Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Order Approving Proposed Rule Change To Modify TRACE Dissemination Protocols for Agency Pass-Through MBS or SBA-Backed ABS Traded in Specified Pool Transactions, 82002-82005 [2020-27727]
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82002
Federal Register / Vol. 85, No. 243 / Thursday, December 17, 2020 / Notices
were eligible for the Incentive, the
proposed elimination of the Incentive
would remove a potential burden on
competition in that it would level the
playing field for all Firms operating on
the Exchange.
Intermarket Competition. The
Exchange operates in a highly
competitive market in which market
participants can readily favor one of the
16 competing option exchanges if they
deem fee levels at a particular venue to
be excessive. In such an environment,
the Exchange must continually adjust its
fees to remain competitive with other
exchanges and to attract order flow to
the Exchange. Based on publiclyavailable information, and excluding
index-based options, no single exchange
currently has more than 16% of the
market share of executed volume of
multiply-listed equity and ETF options
trades.21 Therefore, no exchange
currently possesses significant pricing
power in the execution of multiplylisted equity and ETF options order
flow. More specifically, in August 2020,
the Exchange had less than 10% market
share of executed volume of multiplylisted equity and ETF options trades.22
The Exchange believes that the
proposed rule change reflects this
competitive environment because it
modifies the Exchange’s fees and rebates
in a manner designed to encourage ATP
Holders to direct trading interest to the
Exchange, to provide liquidity and to
attract order flow. To the extent that this
purpose is achieved, all the Exchange’s
market participants should benefit from
the improved market quality and
increased opportunities for price
improvement. The Exchange also
believes that the proposed rule change
reflects this competitive environment
because it removes an underutilized
Incentive that did not achieve its
intended purpose of attracting order
flow.
The Exchange believes that the
proposed changes could promote
competition between the Exchange and
other execution venues, including those
that currently offer similar pricing
incentives, by encouraging additional
orders to be sent to the Exchange for
execution.23
21 See
supra note 15 [sic].
on OCC data, the Exchange’s market
share in equity-based options increased from 7.73%
for the month of August 2019 to 8.18% for the
month of August 2020. See supra note 16 [sic].
23 See, e.g., supra note 17 [sic].
22 Based
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C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
No written comments were solicited
or received with respect to the proposed
rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
The foregoing rule change is effective
upon filing pursuant to Section
19(b)(3)(A) 24 of the Act and
subparagraph (f)(2) of Rule 19b–4 25
thereunder, because it establishes a due,
fee, or other charge imposed by the
Exchange.
At any time within 60 days of the
filing of such proposed rule change, the
Commission summarily may
temporarily suspend such rule change if
it appears to the Commission that such
action is necessary or appropriate in the
public interest, for the protection of
investors, or otherwise in furtherance of
the purposes of the Act. If the
Commission takes such action, the
Commission shall institute proceedings
under Section 19(b)(2)(B) 26 of the Act to
determine whether the proposed rule
change should be approved or
disapproved.
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 the
filing also will be available for
inspection and copying at the principal
office of the Exchange. 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–NYSEAMER–2020–84, and
should be submitted on or before
January 7, 2021.
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:
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.27
J. Matthew DeLesDernier,
Assistant Secretary.
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–
NYSEAMER–2020–84 on the subject
line.
SECURITIES AND EXCHANGE
COMMISSION
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–NYSEAMER–2020–84. 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
24 15
U.S.C. 78s(b)(3)(A).
CFR 240.19b–4(f)(2).
26 15 U.S.C. 78s(b)(2)(B).
[FR Doc. 2020–27729 Filed 12–16–20; 8:45 am]
BILLING CODE 8011–01–P
[Release No. 34–90646; File No. SR–FINRA–
2020–034]
Self-Regulatory Organizations;
Financial Industry Regulatory
Authority, Inc.; Order Approving
Proposed Rule Change To Modify
TRACE Dissemination Protocols for
Agency Pass-Through MBS or SBABacked ABS Traded in Specified Pool
Transactions
December 11, 2020.
I. Introduction
On October 15, 2020, the Financial
Industry Regulatory Authority, Inc.
(‘‘FINRA’’) filed with the Securities and
Exchange Commission (‘‘Commission’’),
pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
25 17
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27 17
E:\FR\FM\17DEN1.SGM
CFR 200.30–3(a)(12).
