Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of a Proposed Rule Change To Modify TRACE Dissemination Protocols Regarding Agency Pass-Through MBS or SBA-Backed ABS Traded in Specified Pool Transactions, 68607-68611 [2020-23919]

Download as PDF Federal Register / Vol. 85, No. 210 / Thursday, October 29, 2020 / Notices to make available publicly. All submissions should refer to File Number SR–ISE–2020–34, and should be submitted on or before November 19, 2020. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.11 J. Matthew DeLesDernier, Assistant Secretary. [FR Doc. 2020–23913 Filed 10–28–20; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–90264; File No. SR–FINRA– 2020–034] Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of a Proposed Rule Change To Modify TRACE Dissemination Protocols Regarding Agency Pass-Through MBS or SBA-Backed ABS Traded in Specified Pool Transactions October 23, 2020. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 notice is hereby given that on October 15, 2020, the Financial Industry Regulatory Authority, Inc. (‘‘FINRA’’) filed with the Securities and Exchange Commission (‘‘SEC’’ or ‘‘Commission’’) the proposed rule change as described in Items I, II, and III below, which Items have been prepared by FINRA. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. jbell on DSKJLSW7X2PROD with NOTICES I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change FINRA is proposing to modify Trade Reporting and Compliance Engine (‘‘TRACE’’) dissemination protocols regarding Agency Pass-Through Mortgage-Backed Securities or Small Business Administration (SBA)-Backed Asset-Backed Securities traded in Specified Pool Transactions. The text of the proposed rule change is available on FINRA’s website at https://www.finra.org, at the principal office of FINRA and at the Commission’s Public Reference Room. 11 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 1 15 VerDate Sep<11>2014 18:03 Oct 28, 2020 Jkt 253001 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 Background FINRA commenced dissemination of Specified Pool Transactions in 2013.3 A ‘‘Specified Pool Transaction’’ is defined as a transaction in an Agency PassThrough Mortgage-Backed Security (‘‘Agency Pass-Through MBS’’) 4 or an SBA-Backed Asset-Backed Security (‘‘SBA-Backed ABS’’) 5 requiring the delivery at settlement of a pool or pools that is identified by a unique pool identification number at the Time of Execution.6 As described in the Specified Pool Dissemination Filing, FINRA currently does not disseminate a CUSIP for Specified Pool transactions, but rather disseminates reference data elements, including approximations of information widely used to project cash 3 See Securities Exchange Act Release No. 68084 (October 23, 2012), 77 FR 65436 (October 26, 2012) (Order Approving File No. SR–FINRA–2012–042) (‘‘Specified Pool Dissemination Filing’’). Among other things, the filing provided for dissemination of transactions in Agency Pass-Through MortgageBacked Securities traded in specified pools and transactions in SBA-Backed Asset-Backed Securities traded in specified pools or to be announced (‘‘TBA’’), and reduced the reporting timeframe for such transactions. 4 FINRA Rule 6710(v) generally defines an ‘‘Agency Pass-Through Mortgage-Backed Security’’ as a type of Securitized Product issued in conformity with a program of an Agency or a Government-Sponsored Enterprise (‘‘GSE’’) for which the timely payment of principal and interest is guaranteed by the Agency or GSE, representing ownership interest in a pool (or pools) of mortgage loans structured to ‘‘pass through’’ the principal and interest payments to the holders of the security on a pro rata basis. 5 FINRA Rule 6710(bb) defines an ‘‘SBA-Backed ABS’’ as a Securitized Product issued in conformity with a program of the SBA, for which the timely payment of principal and interest is guaranteed by the SBA, representing ownership interest in a pool (or pools) of loans or debentures and structured to ‘‘pass through’’ the principal and interest payments made by the borrowers in such loans or debentures to the holders of the security on a pro rata basis. 6 See FINRA Rule 6710(x). PO 00000 Frm 00053 Fmt 4703 Sfmt 4703 68607 flows and prepayment rates, such as loan-to-value (LTV) information. FINRA is proposing changes to the LTV rounding convention used for the information publicly disseminated through TRACE for these types of transactions in Agency Pass-Through MBSs and SBA-Backed ABSs. In the process of developing the approach adopted in the Specified Pool Dissemination Filing, FINRA, among other things, considered industry feedback regarding the nature of the market for Specified Pool Transactions (also, ‘‘Specified Pools’’), including concerns regarding information leakage. Market participants’ concerns included that dissemination of the specific CUSIP of a Specified Pool may result in information leakage regarding trading strategies, positions and other sensitive information, which may negatively impact trading interest and liquidity in the market for these securities.7 In response, FINRA modified the proposal such that the disseminated information regarding Specified Pool Transactions would not include the CUSIP. Instead, FINRA adopted an approach whereby, in lieu of a CUSIP, FINRA disseminates reference data elements, including approximations of information widely used to project cash flows and prepayment rates. Pursuant to this approach, FINRA groups Agency Pass-Through MBSs and SBA-Backed ABSs into cohorts, as discussed further below, using data elements that are integral to describing and valuing these types of securities, such as the pool’s LTV ratio. The cohort groupings are established using rounded or truncated figures for the underlying data elements, so that numeric values within each cohort may be understood within defined ranges. Each cohort is assigned a unique identification number—the Reference Data Identifier (‘‘RDID’’). After a member reports a Specified Pool Transaction to TRACE, FINRA disseminates the corresponding RDID in lieu of disseminating the CUSIP. The underlying data elements that correspond to each RDID are made available to members through the TRACE system. Specifically, FINRA uses the following ten data elements 8 to form the RDID cohorts that describe the underlying security traded in a Specified Pool Transaction: (1) Issuer; (2) Product Type; (3) Amortization Type; (4) Coupon; (5) Original Maturity; 7 See Specified Pool Dissemination Filing, supra note 3. 8 Issuing agencies make the data elements publicly available on a monthly basis. Therefore, TRACE updates RDIDs at least monthly. E:\FR\FM\29OCN1.SGM 29OCN1 jbell on DSKJLSW7X2PROD with NOTICES 68608 Federal Register / Vol. 85, No. 210 / Thursday, October 29, 2020 / Notices (6) Weighted Average Coupon (‘‘WAC’’); (7) Weighted Average Maturity (‘‘WAM’’); (8) Weighted Average Loan Age (‘‘WALA’’); (9) Current Average Loan Size (‘‘ALS’’); and (10) Loan-toValue ratio (‘‘LTV’’). For example, RDID #A1234 may represent: (1) Issuer = FNMA; (2) Product Type = Co-Op; (3) Amortization Type = ARM; (4) Coupon = 2.0; (5) Original Maturity = 360; (6) WAC = 2.5; (7) WAM = 200; (8) WALA = 160; (9) ALS = 100; and (10) Original LTV = 50. Whenever a transaction in a CUSIP that falls within this cohort occurs, TRACE would disseminate RDID #A1234 along with transaction-related (rather than security-related) information, such as the price, execution time, reporting and contraparty types and whether the transaction was a buy or a sell. The values for items (4) through (10) are rounded or truncated in creating cohort groupings to reduce the risk that the specific security traded and the market participant that engaged in the transaction may be identified. Currently, the rounding and truncation conventions that are used for Specified Pool Transactions are as follows.9 • Coupon—Rounded down to the nearest quarter percentage point—e.g., an interest rate of 5.12% is rounded to 5%. • Original Maturity—Rounded up to the nearest 10—e.g., an original maturity of 358 months is rounded to 360 months. • WAC—Truncated to a single decimal—e.g., a WAC of 7.13% is truncated to 7.1%. • WAM—Rounded down to the nearest 10—e.g., a WAM of 87 months is rounded to 80 months. • WALA—Rounded up to the nearest 10—e.g., a WALA