HH = 1 HH < 1
----------------------------------------------------------------------------------------------------------------
Immediate....................................... 0.18 79.11 0.13 58.17
Weekly.......................................... 0.00 9.19 0.02 20.46
Monthly......................................... 0.00 2.55 0.00 4.31
Not dis......................................... 0.36 8.61 0.85 16.05
----------------------------------------------------------------------------------------------------------------
This analysis suggests that information leakage may not be a
significant issue based on the concentration of trading activity in
certain CUSIPs. Tables 5 and 6 confirm that it would be difficult to
ascertain significant information about a single MPID's trading
strategy from both the real time and periodic dissemination of CMO
trades, as less than 1% of trading in concentrated CUSIPs is expected
to be disseminated. Moreover, there are no concentrated CUSIPs where
the proposed rule would have led to dissemination of all trades by any
individual MPID.\20\
---------------------------------------------------------------------------
\20\ 463 MPIDs would have all of their CMO trades disseminated
immediately upon receipt; however, none of those trades are in
concentrated CUSIPs.
---------------------------------------------------------------------------
(2) Reducing the Timeframe for Reporting CMO Transactions
The second proposed change, reducing the reporting timeframe for
CMOs from end-of-day to 60 minutes is intended to facilitate timely
dissemination of information for these securities. However, FINRA is
aware that a narrower reporting window may impose direct costs on firms
to the extent that the firms have to modify or upgrade their reporting
systems to comply with the reduced time period for transactions in CMOs
executed on or after issuance.
In a sample of 2,476,666 transactions reported on the day of the
execution, the average and median reporting time after execution are
approximately 19 minutes and 33 seconds, respectively.\21\
Approximately 92% of CMO transactions are currently reported to TRACE
within 60 minutes. Reports received 60 minutes or more after the
transaction execution are significantly larger than those that are
reported within 60 minutes.\22\
---------------------------------------------------------------------------
\21\ The sample for the analysis of the reporting timeframes
excludes 453,137 ``as of'' trades that were in the original sample,
since such trades are reported at least a day after the transaction
day and are disseminated with a ``late'' flag and are subject to a
fine.
\22\ Trades that are reported after 60 minutes have an average
transaction size of approximately $9.76 million, whereas the same
figure is approximately $2.76 million for trades that are reported
within 60 minutes. The difference of $7.00 million is statistically
significant at the 1% level.
---------------------------------------------------------------------------
Of the 974 market participants that reported CMO trades during the
sample period, 417 reported all transactions
[[Page 44070]]
within 60 minutes. Another 400 market participants reported at least
90%, but less than 100% of their CMO transactions within 60 minutes of
execution. Finally, 157 market participants reported less than 90% of
their transactions within 60 minutes; of these, only six reported all
of their transactions more than 60 minutes after execution, but each of
the six reported fewer than five trades during the sample period.
This analysis suggests that many market participants will require
no change in behavior to meet the proposed rule, and, as such, should
face no material costs. A second group of market participants currently
meet the proposed reporting standards at least 90% of the time,
suggesting that their costs for compliance should also be low. The data
indicate that there are a small but material number of market
participants that currently do not report in a manner consistent with
the proposed rule, but these firms engage in small numbers of
transactions in CMO securities. The cost that these firms would be
expected to incur as a result of the shorter reporting timeframe would
depend on the extent of the modification or upgrade to the reporting
systems to stay in compliance with the proposed rule.
(3) Simplifying the Reporting Requirements for Pre-Issuance CMO
Transactions
The final proposed change would impact the reporting timeframe for
pre-issuance CMO transactions and is expected to benefit firms, since
it is intended to eliminate potential confusion about when the
reporting obligation has been triggered. The proposed requirement that
transactions in CMOs that are executed before the issuance of the
security must be reported no later than the first settlement date
provides firms with more time to report the transactions than they have
today.