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Federal Register / Vol. 85, No. 243 / Thursday, December 17, 2020 / Notices
(‘‘Act’’) 1 and Rule 19b–4 thereunder,2 a
proposed rule change to modify the
Trade Reporting and Compliance Engine
(‘‘TRACE’’) dissemination protocols for
Agency Pass-Through Mortgage-Backed
Securities or Small Business
Administration (‘‘SBA’’)-Backed AssetBacked Securities traded in Specified
Pool Transactions. The proposed rule
change was published for comment in
the Federal Register on October 29,
2020.3 The Commission received one
comment letter in support of the
proposed rule change.4 This order
approves the proposed rule change.
II. Description of the Proposal
FINRA commenced public
dissemination of Specified Pool
Transactions in 2013 after the
Commission approved FINRA’s
proposal to do so in 2012.5 FINRA’s
rules define a ‘‘Specified Pool
Transaction’’ as a transaction in an
Agency Pass-Through Mortgage-Backed
Security (‘‘Agency Pass-Through
MBS’’) 6 or an SBA-Backed AssetBacked Security (‘‘SBA-Backed ABS’’) 7
requiring the delivery at settlement of a
pool or pools that is identified by a
unique pool identification number at
the Time of Execution.8 As described in
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 See Securities Exchange Act Release No. 90264
(October 23, 2020), 85 FR 68607 (October 29, 2020)
(‘‘Notice’’).
4 See Letter from Wendell J. Chambliss, Vice
President and Deputy General Counsel, Mission,
Legislative and Regulatory Affairs, Legal Division,
Freddie Mac, to J. Matthew DeLesDernier, Assistant
Security, Commission, dated November 18, 2020
(‘‘Freddie Mac Letter’’).
5 See Securities Exchange Act Release No. 68084
(October 23, 2012), 77 FR 65436 (October 26, 2012)
(‘‘FINRA–2012–042 Approval’’). This filing
provided for, among other things, public
dissemination of transactions in Agency PassThrough Mortgage-Backed Securities traded in
specified pools and transactions in SBA-Backed
Asset-Backed Securities traded in specified pools or
to be announced, and reduced the reporting
timeframe for such transactions.
6 FINRA Rule 6710(v) defines an ‘‘Agency PassThrough MBS’’ as ‘‘a type of Securitized Product
issued in conformity with a program of an Agency
as defined in [FINRA Rule 6710(k)] or a
Government-Sponsored Enterprise (‘GSE’) as
defined in [FINRA Rule 6710(n)], 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.’’
7 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.’’
8 See FINRA Rule 6710(x).
2 17
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the FINRA–2012–042 Approval, when
disseminating information of a
Specified Pool Transaction, FINRA does
not identify the specific bond transacted
by disclosing its CUSIP code.9 Instead,
FINRA disseminates more general
information about the bond and the pool
underlying the bond, including
approximations of information widely
used to project cash flows and
prepayment rates of the underlying
mortgages, such as loan-to-value
(‘‘LTV’’) information.10
Under its public dissemination
protocol for Specified Pool
Transactions, FINRA groups the pools
underlying the transacted bonds into
cohorts, using data elements that are
integral to describing and valuing the
bonds based on these pools, such as the
LTV ratio. The cohort groupings are
established using rounded or truncated
figures for the underlying data elements,
so that numeric values within each
cohort can 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 transacted
bond’s CUSIP code. The underlying data
elements that correspond to each RDID
are made available to members through
the TRACE system.11 FINRA rounds or
truncates certain cohort groupings to
reduce the risk that the specific bond
traded and the market participant that
engaged in the transaction might be
identified.12
9 See
FINRA–2012–042 Approval, 77 FR at 65437.
id. FINRA stated that, in developing the
approach to public dissemination described in the
FINRA–2012–042 Approval, it considered industry
feedback, including concerns that dissemination of
the CUSIP code in a Specified Pool Transaction
might result in information leakage regarding
trading strategies, positions, and other sensitive
information, which could negatively impact trading
interest and liquidity in the market for these
securities. See Notice, 85 FR at 68607.