of 163 months is rounded to 170 months. • ALS—Rounded down to the nearest 25—e.g., an ALS of 113 (i.e., $113,000 average loan size) is rounded to 100 (i.e., $100,000 average loan size). • LTV—Rounded down to the nearest 25—e.g., an original LTV of 72% is rounded to 50%. As noted in the Specified Pool Dissemination Filing, FINRA believes that the transaction information disseminated through TRACE should provide investors with sufficient information to assess the value and price of a security, which, for Securitized Products, includes information necessary to make assumptions about cash flows and 9 In Regulatory Notice 12–56 (December 2012), FINRA published summary information regarding the data elements and the truncation or rounding conventions that would apply to dissemination for Specified Pools. VerDate Sep<11>2014 18:03 Oct 28, 2020 Jkt 253001 prepayment rates. FINRA anticipated that providing the data elements, as described above, would supply market participants with information that would allow them to perform this analysis. Since that time, FINRA has continued to evaluate the market for Specified Pools, including discussing with market participants the value of the information currently disseminated by TRACE. As a result of these efforts, FINRA is proposing to modify the LTV rounding convention used for purposes of the dissemination protocols for Specified Pool Transactions. FINRA believes that the currently disseminated LTV information is useful, but can be improved upon, as discussed below, to create more granular cohorts and, therefore, more meaningful information to the marketplace.10 original LTV of 100% would be shown as 100%); for an LTV between 101% and 120%, the cohorts would represent the LTV as 120% (such that an original LTV of 105% would be shown as 120%); and for an LTV of 121% or greater, the cohorts would represent the LTV as 121+ (such that an original LTV of 125% would be shown as 121+). Proposal As described above, one of the data elements FINRA uses for organizing cohorts is the original LTV, which currently is rounded down to the nearest 25 (e.g., an original LTV of 72% is shown as 50%). FINRA is proposing to revise the rounding methodology used for purposes of cohort groupings for Specified Pool Transaction dissemination to increase the granularity and usefulness of the information available to market participants. Specifically, FINRA proposes a revised rounding convention whereby LTV ratios would be segmented into eight categories between zero and 121+, and FINRA would organize the cohorts such that each cohort would represent the LTV as the upper limit of the applicable category, as follows: For an LTV up to 20%, the cohorts would represent the LTV as 20% (such that an original LTV of 12% would be shown as 20%); for an LTV between 21% and 40%, the cohorts would represent the LTV as 40% (such that an original LTV of 21% would be shown as 40%); for an LTV between 41% and 60%, the cohorts would represent the LTV as 60% (such that an original LTV of 60% would be shown as 60%); for an LTV between 61% and 80%, the cohorts would represent the LTV as 80% (such that an original LTV of 70% would be shown as 80%); for an LTV between 81% and 93%, the cohorts would represent the LTV as 93% (such that an original LTV of 90% would be shown as 93%); for an LTV between 94% and 100%, the cohorts would represent the LTV as 100% (such that an In developing the proposed approach, FINRA sought to balance the goal of making more detailed information available to the market with concerns regarding the potential risk of identifying the particular security being traded and the market participant that engaged in the transaction. FINRA believes that the revised LTV rounding convention will provide more meaningful information to market participants by grouping securities with more similar characteristics. In particular, the groupings are anticipated to improve how disseminated TRACE data reflects the role of LTV ratios in MBS valuations. For example, separating pools with LTV ratios at or below 80 from those with LTV ratios of 81 or higher delineates the pools with mortgages that may require mortgage insurance from those that may not require mortgage insurance. Similarly, the revised rounding methodology for LTV ratios of 81 or more are more consistent with the way mortgage originators view loan characteristics and the way that the market determines pricing.11 For instance, a LTV ratio of 95 or higher may reflect a ‘‘pay-up’’ in the Fannie Mae market because that is the threshold at which Fannie Mae loan level price adjustments increase significantly.12 10 The original LTV ratio expresses the amount of a first mortgage lien as a percentage of the total appraised value of real property. PO 00000 Frm 00054 Fmt 4703 Sfmt 4703 PROPOSED LTV RATIO SEGMENTS LTV ratio (%) up to 20 ................................ 21 to 40 ................................ 41 to 60 ................................ 61 to 80 ................................ 81 to 93 ................................ 94 to 100 .............................. 101 to 120 ............................ 121 or greater ....................... Disseminated (%) 20 40 60 80 93 100 120 121+ 11 CUSIPs with LTVs from 81% to 100% are likely to have a greater proportion of underlying mortgages that carry insurance or that have the minimum down payment required for a mortgage to conform to GSE guidelines. 12 ‘‘MBS pools typically receive specified pay-ups when the underlying loans have characteristics that make the borrower less likely to refinance as compared to other loans with similar note rates. . . . Given the projected stable behavior of these loans, investors are willing to pay a premium above generic To Be Announced (TBA) security prices for pools of loans of this type. The premium E:\FR\FM\29OCN1.SGM 29OCN1 Federal Register / Vol. 85, No. 210 / Thursday, October 29, 2020 / Notices jbell on DSKJLSW7X2PROD with NOTICES FINRA considered that the revised LTV rounding convention may increase the potential risk that market participants may be able to identify the particular security being traded and the market participant that engaged in the transaction. FINRA believes that the highest potential risk regarding information leakage is present for cohorts with only one CUSIP. Therefore, FINRA analyzed the changes to the total number of cohorts, and the total number of cohorts with only one CUSIP. Applying the proposed LTV tiers to TRACE reference data as of December 2019 would have resulted in an increase of 10.9% in the number of total cohorts, and an increase of 14.3% in the number of cohorts with only one CUSIP. FINRA also analyzed the 787,691 Specified Pool Transactions executed in 2019 totaling $5.8 trillion in volume. Applying the proposed LTV tiers to the 2019 transaction data would have resulted in a 12.8% increase in the number of trades for cohorts with only one CUSIP, and a 10.2% increase in the number of trades for cohorts with only one CUSIP and by only one dealer. FINRA believes, however, that the proposed modifications to the LTV rounding convention represents an improvement to the current framework by increasing the precision in the RDID cohorts, particularly around a significant threshold. Thus, the proposal balances the goal of providing information of increased value to the marketplace with risks relating to the possible reverse engineering of disseminated transactions to identify a specific pool or market participant. FINRA believes that this change to LTV rounding is a measured change that provides more granular information regarding the LTV of the pool traded, which should improve the value of the disseminated information for market participants. If the Commission approves the proposed rule change, FINRA will announce the effective date of the proposed rule change in a Regulatory Notice to be published no later than 60 days following Commission approval. The effective date will be no later than 270 days following publication of the Regulatory Notice announcing Commission approval. 2. Statutory Basis FINRA believes that the proposed rule change is consistent with the provisions of Section 15A(b)(6) of the Act,13 which over a TBA security is referred to as the specified pool pay-up.’’ See Fannie Mae, Specified Pay-ups in Pricing & Execution—Whole Loan®, https:// singlefamily.fanniemae.com/media/5056/display. 