Alternatives Considered
As discussed in detail below, FINRA staff also considered the
dissemination of CMBSs and CDOs in addition to CMOs. Likely due to
differences in the customers that trade Securitized Products, CMOs
typically have relatively smaller transactions sizes than those for
CMBSs and CDOs and thus would be more likely disseminated under the
thresholds applied in this rule. For example, Table 5 above
demonstrates that 79.21% (0.36% + 78.85%) of CMO transactions would
have been below the proposed threshold, and thus would have been
disseminated immediately upon receipt under the proposal, whereas,
FINRA staff found that, under the same thresholds, only 29.51% and
37.92% of CDO and CMBS transactions would have been disseminated,
respectively, upon receipt. This observation suggests that differences
in average trade characteristics may lead to different outcomes for
dissemination across security types. Therefore, FINRA believes that
proceeding with CMO dissemination is a sensible next step, and it will
continue to analyze the potential for enhanced transparency for the
remaining Securitized Product types.
FINRA staff also assessed whether the five-transaction requirement
for periodic dissemination of trades in weekly and monthly reports is
reasonable and appropriate based on trading frequency. The staff found
that increasing the requirement from five to ten transactions creates a
significant shift of transactions from aggregate, periodic
dissemination to no dissemination. If the threshold were increased to a
minimum of 20 transactions, then approximately 96% of trading volume
would not be disseminated.
A higher minimum transaction number threshold may also result in
aggregate, periodic dissemination for transactions reported by far
fewer market participants. For example, based on the sample data
referenced above and assuming a five-transaction threshold for periodic
dissemination, 14 MPIDs would have had all of their transactions
disseminated weekly and an additional three MPIDs would have had all of
their transactions disseminated monthly. However, if the minimum trade
threshold were increased to ten, there would only be a single MPID
whose transactions would be consistently disseminated in weekly
reports, and another single MPID whose transactions would be
consistently disseminated via monthly reports.
The analysis implies that increasing the minimum transaction number
threshold for periodic dissemination would dramatically reduce the
amount of information that is disseminated. In addition, it may
actually increase the risk of reverse-engineering the identity or
trading strategies of the single or few MPIDs whose trades would be
subject to dissemination under a higher minimum transaction number
threshold.
Another alternative that FINRA considered was a 15-minute reporting
requirement for CMO transactions, rather than the 60-minute requirement
that FINRA proposes in this filing. As noted above, based on sample
data that FINRA has analyzed, the median reporting time for CMO
transactions is just under 20 minutes. Accordingly, FINRA believes that
a 15-minute reporting requirement may impose significantly greater
costs than a 60-minute requirement. Notably, FINRA believes that the 60
minute requirement is still expected to provide sufficiently timely
transparency to the market. FINRA also notes that the proposed 60-
minute requirement for CMOs mirrors the 60-minute requirement currently
in place for another type of Securitized Product--agency pass-through
mortgage-backed securities traded to be announced not good for
delivery.
Finally, with respect to the reporting process for pre-issuance
CMOs, FINRA considered requiring that transactions be reported no later
than two days prior to the first settlement date. However, FINRA
understands that in many cases, particularly for private label
securities, the characteristics of a new issue may not be finalized
until the first settlement date of the securities. As a result, FINRA
is instead proposing that pre-issuance CMO transactions be reported by
the first settlement date.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The proposed rule change was published for comment in Regulatory
Notice 15-04 (February 2015). Five comments were received in response
to the Regulatory Notice.\23\ A copy of the Regulatory Notice is
attached as Exhibit 2a. Copies of the comment letters received in
response to the Regulatory Notice are attached as Exhibit 2c. The
comments are summarized below.
---------------------------------------------------------------------------
\23\ See Letters from Letters from the Financial Information
Forum, dated April 7, 2015 (``FIF Letter''); Bond Dealers of
America, dated April 9, 2015 (``BDA Letter''); Association of
Institutional INVESTORS, dated April 10, 2015 (``INVESTORS
Letter''); Bloomberg's Valuation Service, dated April 10, 2015
(``BVAL Letter''); and the Securities Industry and Financial Markets
Association, dated April 13, 2015 (``SIFMA Letter'').