11 FINRA uses the following ten data elements to
form the RDID cohorts that describe the security
traded in a Specified Pool Transaction: (1) Issuer;
(2) Product Type; (3) Amortization Type; (4)
Coupon; (5) Original Maturity; (6) Weighted
Average Coupon (‘‘WAC’’); (7) Weighted Average
Maturity (‘‘WAM’’); (8) Weighted Average Loan Age
(‘‘WALA’’); (9) Current Average Loan Size (‘‘ALS’’);
and (10) Original LTV. For example, RDID #A1234
might 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. See id., 85 FR
at 68607–08.
12 Currently, the rounding and truncation
conventions that are used for Specified Pool
Transactions are the following: (1) Coupon—
Rounded down to the nearest quarter percentage
point—e.g., an interest rate of 5.12% is rounded to
5%; (2) Original Maturity—Rounded up to the
nearest 10—e.g., an original maturity of 358 months
10 See
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82003
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.’’ 13 The elements
described above are intended to provide
market participants with the
information necessary to perform such
an analysis.14
FINRA stated that, since commencing
public dissemination of Specified Pool
Transactions, it has continued to
evaluate the relevant market and the
value of the information disseminated to
market participants.15 As a result of
these efforts, which included
discussions with market participants,
FINRA is now proposing changes to the
LTV rounding convention used in the
public dissemination of Specified Pool
Transactions.16 Specifically, FINRA
proposes to create more granular cohorts
for LTV to increase the precision of the
information regarding the LTV of the
pool traded. In place of the current LTV
rounding convention, which is rounded
down to the nearest 25%, FINRA will
organize the cohorts such that each
cohort represents the LTV as the upper
limit of the applicable category, as
follows:
1. 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%);
2. 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%);
3. 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%);
4. 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%);
5. for an LTV between 81% and 93%,
the cohorts would represent the LTV as
is rounded to 360 months; (3) WAC—Truncated to
a single decimal—e.g., a WAC of 7.13% is truncated
to 7.1%; (4) WAM—Rounded down to the nearest
10—e.g., a WAM of 87 months is rounded to 80
month; (5) WALA—Rounded up to the nearest 10—
e.g., a WALA of 163 months is rounded to 170
months; (6) 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); and (7) LTV—Rounded down to the nearest
25—e.g., an original LTV of 72% is rounded to
50%. See id., 85 FR at 68608.
13 Id.
14 See id.
15 See id.
16 FINRA has not proposed changes to the
rounding or truncation conventions utilized for the
other data elements.
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Federal Register / Vol. 85, No. 243 / Thursday, December 17, 2020 / Notices
93% (such that an original LTV of 90%
would be shown as 93%);
6. 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%);
7. 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
8. 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+).
Thus, as a result of the proposed rule
change, FINRA will disseminate the
LTV ratio cohorts at 20%, 40%, 60%,
80%, 93%, 100%, 120%, and 120%+.
FINRA stated that, in developing the
new LTV approach, it sought to balance
the goal of making more detailed
information available to the market
against the potential risk of identifying
the particular security being traded and
the market participant that engaged in
the transaction.17 FINRA believes that
the new LTV rounding convention is a
‘‘measured change’’ that will provide
more granular and meaningful
information on the LTV of the Specified
Pool Transaction, which should
increase the value of the disseminated
information to market participants.18
FINRA also anticipates that the new
cohorts will improve how disseminated
TRACE data reflects the role of LTV
ratios in MBS valuations.19
FINRA has stated that it will
announce the effective date of the rule
change in a Regulatory Notice to be
published no later than 60 days
following a Commission approval, and
the effective date will be no later than
270 days following publication of that
Regulatory Notice.20
III. Discussion and Commission
Findings
After careful consideration, the
Commission finds that the proposed
rule change is consistent with the
requirements of the Act and the rules
and regulations thereunder applicable to
a national securities association.21 In
17 See
Notice, 85 FR at 68608.
id., 85 FR at 68609.
19 See id., 85 FR at 68608. FINRA stated, for
example, that separating pools with LTV ratios at
or below 80% from those with LTV ratios of 81%
or higher delineates the pools with mortgages that
might require mortgage insurance from those that
might not require mortgage insurance. See id.
Similarly, FINRA believes that the cohorts 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. See
id.
20 See id., 85 FR at 68609.
21 In approving this proposal, the Commission has
considered the proposed rule’s impact on
18 See
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18:52 Dec 16, 2020
Jkt 253001
particular, the Commission finds that
the proposed rule change is consistent
with Section 15A(b)(6) of the Act,22
which requires, among other things, that
FINRA rules be designed to prevent
fraudulent and manipulative acts and
practices, to promote just and equitable
principles of trade, and, in general, to
protect investors and the public interest.