13 15 U.S.C. 78o–3(b)(6). VerDate Sep<11>2014 18:03 Oct 28, 2020 Jkt 253001 requires, among other things, that FINRA rules must be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, and, in general, to protect investors and the public interest. FINRA believes that the proposed rule change to improve transparency for Specified Pool Transactions is designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, and, generally to protect investors and the public. FINRA believes that the proposed changes to the LTV ratio rounding convention for Specified Pool Transactions should enhance the usefulness of TRACE data. FINRA believes that this change to LTV dissemination is a measured change that provides more granular information regarding the LTV of the pool traded, which should improve the value of the disseminated information for market participants. 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. Economic Impact Assessment (a) Regulatory Need The transaction information made available through TRACE provides market participants with information to assess the value and price of a TRACEEligible Security. FINRA is proposing changes to modify the LTV rounding convention to increase the precision of the cohort groupings, thereby providing more valuable information to the market. (b) Economic Baseline The economic baseline for the proposal is the current rounding convention for Agency Pass-Through MBS or an SBA-Backed ABS traded in Specified Pool Transactions. The proposal is expected to affect market participants that transact in these securities or related derivatives. As discussed above, FINRA groups Specified Pools into cohorts identified by a unique RDID. When a transaction PO 00000 Frm 00055 Fmt 4703 Sfmt 4703 68609 in a Specified Pool occurs, FINRA disseminates the corresponding RDID in lieu of the CUSIP to reduce the disclosure of information regarding trading strategies, positions, and other sensitive information. Potential information leakage may negatively impact trading interest and liquidity in the market for these securities. Although disseminating RDIDs in lieu of specific CUSIPs may reduce the amount of information leakage, it also may decrease the value of the disseminated information. The value of RDIDs and corresponding reference information, and its resultant effect on price transparency, is dependent on the similarity of the CUSIPs within each cohort (i.e., how well a cohort assignment represents the characteristics of all CUSIPs within a given cohort). (c) Economic Impact The application of the proposed LTV tiers to the December 2019 data would have increased the total number of cohorts by 10.9% (from 287,802 to 319,188). The average number of CUSIPs in a cohort would have decreased by 10.0% (from 4.0 to 3.6), and the number of cohorts with only one CUSIP would have increased 14.3% (from 163,215 to 186,521). We discuss the benefits and costs of the application of the proposed LTV dissemination categories below, including the potential risk to market participants relating to the number of transactions for cohorts with only one CUSIP.14 FINRA believes that the proposal will enhance transparency by increasing the precision of the RDID cohorts. The rounding convention under the proposal will create tighter bands around LTVs within a cohort. Currently, the median difference between the minimum and maximum LTV within a cohort (i.e., LTV spread) is 17.0. The LTV spread also has an interquartile range (the difference between the 25th and 75th percentile) of 12.0. Under the proposal, however, the median LTV spread within a cohort would be 11.0, a decrease of 35.3%, and an interquartile range of 10.0.15 The tighter bands around LTV would increase the similarity of the CUSIPs within a given cohort, and therefore the 14 The economic analysis will more accurately reflect the potential impact of the proposal to the extent that previous market conditions and distribution of LTVs remain similar. For example, the distribution of LTVs remained similar from 2015 to 2019 with a mean and median of approximately 78. 15 These measures include only those 898,345 CUSIPs that are in a cohort with more than one CUSIP both before and after the application of the proposed revised rounding convention. E:\FR\FM\29OCN1.SGM 29OCN1 68610 Federal Register / Vol. 85, No. 210 / Thursday, October 29, 2020 / Notices jbell on DSKJLSW7X2PROD with NOTICES representativeness of prices, in the cohort. This would benefit market participants by increasing the value of price information as it relates to LTV, and thereby contributing to more efficient pricing and better execution quality.16 The rounding convention under the proposal also would increase the similarity of CUSIPs when LTV is relatively more important for pricing purposes (i.e., LTVs from 81% up to 100%). Various factors may be more important for mortgages in this range (e.g., the premium or ‘‘pay-up’’ for Specified Pools relative to generic TBA security prices),17 and further demarcation around LTV ratios also would mirror mortgage origination practices. The rounding conventions with respect to the other security characteristics and its effect on price variation, however, would not change. Alternatively, the rounding convention under the proposal could increase the potential for and the costs associated with information leakage. In particular, the rounding convention may increase the potential for information leakage as a result of an increase in the number of cohorts with only one CUSIP and the small number of dealers that trade any one CUSIP.18 This may negatively impact trading interest and liquidity in the market for these securities. The proposal would increase the number of cohorts with only one CUSIP from 163,215 to 186,521. As noted 16 Transactions in Securitized Products began being reported to TRACE in May 2011 on a nextday basis. See Securities Exchange Act Release No. 63223 (November 1, 2010), 75 FR 68654 (November 8, 2010) (Notice of Filing and Immediate Effectiveness of File No. SR–FINRA–2010–054). In 2015, transactions were required to be reported to TRACE within 15 minutes of execution. See Securities Exchange Act Release No. 71607 (February 24, 2014), 79 FR 11481 (February 28, 2014) (Order Approving File No. SR–FINRA–2013– 046). See An He & Bruce Mizrach, Analysis of Securitized Asset Liquidity, (2017), FINRA Office of the Chief Economist, Research Note. The authors study the changes in the liquidity of securitized assets between 2012 and 2016. Although they did not directly test for a causal link between transparency and liquidity, the improved liquidity for MBS securities during a time of increasing trade transparency is a positive indicator of the value of transparency for these securities. The authors also note that the bid-ask spread for MBSs decreased by 37% during the period while average daily trading volume increased. An improvement in execution quality as a result of the proposal may further decrease the bid-ask spreads for MBSs. 17 See supra note 12. 18 For example, among the 123,481 CUSIPs that traded in 2019, 47.7% (58,859) were traded by one dealer (as proxied by the market participant identifier (MPID)). In addition, two dealers traded 20.8% (or 25,671) of the CUSIPs, and three dealers traded 12.0% (or 14,840) of the CUSIPs. Four or more dealers traded the remaining 19.5% (or 24,111) of CUSIPs. VerDate Sep<11>2014 18:03 Oct 28, 2020 Jkt 253001 above, the number of Specified Pool Transactions for cohorts with only one CUSIP would increase under the proposal by 12.8% from 77,234 (9.8% of all transactions) to 87,096 (11.1% of all transactions). The percentage of transactions for cohorts with only one CUSIP that were made by only one dealer also would increase under the proposal by 10.2% from 12,203 (1.5% of total trades) to 13,445 (1.7% of total trades). The 12.8% increase in the number of transactions for cohorts with only one CUSIP and the 10.2% increase in the number of transactions for those cohorts by only one dealer may increase the risk to market participants from disclosing information relating to trading strategies, positions, and other sensitive information. As noted above, this may reduce market participation and liquidity in those CUSIPs.19 However, FINRA believes that the proposal properly balances this potential risk related to information leakage with providing more valuable information to market participants. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action (d) Alternatives Considered • 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–2020–034 on the subject line. Plausible alternatives to the proposal would be using different LTV categories and rounding conventions. For example, the rounding convention could have further segmented the LTV ratios in the range of 81% to 100%. The rounding convention also could have incorporated a catch-all tier of 141+ for LTVs of 141% or more instead of the catch-all tier of 121+ for LTVs of 121% or more. In general, tighter (looser) bands would increase (decrease) the number of cohorts with only one CUSIP but increase (decrease) the similarity of the specified pools within the same cohort. FINRA believes that the costs associated with the LTV rounding convention proposed herein is appropriate given the potential increase in the precision of the cohorts and value of the transaction information. FINRA will continue to evaluate the market for Specified Pools and evaluate the conventions that are used for disseminating these transactions. C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others Written comments were neither solicited nor received. 19 The number of counterparties for MBS securities decreased between 2012 and 2016, consistent with brokers experiencing higher risk from increased transparency. See He & Mizrach (2017), supra note 16. PO 00000 Frm 00056 Fmt 4703 Sfmt 4703 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 Paper Comments • Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549–1090. All submissions should refer to File Number SR–FINRA–2020–034. 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 website (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 website 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 E:\FR\FM\29OCN1.SGM 29OCN1 Federal Register / Vol. 85, No. 210 / Thursday, October 29, 2020 / Notices filing also will be available for inspection and copying at the principal office of FINRA. All comments received will be posted without change. Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR–FINRA– 2020–034, and should be submitted on or before November 19, 2020. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.20 J. Matthew DeLesDernier, Assistant Secretary. [FR Doc. 2020–23919 Filed 10–28–20; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–90263; File No. SR–CBOE– 2020–100] Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Extend the Operation of Its SPXPM Pilot Program October 23, 2020. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (the ‘‘Act’’),1 and Rule 19b–4 thereunder,2 notice is hereby given that on October 13, 2020, Cboe Exchange, Inc. (the ‘‘Exchange’’ or ‘‘Cboe Options’’) filed with the Securities and Exchange Commission (the ‘‘Commission’’) the proposed rule change as described in Items I and II below, which Items have been prepared by the Exchange. The Exchange filed the proposal as a ‘‘noncontroversial’’ proposed rule change pursuant to Section 19(b)(3)(A)(iii) of the Act 3 and Rule 19b–4(f)(6) thereunder.4 The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. jbell on DSKJLSW7X2PROD with NOTICES I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change Cboe Exchange, Inc. (the ‘‘Exchange’’ or ‘‘Cboe Options’’) proposes to extend the operation of its SPXPM pilot program. The text of the proposed rule change is provided below. 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)(iii). 4 17 CFR 240.19b–4(f)(6). 1 15 18:03 Oct 28, 2020 Rules of Cboe Exchange, Inc. * * * * * Rule 4.13. Series of Index Options * * * * * Interpretations and Policies .01–.12 No change. .13 In addition to A.M.-settled S&P 500 Stock Index options approved for trading on the Exchange pursuant to Rule 4.13, the Exchange may also list options on the S&P 500 Index whose exercise settlement value is derived from closing prices on the last trading day prior to expiration (P.M.-settled third Friday-of-the-month SPX options series). The Exchange may also list options on the Mini-SPX Index (‘‘XSP’’) whose exercise settlement value is derived from closing prices on the last trading day prior to expiration (‘‘P.M.settled’’). P.M.-settled third Friday-ofthe-month SPX options series and P.M.settled XSP options will be listed for trading for a pilot period ending [November 2, 2020] May 3, 2021. * * * * * The text of the proposed rule change is also available on the Exchange’s website (https://www.cboe.com/ AboutCBOE/ CBOELegalRegulatoryHome.aspx), at the Exchange’s Office of the Secretary, and at the Commission’s Public Reference Room. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the 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 aspects of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose On February 8, 2013, the Securities and Exchange Commission (the ‘‘Commission’’) approved a rule change that established a Pilot Program that allows the Exchange to list options on 20 17 VerDate Sep<11>2014 (additions are italicized; deletions are [bracketed]) * * * * * Jkt 253001 PO 00000 Frm 00057 Fmt 4703 Sfmt 4703 68611 the S&P 500 Index whose exercise settlement value is derived from closing prices on the last trading day prior to expiration (‘‘SPXPM’’).5 On July 31, 2013, the Commission approved a rule change that amended the Pilot Program that allows the Exchange to list options on the Mini-SPX Index (‘‘XSP’’) whose exercise settlement value is derived from closing prices on the last trading day prior to expiration (‘‘P.M.-settled XSP’’) 6 (together, SPXPM and P.M.settled XSP to be referred to herein as the ‘‘Pilot Products’’).7 The Exchange has extended the pilot period numerous times, which, pursuant to Rule 4.13.13,8 is currently set to expire on the earlier of November 2, 2020 or the date on which the pilot program is approved on a permanent basis.9 The Exchange hereby proposes to further extend the end date of the pilot period to May 3, 2021. During the course of the Pilot Program and in support of the extensions of the Pilot Program, the Exchange submits reports to the Commission regarding the Pilot Program that detail the Exchange’s experience with the Pilot Program, pursuant to the SPXPM Approval Order 10 and the P.M.-settled XSP 5 See Securities Exchange Act Release No. 68888 (February 8, 2013), 78 FR 10668 (February 14, 2013) (SR–CBOE–2012–120) (the ‘‘SPXPM Approval Order’’). Pursuant to Securities Exchange Act Release No. 80060 (February 17, 2017), 82 FR 11673 (February 24, 2017) (SR–CBOE–2016–091), the Exchange moved third-Friday P.M.-settled options into the S&P 500 Index options class, and as a result, the trading symbol for P.M.-settled S&P 500 Index options that have standard third Friday-ofthe-month expirations changed from ‘‘SPXPM’’ to ‘‘SPXW.’’ This change went into effect on May 1, 2017, pursuant to Cboe Options Regulatory Circular RG17–054. 6 See Securities Exchange Act Release No. 70087 (July 31, 2013), 78 FR 47809 (August 6, 2013) (SR– CBOE–2013–055) (the ‘‘P.M.-settled XSP Approval Order’’). 7 For more information on the Pilot Products or the Pilot Program, see the SPXPM Approval Order and the P.M.-settled XSP Approval Order. 8 The Exchange recently relocated prior Rule 24.9, containing the provision which governs the Pilot Program, to current Rule 4.13. See SR–CBOE–2019– 092 (October 4, 2019), which did not make any substantive changes to prior Rule 24.9 and merely relocated it to Rule 4.13. 9 See Securities Exchange Act Release Nos. 71424 (January 28, 2014), 79 FR 6249 (February 3, 2014) (SR–CBOE–2014–004); 73338 (October 10, 2014), 79 FR 62502 (October 17, 2014) (SR–CBOE–2014–076); 77573 (April 8, 2016), 81 FR 22148 (April 14, 2016) (SR–CBOE–2016–036); 80386 (April 6, 2017), 82 FR 17704 (April 12, 2017) (SR–CBOE–2017–025); 83166 (May 3, 2018), 83 FR 21324 (May 9, 2018) (SR–CBOE–2018–036); 84535 (November 5, 2018), 83 FR 56129 (November 9, 2018) (SR–CBOE–2018– 069); 85688 (April 18, 2019), 84 FR 17214 (April 24, 2019) (SR–CBOE–2019–023); 87464 (November 5, 2019), 84 FR 61099 (November 12, 2019) (SR– CBOE–2019–107); and 88674 (April 16, 2020), 85 FR 22479 (April 22, 2020) (SR–CBOE–2020–036). 10 See supra note 5. E:\FR\FM\29OCN1.SGM 29OCN1