---------------------------------------------------------------------------
As an initial step, prior to issuing Regulatory Notice 15-04, FINRA
staff solicited industry input from several of its industry advisory
committees. At this stage, as in the Regulatory Notice, FINRA was
contemplating expanding dissemination to all remaining Securitized
Products, including CMOs, CMBSs, and CDOs. FINRA was also considering
reducing the reporting timeframe for these remaining Securitized
Products to 15 minutes. The committees were generally supportive. To
the extent the committees raised concerns, they were focused primarily
[[Page 44071]]
on what an appropriate threshold would be to determine whether
transactions are subject to immediate or periodic dissemination. At the
time FINRA raised this proposal with the committees, it was proposing
immediate dissemination for transactions below a threshold of $1
million in transaction size, and aggregate periodic reporting for
transactions greater than $1 million, provided there were at least five
trade reports in the same security during the applicable reporting
period. FINRA committed to vetting these proposed thresholds more
completely through the Regulatory Notice comment process.
FINRA then published Regulatory Notice 15-04 in February 2015 and
received five comments in response. Like the industry advisory
committees, commenters focused primarily on the merits of disseminating
transaction information for the remaining Securitized Products, as well
as the thresholds proposed for immediate versus aggregate, periodic
reporting. Some of the commenters also discussed the elements of the
proposal that would have reduced the reporting timeframe for the
remaining Securities Products to 15 minutes.
Two of the commenters took different views on the merits of
expanding dissemination to include the remaining Securitized Products.
The Association of Institutional INVESTORS (``INVESTORS'') strongly
favored dissemination because ``transparency will be extremely
beneficial to all market participants and greatly assist in price
discovery and in decreasing price dispersion.'' \24\ In contrast, the
Securities Industry and Financial Markets Association (``SIFMA'')
acknowledged that dissemination may contribute to better price
formation for additional Securitized Products but expressed its belief
that dissemination may negatively impact market liquidity. In SIFMA's
view, liquidity should be prioritized over enhancing price
discovery.\25\
---------------------------------------------------------------------------
\24\ INVESTORS Letter at 1.
\25\ See SIFMA Letter at 1-2.
---------------------------------------------------------------------------
With respect to the specific items of transaction information FINRA
proposed in the Regulatory Notice to disseminate, the Financial
Information Forum (``FIF'') argued that the information disseminated
for the remaining Securitized Products should align with the
information disseminated for Asset-Backed Securities. FIF specifically
recommended suppressing the contra-party indicator and identifying
transactions that meet the definition of a List or Fixed Offering Price
Transaction.\26\ SIFMA similarly argued that only secondary trades in
CMOs should be disseminated, to align dissemination for additional
Securitized Products with dissemination for corporate and agency debt
and Asset-Backed Securities. SIFMA also expressed concerns about the
ability to reverse engineer transactions more easily if last sale price
and last sale date information were included in the periodic
reports.\27\
---------------------------------------------------------------------------
\26\ See FIF Letter at 2. The term ``List or Fixed Price
Transaction'' is defined in Rule 6710(q) to mean a primary market
sale transaction sold on the first day of trading of a security,
including an Asset-Backed Security as defined in paragraph (cc), but
excluding any other Securitized Product as defined in paragraph (m):
(i) By a sole underwriter, syndicate manager, syndicate member or
selling group member at the published or stated list or fixed
offering price, or (ii) in the case of a primary market sale
transaction effected pursuant to Securities Act Rule 144A, by an
initial purchaser, syndicate manager, syndicate member or selling
group member at the published or stated fixed offering price.
\27\ See SIFMA Letter at 3.