When it issued the FINRA–2012–042
Approval, the Commission found that
the protocols for publicly disseminating
Specified Pool Transactions proposed
by FINRA—specifically, eschewing
dissemination of CUSIP codes and
instead providing more generic
information about the bond transacted
and the underlying pool—were
consistent with the Act.23 The
Commission stated that the
dissemination protocols for the
specified data elements ‘‘strike an
appropriate balance between providing
meaningful post-trade transparency and,
at the same time, reducing the potential
for ‘reverse engineering’ of transaction
data that could permit identification of
a market participant and/or its trading
strategy.’’ 24 The Commission also noted
that FINRA could in the future
determine to propose dissemination of
additional data elements that it believes
would improve transparency for
Specified Pool Transactions.25
FINRA is now proposing to revise the
dissemination protocol for Specified
Pool Transactions by increasing the
precision of the LTV cohort groupings.
In place of the current rounding
convention used for LTV (i.e., rounded
down to the nearest 25%), FINRA will
utilize eight cohorts, with each cohort
representing the LTV as the upper limit
of the applicable grouping. FINRA
believes that the tighter bands around
LTVs will benefit market participants by
increasing the value of price
information as it relates to LTV.26
The Commission finds that the
current proposal is consistent with the
Act because it represents a measured
adjustment to the overall public
dissemination protocols for Specialized
Pool Transactions that the Commission
previously found consistent with the
Act in the FINRA–2012–042 Approval.
Establishing additional cohorts utilizing
the proposed LTV thresholds appears
reasonably designed to provide market
participants and other market observers
with more useful information about the
efficiency, competition, and capital formation. See
15 U.S.C. 78c(f).
22 15 U.S.C. 78o–3(b)(6).
23 See FINRA–2012–042 Approval, 77 FR at
65437–38.
24 Id., 77 FR at 65437.
25 See id., 77 FR at 65438.
26 See Notice, 85 FR at 68610.
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transacted bonds while minimizing the
potential for adverse market impact. The
Commission notes that it received no
comments suggesting that the proposal
would have adverse market impact; the
one comment letter received on the
proposal was supportive.27 Moreover,
FINRA has represented that it will
continue to evaluate the market for
Specified Pool Transactions and
evaluate the conventions that it uses for
disseminating information on these
transactions.28 The Commission also
notes that, under this proposal, FINRA
members will not incur any
administrative burdens to report
transactions differently; the creation and
distribution of the new LTV cohorts will
be performed by FINRA through the
TRACE system.
Pursuant to Section 19(b)(5) of the
Act,29 the Commission consulted with
and considered the views of the
Treasury Department in determining to
approve the proposed rule change. The
Treasury Department indicated its
support for the proposal.30 Pursuant to
Section 19(b)(6) of the Act,31 the
Commission has considered the
sufficiency and appropriateness of
existing laws and rules applicable to
government securities brokers,
government securities dealers, and their
associated persons in approving the
proposal. As discussed above, the
proposed rule change appears
reasonably designed to improve the
value to market participants and other
market observers of the LTV information
disseminated for Specified Pool
Transactions.
IV. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,32 that the
proposed rule change (SR–FINRA–
2020–034) is approved.
27 See Freddie Mac Letter at 1 (stating that
‘‘[a]dopting the proposed approach of segmenting
LTV ratios into eight categories would align TRACE
data with pooling practices and would enhance
market transparency while maintaining sufficient
anonymity’’).
28 See Notice, 85 FR at 68610.
29 15 U.S.C. 78s(b)(5) (providing that the
Commission ‘‘shall consult with and consider the
views of the Secretary of the Treasury prior to
approving a proposed rule filed by a registered
securities association that primarily concerns
conduct related to transactions in government
securities, except where the Commission
determines that an emergency exists requiring
expeditious or summary action and publishes its
reasons therefor’’).
30 Email from Treasury Department staff to
Michael Gaw, Assistant Director, Division of
Trading and Markets, Commission (November 30,
2020).
31 15 U.S.C. 78s(b)(6).
32 15 U.S.C. 78s(b)(2).