Agencies

[Federal Register Volume 85, Number 210 (Thursday, October 29, 2020)]
[Notices]
[Pages 68607-68611]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-23919]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-90264; File No. SR-FINRA-2020-034]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of a Proposed Rule Change To Modify 
TRACE Dissemination Protocols Regarding Agency Pass-Through MBS or SBA-
Backed ABS Traded in Specified Pool Transactions

October 23, 2020.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on October 15, 2020, the Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission'') the proposed rule change as described in Items I, 
II, and III below, which Items have been prepared by FINRA. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing to modify Trade Reporting and Compliance Engine 
(``TRACE'') dissemination protocols regarding Agency Pass-Through 
Mortgage-Backed Securities or Small Business Administration (SBA)-
Backed Asset-Backed Securities traded in Specified Pool Transactions.
    The text of the proposed rule change is available on FINRA's 
website 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
Background
    FINRA commenced dissemination of Specified Pool Transactions in 
2013.\3\ A ``Specified Pool Transaction'' is defined as a transaction 
in an Agency Pass-Through Mortgage-Backed Security (``Agency Pass-
Through MBS'') \4\ or an SBA-Backed Asset-Backed Security (``SBA-Backed 
ABS'') \5\ requiring the delivery at settlement of a pool or pools that 
is identified by a unique pool identification number at the Time of 
Execution.\6\ As described in the Specified Pool Dissemination Filing, 
FINRA currently does not disseminate a CUSIP for Specified Pool 
transactions, but rather disseminates reference data elements, 
including approximations of information widely used to project cash 
flows and prepayment rates, such as loan-to-value (LTV) information. 
FINRA is proposing changes to the LTV rounding convention used for the 
information publicly disseminated through TRACE for these types of 
transactions in Agency Pass-Through MBSs and SBA-Backed ABSs.
---------------------------------------------------------------------------

    \3\ See Securities Exchange Act Release No. 68084 (October 23, 
2012), 77 FR 65436 (October 26, 2012) (Order Approving File No. SR-
FINRA-2012-042) (``Specified Pool Dissemination Filing''). Among 
other things, the filing provided for dissemination of transactions 
in Agency Pass-Through Mortgage-Backed Securities traded in 
specified pools and transactions in SBA-Backed Asset-Backed 
Securities traded in specified pools or to be announced (``TBA''), 
and reduced the reporting timeframe for such transactions.
    \4\ FINRA Rule 6710(v) generally defines an ``Agency Pass-
Through Mortgage-Backed Security'' as a type of Securitized Product 
issued in conformity with a program of an Agency or a Government-
Sponsored Enterprise (``GSE'') for which the timely payment of 
principal and interest is guaranteed by the Agency or GSE, 
representing ownership interest in a pool (or pools) of mortgage 
loans structured to ``pass through'' the principal and interest 
payments to the holders of the security on a pro rata basis.
    \5\ FINRA Rule 6710(bb) defines an ``SBA-Backed ABS'' as a 
Securitized Product issued in conformity with a program of the SBA, 
for which the timely payment of principal and interest is guaranteed 
by the SBA, representing ownership interest in a pool (or pools) of 
loans or debentures and structured to ``pass through'' the principal 
and interest payments made by the borrowers in such loans or 
debentures to the holders of the security on a pro rata basis.
    \6\ See FINRA Rule 6710(x).
---------------------------------------------------------------------------

    In the process of developing the approach adopted in the Specified 
Pool Dissemination Filing, FINRA, among other things, considered 
industry feedback regarding the nature of the market for Specified Pool 
Transactions (also, ``Specified Pools''), including concerns regarding 
information leakage. Market participants' concerns included that 
dissemination of the specific CUSIP of a Specified Pool may result in 
information leakage regarding trading strategies, positions and other 
sensitive information, which may negatively impact trading interest and 
liquidity in the market for these securities.\7\ In response, FINRA 
modified the proposal such that the disseminated information regarding 
Specified Pool Transactions would not include the CUSIP. Instead, FINRA 
adopted an approach whereby, in lieu of a CUSIP, FINRA disseminates 
reference data elements, including approximations of information widely 
used to project cash flows and prepayment rates.
---------------------------------------------------------------------------