---------------------------------------------------------------------------
Four of the commenters disagreed with the $1 million real-time
dissemination threshold that FINRA proposed in the Regulatory Notice,
although they took opposing views as to whether the threshold would
result in too many or too few transactions being subject to real-time
dissemination. According to INVESTORS, $1 million is too low given that
the market for Securitized Products is primarily institutional, so
INVESTORS recommended a $5 million threshold instead.\28\ Another
commenter, Bloomberg's Valuation Service (``BVAL'') also stated that
the $1 million threshold is too low to provide relevant pricing
information to the market, since less than 1% of the market trades
below $1 million, and the trades that do occur below the threshold
involve a different buyer base and pricing model.\29\
---------------------------------------------------------------------------
\28\ See INVESTORS Letter at 2-3.
\29\ See BVAL Letter at 1.
---------------------------------------------------------------------------
On the other hand, two of the commenters believed that the proposed
$1 million threshold was too high. SIFMA stated that the threshold
should be lowered from $1 million to $100,000 ``to ensure only truly
retail-sized transactions'' are subject to real-time dissemination.
According SIFMA, setting the threshold at $1 million would include
inter-dealer trades as well as retail, and disseminating information on
both types of transactions could be ``misleading'' to retail investors.
Additionally, SIFMA expressed its belief that disseminating larger-size
trades could harm liquidity in an already illiquid marketplace.\30\ The
Bond Dealers of America (``BDA'') echoed the concern that disseminating
trades up to $1 million in value could impact market pricing and
liquidity and impact trading strategies.\31\
---------------------------------------------------------------------------
\30\ See SIFMA Letter at 2.
\31\ See BDA Letter at 3.
---------------------------------------------------------------------------
Three of the commenters provided views on the proposed five
transaction threshold for the dissemination of aggregate periodic
reports for larger-size transactions. INVESTORS and BVAL did not
believe that there should be any minimum number of transactions
required per reporting period to qualify for dissemination, and that
such a minimum would restrict the proposal's usefulness.\32\ In
contrast, SIFMA argued that the five transaction minimum was too low,
and believed that it should be raised from five to 20, because
``[l]iquidity in the securitized products markets will be least
impacted by price dissemination if only truly actively traded CUSIPs
are captured in the weekly and monthly reports.'' \33\
---------------------------------------------------------------------------
\32\ See INVESTORS Letter at 2-3 and BVAL Letter at 1.
\33\ See SIFMA Letter at 2-3. This commenter further asked that
the proposed aggregate periodic reports not include last price and
trade date, to minimize the potential for reverse engineering.
---------------------------------------------------------------------------
One commenter also addressed the proposed reduction of the
reporting timeframe to 15 minutes for transactions in the remaining
Securitized Products. BDA expressed concern that a reduced reporting
timeframe could have a disproportionate impact on smaller dealers and
may result in these products being traded less by dealers and more by
banking institutions that do not have to comply with TRACE reporting
requirements. BDA stated that additional Securitized Products typically
trade in ``odd lot'' sizes, where liquidity has traditionally been
provided by small to medium size dealers, who would face ``significant
challenges'' complying with a 15-minute reporting requirement.\34\
---------------------------------------------------------------------------
\34\ See BDA Letter at 2-3.
---------------------------------------------------------------------------
Finally, three of the commenters addressed the element of the
proposal that would simplify the reporting process for pre-issuance
CMOs, which in the Regulatory Notice would have required reporting no
later than two days prior to the first settlement date, with varying
levels of support. SIFMA strongly supported the change as proposed.\35\
BDA expressed support for the proposed change, but recommended that the
reporting deadline be moved back further, to settlement minus one
day.\36\ FIF recommended greater relaxation of the reporting timeframe,
proposing a settlement date deadline, rather than settlement minus two.
[[Page 44072]]
According to FIF, information for pre-issuance CMOs ``is not
consistently available two days prior to the first settlement date.''
\37\
---------------------------------------------------------------------------
\35\ See SIFMA Letter at 3.
\36\ See BDA Letter at 4.
\37\ See FIF Letter at 2.