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Federal Register / Vol. 85, No. 243 / Thursday, December 17, 2020 / Notices
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.33
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020–27727 Filed 12–16–20; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–90644; File No. SR–
NASDAQ–2020–069]
Self-Regulatory Organizations; The
Nasdaq Stock Market LLC; Notice of
Designation of a Longer Period for
Commission Action on a Proposed
Rule Change, as Modified by
Amendment No. 1, To Exclude Special
Purpose Acquisition Companies From
the Requirement That at Least 50% of
a Company’s Round Lot Holders Each
Hold Unrestricted Securities With a
Market Value of at Least $2,500
On October 8, 2020, The Nasdaq
Stock Market LLC (‘‘Nasdaq’’ or
‘‘Exchange’’) filed with the Securities
and Exchange Commission
(‘‘Commission’’), pursuant to Section
19(b)(1) of the Securities Exchange Act
of 1934 (‘‘Act’’) 1 and Rule 19b–4
thereunder,2 a proposed rule change to
exclude special purpose acquisition
companies from the requirement that at
least 50% of a company’s round lot
holders each hold unrestricted
securities with a market value of at least
$2,500. On October 21, 2020, the
Exchange filed Amendment No. 1 to the
proposed rule change, which amended
and replaced the proposed rule change
in its entirety. The proposed rule
change, as modified by Amendment No.
1, was published for comment in the
Federal Register on October 28, 2020.3
Section 19(b)(2) of the Act 4 provides
that within 45 days of the publication of
notice of the filing of a proposed rule
change, or within such longer period up
to 90 days as the Commission may
designate if it finds such longer period
to be appropriate and publishes its
reasons for so finding, or as to which the
self-regulatory organization consents,
the Commission shall either approve the
proposed rule change, disapprove the
proposed rule change, or institute
proceedings to determine whether the
proposed rule change should be
33 17
CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 See Securities Exchange Act Release No. 90245
(October 22, 2020), 85 FR 68400.
4 15 U.S.C. 78s(b)(2).
18:52 Dec 16, 2020
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.6
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020–27725 Filed 12–16–20; 8:45 am]
BILLING CODE 8011–01–P
December 11, 2020.
VerDate Sep<11>2014
disapproved. The 45th day after
publication of the notice for this
proposed rule change is December 12,
2020. The Commission is extending this
45-day time period.
The Commission finds it appropriate
to designate a longer period within
which to take action on the proposed
rule change so that it has sufficient time
to consider the proposed rule change.
Accordingly, the Commission, pursuant
to Section 19(b)(2) of the Act,5
designates January 26, 2021, as the date
by which the Commission shall either
approve or disapprove, or institute
proceedings to determine whether to
disapprove, the proposed rule change,
as modified by Amendment No. 1 (File
No. SR–NASDAQ–2020–069).
Jkt 253001
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–90642; File No. SR–CBOE–
2020–115]
Self-Regulatory Organizations; Cboe
Exchange, Inc.; Notice of Filing and
Immediate Effectiveness of a Proposed
Rule Change To Amend the Fees
Schedule With Respect to Certain Fees
Related to Qualified Contingent Cross
Transactions the Exchange’s LMM
Incentive Programs
December 11, 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 December
4, 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, II, and III below, which Items
have been prepared by the Exchange.
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
Cboe Exchange, Inc. (the ‘‘Exchange’’
or ‘‘Cboe Options’’) proposes to amend
5 Id.
6 17
CFR 200.30–3(a)(31).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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82005
the Fees Schedule with respect to
certain fees related to Qualified
Contingent Cross transactions the
Exchange’s LMM incentive programs.
The text of the proposed rule change is
attached [sic] as Exhibit 5.
The text of the proposed rule change
is also available on the Exchange’s
website (https://www.cboe.com/
AboutCBOE/CBOELegalRegulatory
Home.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
The Exchange proposes to amend its
Fees Schedule with respect to Qualified
Contingent Cross (‘‘QCC’’) transaction
fees and the Exchange’s Lead MarketMaker (‘‘LMM’’) programs.3
The Exchange first notes that it
operates in a highly competitive market
in which market participants can
readily direct order flow to competing
venues if they deem fee levels at a
particular venue to be excessive or
incentives to be insufficient. More
specifically, the Exchange is only one of
16 options venues to which market
participants may direct their order flow.