    \7\ See Specified Pool Dissemination Filing, supra note 3.
---------------------------------------------------------------------------

    Pursuant to this approach, FINRA groups Agency Pass-Through MBSs 
and SBA-Backed ABSs into cohorts, as discussed further below, using 
data elements that are integral to describing and valuing these types 
of securities, such as the pool's LTV ratio. The cohort groupings are 
established using rounded or truncated figures for the underlying data 
elements, so that numeric values within each cohort may be understood 
within defined ranges. Each cohort is assigned a unique identification 
number--the Reference Data Identifier (``RDID''). After a member 
reports a Specified Pool Transaction to TRACE, FINRA disseminates the 
corresponding RDID in lieu of disseminating the CUSIP. The underlying 
data elements that correspond to each RDID are made available to 
members through the TRACE system.
    Specifically, FINRA uses the following ten data elements \8\ to 
form the RDID cohorts that describe the underlying security traded in a 
Specified Pool Transaction: (1) Issuer; (2) Product Type; (3) 
Amortization Type; (4) Coupon; (5) Original Maturity;

[[Page 68608]]

(6) Weighted Average Coupon (``WAC''); (7) Weighted Average Maturity 
(``WAM''); (8) Weighted Average Loan Age (``WALA''); (9) Current 
Average Loan Size (``ALS''); and (10) Loan-to-Value ratio (``LTV''). 
For example, RDID #A1234 may represent: (1) Issuer = FNMA; (2) Product 
Type = Co-Op; (3) Amortization Type = ARM; (4) Coupon = 2.0; (5) 
Original Maturity = 360; (6) WAC = 2.5; (7) WAM = 200; (8) WALA = 160; 
(9) ALS = 100; and (10) Original LTV = 50. Whenever a transaction in a 
CUSIP that falls within this cohort occurs, TRACE would disseminate 
RDID #A1234 along with transaction-related (rather than security-
related) information, such as the price, execution time, reporting and 
contra-party types and whether the transaction was a buy or a sell.
---------------------------------------------------------------------------

    \8\ Issuing agencies make the data elements publicly available 
on a monthly basis. Therefore, TRACE updates RDIDs at least monthly.
---------------------------------------------------------------------------

    The values for items (4) through (10) are rounded or truncated in 
creating cohort groupings to reduce the risk that the specific security 
traded and the market participant that engaged in the transaction may 
be identified. Currently, the rounding and truncation conventions that 
are used for Specified Pool Transactions are as follows.\9\
---------------------------------------------------------------------------

    \9\ In Regulatory Notice 12-56 (December 2012), FINRA published 
summary information regarding the data elements and the truncation 
or rounding conventions that would apply to dissemination for 
Specified Pools.
---------------------------------------------------------------------------

     Coupon--Rounded down to the nearest quarter percentage 
point--e.g., an interest rate of 5.12% is rounded to 5%.
     Original Maturity--Rounded up to the nearest 10--e.g., an 
original maturity of 358 months is rounded to 360 months.
     WAC--Truncated to a single decimal--e.g., a WAC of 7.13% 
is truncated to 7.1%.
     WAM--Rounded down to the nearest 10--e.g., a WAM of 87 
months is rounded to 80 months.
     WALA--Rounded up to the nearest 10--e.g., a WALA of 163 
months is rounded to 170 months.
     ALS--Rounded down to the nearest 25--e.g., an ALS of 113 
(i.e., $113,000 average loan size) is rounded to 100 (i.e., $100,000 
average loan size).
     LTV--Rounded down to the nearest 25--e.g., an original LTV 
of 72% is rounded to 50%.
    As noted in the Specified Pool Dissemination Filing, FINRA believes 
that the transaction information disseminated through TRACE should 
provide investors with sufficient information to assess the value and 
price of a security, which, for Securitized Products, includes 
information necessary to make assumptions about cash flows and 
prepayment rates. FINRA anticipated that providing the data elements, 
as described above, would supply market participants with information 
that would allow them to perform this analysis.
    Since that time, FINRA has continued to evaluate the market for 
Specified Pools, including discussing with market participants the 
value of the information currently disseminated by TRACE. As a result 
of these efforts, FINRA is proposing to modify the LTV rounding 
convention used for purposes of the dissemination protocols for 
Specified Pool Transactions. FINRA believes that the currently 
disseminated LTV information is useful, but can be improved upon, as 
discussed below, to create more granular cohorts and, therefore, more 
meaningful information to the marketplace.\10\
---------------------------------------------------------------------------

    \10\ The original LTV ratio expresses the amount of a first 
mortgage lien as a percentage of the total appraised value of real 
property.
---------------------------------------------------------------------------

Proposal
    As described above, one of the data elements FINRA uses for 
organizing cohorts is the original LTV, which currently is rounded down 
to the nearest 25 (e.g., an original LTV of 72% is shown as 50%). FINRA 
is proposing to revise the rounding methodology used for purposes of 
cohort groupings for Specified Pool Transaction dissemination to 
increase the granularity and usefulness of the information available to 
market participants. Specifically, FINRA proposes a revised rounding 
convention whereby LTV ratios would be segmented into eight categories 
between zero and 121+, and FINRA would organize the cohorts such that 
each cohort would represent the LTV as the upper limit of the 
applicable category, as follows: For an LTV up to 20%, the cohorts 
would represent the LTV as 20% (such that an original LTV of 12% would 
be shown as 20%); for an LTV between 21% and 40%, the cohorts would 
represent the LTV as 40% (such that an original LTV of 21% would be 
shown as 40%); for an LTV between 41% and 60%, the cohorts would 
represent the LTV as 60% (such that an original LTV of 60% would be 
shown as 60%); for an LTV between 61% and 80%, the cohorts would 
represent the LTV as 80% (such that an original LTV of 70% would be 
shown as 80%); for an LTV between 81% and 93%, the cohorts would 
represent the LTV as 93% (such that an original LTV of 90% would be 
shown as 93%); for an LTV between 94% and 100%, the cohorts would 
represent the LTV as 100% (such that an original LTV of 100% would be 
shown as 100%); for an LTV between 101% and 120%, the cohorts would 
represent the LTV as 120% (such that an original LTV of 105% would be 
shown as 120%); and for an LTV of 121% or greater, the cohorts would 
represent the LTV as 121+ (such that an original LTV of 125% would be 
shown as 121+).