---------------------------------------------------------------------------
FINRA carefully considered the committee views and written
comments. After analyzing this feedback, FINRA believes it is
appropriate to proceed with the proposal as described and explained
above in the filing, which has been modified from what FINRA proposed
in Regulatory Notice 15-04. Based on FINRA's continued study of the
impact of dissemination on TRACE-Eligible Securities, and Securitized
Products in particular, in addition to dialogue with a variety of
market participants and the feedback received on Regulatory Notice 15-
04, FINRA believes the proposed dissemination of transaction
information for CMOs would be valuable to assist in price discovery,
determination of execution quality, and, in particular, valuation of
securities positions. FINRA recognizes, however, that CMOs generally
are more complex and less fungible than the securities that are
currently subject to dissemination. As a result, FINRA believes it is
important to calibrate its proposal to provide for tiered dissemination
of these products in a way that promotes transparency while minimizing
potential negative impacts on liquidity. Importantly, while FINRA has
decided not to expand dissemination to CMBSs and CDOs at this time,
FINRA believes this proposal is a careful step towards enhanced
transparency for these remaining Securitized Product types, and that it
will allow FINRA and market participants to consider how best to
approach the final phase of dissemination expansion.
In an effort to further calibrate the proposal to provide
additional safeguards against the risk of reverse-engineering, FINRA
modified the minimum security activity threshold first proposed in
Regulatory Notice 15-04 for periodic reporting. The Regulatory Notice
proposed to disseminate larger-size transactions ($1 million or more)
on an aggregate periodic basis provided there were five or more
transactions in the security during the reporting period. In response
to the feedback FINRA received, FINRA is now proposing to disseminate
aggregate periodic reports for larger-size transactions provided there
are five or more transactions in the security during the reporting
period, and further that the transactions must be reported by at least
two different MPIDs. FINRA believes that this modified threshold for
aggregate periodic reporting will further the interests of transparency
while being sensitive to the confidentiality of positions or trading
strategies, particularly in securities that trade in a concentrated
market made by just one dealer.
Concerning the specific items of transaction information that FINRA
would disseminate for CMOs, FINRA has modified the proposal in part to
reflect the input it received from commenters. Specifically, FINRA will
remove counterparty information from transactions that are disseminated
and will also remove the data fields that it proposed in Regulatory
Notice 15-04 for the periodic reports that would have conveyed last
sale price, last sale date, customer buy, customer sell, and
interdealer prices. FINRA believes these modifications are appropriate
to address commenters' concerns about reverse engineering. FINRA has
not modified the proposal, however, in response to commenters'
suggestion to suppress new issue transactions in CMOs. The definition
of List or Fixed Price Transaction does not apply to CMOs. FINRA
believes that redefining the term List or Fixed Price Transaction to
include CMOs would result in a significantly less effective proposal,
according to input FINRA has received from various market participants.
Concerning the reporting timeframe for transactions in CMOs
executed on or after issuance, FINRA modified its proposal to allow for
60-minute reporting rather than 15-minute reporting. FINRA believes
this change is appropriate to minimize firms' reporting burdens while
improving the timeliness in the receipt and dissemination of CMO
transaction information. FINRA notes that the proposed 60-minute
timeframe is the same as the reporting requirement for other
Securitized Products, namely, agency pass-through mortgage-backed
securities traded to be announced not for good delivery.
Finally, FINRA has modified its approach to simplifying the
reporting process for pre-issuance CMOs from what it proposed in its
Regulatory Notice. As noted above, FINRA understands that in many
cases, particularly for private label securities, the characteristics
of a new issue may not be finalized until the first settlement date of
the securities. As a result, FINRA is no longer proposing a reporting
deadline two days prior to the first settlement date, but is instead
proposing that pre-issuance CMO transactions be reported by the first
settlement date.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve or disapprove such proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to rule-comments@sec.gov. Please include
File Number SR-FINRA-2016-023 on the subject line.
Paper Comments
Send paper comments in triplicate to Brent J. Fields,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-FINRA-2016-023. 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 such
[[Page 44073]]
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-2016-023, and should be submitted on or before July 27, 2016.
---------------------------------------------------------------------------
\38\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\38\
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-15918 Filed 7-5-16; 8:45 am]
BILLING CODE 8011-01-P