Based on publicly available information,
no single options exchange has more
than 15% of the market share.4 Thus, in
such a low-concentrated and highly
competitive market, no single options
exchange possesses significant pricing
power in the execution of option order
flow. The Exchange believes that the
ever-shifting market share among the
exchanges from month to month
3 The Exchange initially filed the proposed fee
changes December 1, 2020 (SR–CBOE–2020–113).
On December 4, 2020, the Exchange withdrew that
filing and submitted this proposal.
4 See Cboe Global Markets U.S. Options Monthly
Market Volume Summary (November 25, 2020),
available at https://markets.cboe.com/us/options/
market_statistics/.
E:\FR\FM\17DEN1.SGM
17DEN1
]]>Agencies
[Federal Register Volume 85, Number 243 (Thursday, December 17, 2020)]
[Notices]
[Pages 82002-82005]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-27727]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-90646; File No. SR-FINRA-2020-034]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Order Approving Proposed Rule Change To Modify TRACE
Dissemination Protocols for Agency Pass-Through MBS or SBA-Backed ABS
Traded in Specified Pool Transactions
December 11, 2020.
I. Introduction
On October 15, 2020, the Financial Industry Regulatory Authority,
Inc. (``FINRA'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934
[[Page 82003]]
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to
modify the Trade Reporting and Compliance Engine (``TRACE'')
dissemination protocols for Agency Pass-Through Mortgage-Backed
Securities or Small Business Administration (``SBA'')-Backed Asset-
Backed Securities traded in Specified Pool Transactions. The proposed
rule change was published for comment in the Federal Register on
October 29, 2020.\3\ The Commission received one comment letter in
support of the proposed rule change.\4\ This order approves the
proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 90264 (October 23,
2020), 85 FR 68607 (October 29, 2020) (``Notice'').
\4\ See Letter from Wendell J. Chambliss, Vice President and
Deputy General Counsel, Mission, Legislative and Regulatory Affairs,
Legal Division, Freddie Mac, to J. Matthew DeLesDernier, Assistant
Security, Commission, dated November 18, 2020 (``Freddie Mac
Letter'').
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II. Description of the Proposal
FINRA commenced public dissemination of Specified Pool Transactions
in 2013 after the Commission approved FINRA's proposal to do so in
2012.\5\ FINRA's rules define a ``Specified Pool Transaction'' as a
transaction in an Agency Pass-Through Mortgage-Backed Security
(``Agency Pass-Through MBS'') \6\ or an SBA-Backed Asset-Backed
Security (``SBA-Backed ABS'') \7\ requiring the delivery at settlement
of a pool or pools that is identified by a unique pool identification
number at the Time of Execution.\8\ As described in the FINRA-2012-042
Approval, when disseminating information of a Specified Pool
Transaction, FINRA does not identify the specific bond transacted by
disclosing its CUSIP code.\9\ Instead, FINRA disseminates more general
information about the bond and the pool underlying the bond, including
approximations of information widely used to project cash flows and
prepayment rates of the underlying mortgages, such as loan-to-value
(``LTV'') information.\10\
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\5\ See Securities Exchange Act Release No. 68084 (October 23,
2012), 77 FR 65436 (October 26, 2012) (``FINRA-2012-042 Approval'').
This filing provided for, among other things, public 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, and
reduced the reporting timeframe for such transactions.
\6\ FINRA Rule 6710(v) defines an ``Agency Pass-Through MBS'' as
``a type of Securitized Product issued in conformity with a program
of an Agency as defined in [FINRA Rule 6710(k)] or a Government-
Sponsored Enterprise (`GSE') as defined in [FINRA Rule 6710(n)], 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.''
\7\ 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.''
\8\ See FINRA Rule 6710(x).
\9\ See FINRA-2012-042 Approval, 77 FR at 65437.
\10\ See id. FINRA stated that, in developing the approach to
public dissemination described in the FINRA-2012-042 Approval, it
considered industry feedback, including concerns that dissemination
of the CUSIP code in a Specified Pool Transaction might result in
information leakage regarding trading strategies, positions, and
other sensitive information, which could negatively impact trading
interest and liquidity in the market for these securities. See
Notice, 85 FR at 68607.