                       Proposed LTV Ratio Segments
------------------------------------------------------------------------
                                                           Disseminated
                     LTV ratio  (%)                             (%)
------------------------------------------------------------------------
up to 20................................................              20
21 to 40................................................              40
41 to 60................................................              60
61 to 80................................................              80
81 to 93................................................              93
94 to 100...............................................             100
101 to 120..............................................             120
121 or greater..........................................            121+
------------------------------------------------------------------------

    In developing the proposed approach, FINRA sought to balance the 
goal of making more detailed information available to the market with 
concerns regarding the potential risk of identifying the particular 
security being traded and the market participant that engaged in the 
transaction. FINRA believes that the revised LTV rounding convention 
will provide more meaningful information to market participants by 
grouping securities with more similar characteristics. In particular, 
the groupings are anticipated to improve how disseminated TRACE data 
reflects the role of LTV ratios in MBS valuations. For example, 
separating pools with LTV ratios at or below 80 from those with LTV 
ratios of 81 or higher delineates the pools with mortgages that may 
require mortgage insurance from those that may not require mortgage 
insurance. Similarly, the revised rounding methodology for LTV ratios 
of 81 or more are more consistent with the way mortgage originators 
view loan characteristics and the way that the market determines 
pricing.\11\ For instance, a LTV ratio of 95 or higher may reflect a 
``pay-up'' in the Fannie Mae market because that is the threshold at 
which Fannie Mae loan level price adjustments increase 
significantly.\12\
---------------------------------------------------------------------------

    \11\ CUSIPs with LTVs from 81% to 100% are likely to have a 
greater proportion of underlying mortgages that carry insurance or 
that have the minimum down payment required for a mortgage to 
conform to GSE guidelines.
    \12\ ``MBS pools typically receive specified pay-ups when the 
underlying loans have characteristics that make the borrower less 
likely to refinance as compared to other loans with similar note 
rates. . . . Given the projected stable behavior of these loans, 
investors are willing to pay a premium above generic To Be Announced 
(TBA) security prices for pools of loans of this type. The premium 
over a TBA security is referred to as the specified pool pay-up.'' 
See Fannie Mae, Specified Pay-ups in Pricing & Execution--Whole 
Loan[supreg], https://singlefamily.fanniemae.com/media/5056/display.

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[[Page 68609]]

    FINRA considered that the revised LTV rounding convention may 
increase the potential risk that market participants may be able to 
identify the particular security being traded and the market 
participant that engaged in the transaction. FINRA believes that the 
highest potential risk regarding information leakage is present for 
cohorts with only one CUSIP. Therefore, FINRA analyzed the changes to 
the total number of cohorts, and the total number of cohorts with only 
one CUSIP. Applying the proposed LTV tiers to TRACE reference data as 
of December 2019 would have resulted in an increase of 10.9% in the 
number of total cohorts, and an increase of 14.3% in the number of 
cohorts with only one CUSIP. FINRA also analyzed the 787,691 Specified 
Pool Transactions executed in 2019 totaling $5.8 trillion in volume. 
Applying the proposed LTV tiers to the 2019 transaction data would have 
resulted in a 12.8% increase in the number of trades for cohorts with 
only one CUSIP, and a 10.2% increase in the number of trades for 
cohorts with only one CUSIP and by only one dealer.
    FINRA believes, however, that the proposed modifications to the LTV 
rounding convention represents an improvement to the current framework 
by increasing the precision in the RDID cohorts, particularly around a 
significant threshold. Thus, the proposal balances the goal of 
providing information of increased value to the marketplace with risks 
relating to the possible reverse engineering of disseminated 
transactions to identify a specific pool or market participant. FINRA 
believes that this change to LTV rounding is a measured change that 
provides more granular information regarding the LTV of the pool 
traded, which should improve the value of the disseminated information 
for market participants.
    If the Commission approves the proposed rule change, FINRA will 
announce the effective date of the proposed rule change in a Regulatory 
Notice to be published no later than 60 days following Commission 
approval. The effective date will be no later than 270 days following 
publication of the Regulatory Notice announcing Commission approval.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\13\ which requires, among 
other things, that FINRA rules must be designed to prevent fraudulent 
and manipulative acts and practices, to promote just and equitable 
principles of trade, and, in general, to protect investors and the 
public interest. FINRA believes that the proposed rule change to 
improve transparency for Specified Pool Transactions is designed to 
prevent fraudulent and manipulative acts and practices, to promote just 
and equitable principles of trade, and, generally to protect investors 
and the public.
---------------------------------------------------------------------------

    \13\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

    FINRA believes that the proposed changes to the LTV ratio rounding 
convention for Specified Pool Transactions should enhance the 
usefulness of TRACE data. FINRA believes that this change to LTV 
dissemination is a measured change that provides more granular 
information regarding the LTV of the pool traded, which should improve 
the value of the disseminated information for market participants.

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.
Economic Impact Assessment
(a) Regulatory Need
    The transaction information made available through TRACE provides 
market participants with information to assess the value and price of a 
TRACE-Eligible Security. FINRA is proposing changes to modify the LTV 
rounding convention to increase the precision of the cohort groupings, 
thereby providing more valuable information to the market.
(b) Economic Baseline
    The economic baseline for the proposal is the current rounding 
convention for Agency Pass-Through MBS or an SBA-Backed ABS traded in 
Specified Pool Transactions. The proposal is expected to affect market 
participants that transact in these securities or related derivatives.
    As discussed above, FINRA groups Specified Pools into cohorts 
identified by a unique RDID. When a transaction in a Specified Pool 
occurs, FINRA disseminates the corresponding RDID in lieu of the CUSIP 
to reduce the disclosure of information regarding trading strategies, 
positions, and other sensitive information. Potential information 
leakage may negatively impact trading interest and liquidity in the 
market for these securities. Although disseminating RDIDs in lieu of 
specific CUSIPs may reduce the amount of information leakage, it also 
may decrease the value of the disseminated information. The value of 
RDIDs and corresponding reference information, and its resultant effect 
on price transparency, is dependent on the similarity of the CUSIPs 
within each cohort (i.e., how well a cohort assignment represents the 
characteristics of all CUSIPs within a given cohort).
(c) Economic Impact
    The application of the proposed LTV tiers to the December 2019 data 
would have increased the total number of cohorts by 10.9% (from 287,802 
to 319,188). The average number of CUSIPs in a cohort would have 
decreased by 10.0% (from 4.0 to 3.6), and the number of cohorts with 
only one CUSIP would have increased 14.3% (from 163,215 to 186,521). We 
discuss the benefits and costs of the application of the proposed LTV 
dissemination categories below, including the potential risk to market 
participants relating to the number of transactions for cohorts with 
only one CUSIP.\14\
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    \14\ The economic analysis will more accurately reflect the 
potential impact of the proposal to the extent that previous market 
conditions and distribution of LTVs remain similar. For example, the 
distribution of LTVs remained similar from 2015 to 2019 with a mean 
and median of approximately 78.
---------------------------------------------------------------------------