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Under its public dissemination protocol for Specified Pool
Transactions, FINRA groups the pools underlying the transacted bonds
into cohorts, using data elements that are integral to describing and
valuing the bonds based on these pools, such as the LTV ratio. The
cohort groupings are established using rounded or truncated figures for
the underlying data elements, so that numeric values within each cohort
can 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
transacted bond's CUSIP code. The underlying data elements that
correspond to each RDID are made available to members through the TRACE
system.\11\ FINRA rounds or truncates certain cohort groupings to
reduce the risk that the specific bond traded and the market
participant that engaged in the transaction might be identified.\12\
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\11\ FINRA uses the following ten data elements to form the RDID
cohorts that describe the security traded in a Specified Pool
Transaction: (1) Issuer; (2) Product Type; (3) Amortization Type;
(4) Coupon; (5) Original Maturity; (6) Weighted Average Coupon
(``WAC''); (7) Weighted Average Maturity (``WAM''); (8) Weighted
Average Loan Age (``WALA''); (9) Current Average Loan Size
(``ALS''); and (10) Original LTV. For example, RDID #A1234 might
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. See id., 85 FR at 68607-08.
\12\ Currently, the rounding and truncation conventions that are
used for Specified Pool Transactions are the following: (1) Coupon--
Rounded down to the nearest quarter percentage point--e.g., an
interest rate of 5.12% is rounded to 5%; (2) Original Maturity--
Rounded up to the nearest 10--e.g., an original maturity of 358
months is rounded to 360 months; (3) WAC--Truncated to a single
decimal--e.g., a WAC of 7.13% is truncated to 7.1%; (4) WAM--Rounded
down to the nearest 10--e.g., a WAM of 87 months is rounded to 80
month; (5) WALA--Rounded up to the nearest 10--e.g., a WALA of 163
months is rounded to 170 months; (6) 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); and (7) LTV--
Rounded down to the nearest 25--e.g., an original LTV of 72% is
rounded to 50%. See id., 85 FR at 68608.
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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.'' \13\ The elements described above are
intended to provide market participants with the information necessary
to perform such an analysis.\14\
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\13\ Id.
\14\ See id.
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FINRA stated that, since commencing public dissemination of
Specified Pool Transactions, it has continued to evaluate the relevant
market and the value of the information disseminated to market
participants.\15\ As a result of these efforts, which included
discussions with market participants, FINRA is now proposing changes to
the LTV rounding convention used in the public dissemination of
Specified Pool Transactions.\16\ Specifically, FINRA proposes to create
more granular cohorts for LTV to increase the precision of the
information regarding the LTV of the pool traded. In place of the
current LTV rounding convention, which is rounded down to the nearest
25%, FINRA will organize the cohorts such that each cohort represents
the LTV as the upper limit of the applicable category, as follows:
---------------------------------------------------------------------------
\15\ See id.
\16\ FINRA has not proposed changes to the rounding or
truncation conventions utilized for the other data elements.
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1. 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%);
2. 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%);
3. 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%);
4. 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%);
5. for an LTV between 81% and 93%, the cohorts would represent the
LTV as
[[Page 82004]]
93% (such that an original LTV of 90% would be shown as 93%);
6. 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%);
7. 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
8. 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+).
Thus, as a result of the proposed rule change, FINRA will
disseminate the LTV ratio cohorts at 20%, 40%, 60%, 80%, 93%, 100%,
120%, and 120%+. FINRA stated that, in developing the new LTV approach,
it sought to balance the goal of making more detailed information
available to the market against the potential risk of identifying the
particular security being traded and the market participant that
engaged in the transaction.\17\ FINRA believes that the new LTV
rounding convention is a ``measured change'' that will provide more
granular and meaningful information on the LTV of the Specified Pool
Transaction, which should increase the value of the disseminated
information to market participants.\18\ FINRA also anticipates that the
new cohorts will improve how disseminated TRACE data reflects the role
of LTV ratios in MBS valuations.\19\
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\17\ See Notice, 85 FR at 68608.
\18\ See id., 85 FR at 68609.
\19\ See id., 85 FR at 68608. FINRA stated, for example, that
separating pools with LTV ratios at or below 80% from those with LTV
ratios of 81% or higher delineates the pools with mortgages that
might require mortgage insurance from those that might not require
mortgage insurance. See id. Similarly, FINRA believes that the
cohorts 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. See id.
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FINRA has stated that it will announce the effective date of the
rule change in a Regulatory Notice to be published no later than 60
days following a Commission approval, and the effective date will be no
later than 270 days following publication of that Regulatory
Notice.\20\
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\20\ See id., 85 FR at 68609.