    FINRA believes that the proposal will enhance transparency by 
increasing the precision of the RDID cohorts. The rounding convention 
under the proposal will create tighter bands around LTVs within a 
cohort. Currently, the median difference between the minimum and 
maximum LTV within a cohort (i.e., LTV spread) is 17.0. The LTV spread 
also has an interquartile range (the difference between the 25th and 
75th percentile) of 12.0. Under the proposal, however, the median LTV 
spread within a cohort would be 11.0, a decrease of 35.3%, and an 
interquartile range of 10.0.\15\
---------------------------------------------------------------------------

    \15\ These measures include only those 898,345 CUSIPs that are 
in a cohort with more than one CUSIP both before and after the 
application of the proposed revised rounding convention.
---------------------------------------------------------------------------

    The tighter bands around LTV would increase the similarity of the 
CUSIPs within a given cohort, and therefore the

[[Page 68610]]

representativeness of prices, in the cohort. This would benefit market 
participants by increasing the value of price information as it relates 
to LTV, and thereby contributing to more efficient pricing and better 
execution quality.\16\
---------------------------------------------------------------------------

    \16\ Transactions in Securitized Products began being reported 
to TRACE in May 2011 on a next-day basis. See Securities Exchange 
Act Release No. 63223 (November 1, 2010), 75 FR 68654 (November 8, 
2010) (Notice of Filing and Immediate Effectiveness of File No. SR-
FINRA-2010-054). In 2015, transactions were required to be reported 
to TRACE within 15 minutes of execution. See Securities Exchange Act 
Release No. 71607 (February 24, 2014), 79 FR 11481 (February 28, 
2014) (Order Approving File No. SR-FINRA-2013-046). See An He & 
Bruce Mizrach, Analysis of Securitized Asset Liquidity, (2017), 
FINRA Office of the Chief Economist, Research Note. The authors 
study the changes in the liquidity of securitized assets between 
2012 and 2016. Although they did not directly test for a causal link 
between transparency and liquidity, the improved liquidity for MBS 
securities during a time of increasing trade transparency is a 
positive indicator of the value of transparency for these 
securities. The authors also note that the bid-ask spread for MBSs 
decreased by 37% during the period while average daily trading 
volume increased. An improvement in execution quality as a result of 
the proposal may further decrease the bid-ask spreads for MBSs.
---------------------------------------------------------------------------

    The rounding convention under the proposal also would increase the 
similarity of CUSIPs when LTV is relatively more important for pricing 
purposes (i.e., LTVs from 81% up to 100%). Various factors may be more 
important for mortgages in this range (e.g., the premium or ``pay-up'' 
for Specified Pools relative to generic TBA security prices),\17\ and 
further demarcation around LTV ratios also would mirror mortgage 
origination practices. The rounding conventions with respect to the 
other security characteristics and its effect on price variation, 
however, would not change.
---------------------------------------------------------------------------

    \17\ See supra note 12.
---------------------------------------------------------------------------

    Alternatively, the rounding convention under the proposal could 
increase the potential for and the costs associated with information 
leakage. In particular, the rounding convention may increase the 
potential for information leakage as a result of an increase in the 
number of cohorts with only one CUSIP and the small number of dealers 
that trade any one CUSIP.\18\ This may negatively impact trading 
interest and liquidity in the market for these securities.
---------------------------------------------------------------------------

    \18\ For example, among the 123,481 CUSIPs that traded in 2019, 
47.7% (58,859) were traded by one dealer (as proxied by the market 
participant identifier (MPID)). In addition, two dealers traded 
20.8% (or 25,671) of the CUSIPs, and three dealers traded 12.0% (or 
14,840) of the CUSIPs. Four or more dealers traded the remaining 
19.5% (or 24,111) of CUSIPs.
---------------------------------------------------------------------------

    The proposal would increase the number of cohorts with only one 
CUSIP from 163,215 to 186,521. As noted above, the number of Specified 
Pool Transactions for cohorts with only one CUSIP would increase under 
the proposal by 12.8% from 77,234 (9.8% of all transactions) to 87,096 
(11.1% of all transactions). The percentage of transactions for cohorts 
with only one CUSIP that were made by only one dealer also would 
increase under the proposal by 10.2% from 12,203 (1.5% of total trades) 
to 13,445 (1.7% of total trades).
    The 12.8% increase in the number of transactions for cohorts with 
only one CUSIP and the 10.2% increase in the number of transactions for 
those cohorts by only one dealer may increase the risk to market 
participants from disclosing information relating to trading 
strategies, positions, and other sensitive information. As noted above, 
this may reduce market participation and liquidity in those CUSIPs.\19\ 
However, FINRA believes that the proposal properly balances this 
potential risk related to information leakage with providing more 
valuable information to market participants.
---------------------------------------------------------------------------

    \19\ The number of counterparties for MBS securities decreased 
between 2012 and 2016, consistent with brokers experiencing higher 
risk from increased transparency. See He & Mizrach (2017), supra 
note 16.
---------------------------------------------------------------------------

(d) Alternatives Considered
    Plausible alternatives to the proposal would be using different LTV 
categories and rounding conventions. For example, the rounding 
convention could have further segmented the LTV ratios in the range of 
81% to 100%. The rounding convention also could have incorporated a 
catch-all tier of 141+ for LTVs of 141% or more instead of the catch-
all tier of 121+ for LTVs of 121% or more. In general, tighter (looser) 
bands would increase (decrease) the number of cohorts with only one 
CUSIP but increase (decrease) the similarity of the specified pools 
within the same cohort. FINRA believes that the costs associated with 
the LTV rounding convention proposed herein is appropriate given the 
potential increase in the precision of the cohorts and value of the 
transaction information. FINRA will continue to evaluate the market for 
Specified Pools and evaluate the conventions that are used for 
disseminating these transactions.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Written comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 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 [email protected]. Please include 
File Number SR-FINRA-2020-034 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR-FINRA-2020-034. 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 website (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 website 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 68611]]

filing also will be available for inspection and copying at the 
principal office of FINRA. All comments received will be posted without 
change. Persons submitting comments are cautioned that we do not redact 
or edit personal identifying information from comment submissions. You 
should submit only information that you wish to make available 
publicly. All submissions should refer to File Number SR-FINRA-2020-
034, and should be submitted on or before November 19, 2020.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-23919 Filed 10-28-20; 8:45 am]
BILLING CODE 8011-01-P
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