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III. Discussion and Commission Findings
After careful consideration, the Commission finds that the proposed
rule change is consistent with the requirements of the Act and the
rules and regulations thereunder applicable to a national securities
association.\21\ In particular, the Commission finds that the proposed
rule change is consistent with Section 15A(b)(6) of the Act,\22\ which
requires, among other things, that FINRA rules be designed to prevent
fraudulent and manipulative acts and practices, to promote just and
equitable principles of trade, and, in general, to protect investors
and the public interest.
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\21\ In approving this proposal, the Commission has considered
the proposed rule's impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
\22\ 15 U.S.C. 78o-3(b)(6).
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When it issued the FINRA-2012-042 Approval, the Commission found
that the protocols for publicly disseminating Specified Pool
Transactions proposed by FINRA--specifically, eschewing dissemination
of CUSIP codes and instead providing more generic information about the
bond transacted and the underlying pool--were consistent with the
Act.\23\ The Commission stated that the dissemination protocols for the
specified data elements ``strike an appropriate balance between
providing meaningful post-trade transparency and, at the same time,
reducing the potential for `reverse engineering' of transaction data
that could permit identification of a market participant and/or its
trading strategy.'' \24\ The Commission also noted that FINRA could in
the future determine to propose dissemination of additional data
elements that it believes would improve transparency for Specified Pool
Transactions.\25\
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\23\ See FINRA-2012-042 Approval, 77 FR at 65437-38.
\24\ Id., 77 FR at 65437.
\25\ See id., 77 FR at 65438.
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FINRA is now proposing to revise the dissemination protocol for
Specified Pool Transactions by increasing the precision of the LTV
cohort groupings. In place of the current rounding convention used for
LTV (i.e., rounded down to the nearest 25%), FINRA will utilize eight
cohorts, with each cohort representing the LTV as the upper limit of
the applicable grouping. FINRA believes that the tighter bands around
LTVs will benefit market participants by increasing the value of price
information as it relates to LTV.\26\
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\26\ See Notice, 85 FR at 68610.
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The Commission finds that the current proposal is consistent with
the Act because it represents a measured adjustment to the overall
public dissemination protocols for Specialized Pool Transactions that
the Commission previously found consistent with the Act in the FINRA-
2012-042 Approval. Establishing additional cohorts utilizing the
proposed LTV thresholds appears reasonably designed to provide market
participants and other market observers with more useful information
about the transacted bonds while minimizing the potential for adverse
market impact. The Commission notes that it received no comments
suggesting that the proposal would have adverse market impact; the one
comment letter received on the proposal was supportive.\27\ Moreover,
FINRA has represented that it will continue to evaluate the market for
Specified Pool Transactions and evaluate the conventions that it uses
for disseminating information on these transactions.\28\ The Commission
also notes that, under this proposal, FINRA members will not incur any
administrative burdens to report transactions differently; the creation
and distribution of the new LTV cohorts will be performed by FINRA
through the TRACE system.
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\27\ See Freddie Mac Letter at 1 (stating that ``[a]dopting the
proposed approach of segmenting LTV ratios into eight categories
would align TRACE data with pooling practices and would enhance
market transparency while maintaining sufficient anonymity'').
\28\ See Notice, 85 FR at 68610.
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Pursuant to Section 19(b)(5) of the Act,\29\ the Commission
consulted with and considered the views of the Treasury Department in
determining to approve the proposed rule change. The Treasury
Department indicated its support for the proposal.\30\ Pursuant to
Section 19(b)(6) of the Act,\31\ the Commission has considered the
sufficiency and appropriateness of existing laws and rules applicable
to government securities brokers, government securities dealers, and
their associated persons in approving the proposal. As discussed above,
the proposed rule change appears reasonably designed to improve the
value to market participants and other market observers of the LTV
information disseminated for Specified Pool Transactions.
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\29\ 15 U.S.C. 78s(b)(5) (providing that the Commission ``shall
consult with and consider the views of the Secretary of the Treasury
prior to approving a proposed rule filed by a registered securities
association that primarily concerns conduct related to transactions
in government securities, except where the Commission determines
that an emergency exists requiring expeditious or summary action and
publishes its reasons therefor'').
\30\ Email from Treasury Department staff to Michael Gaw,
Assistant Director, Division of Trading and Markets, Commission
(November 30, 2020).
\31\ 15 U.S.C. 78s(b)(6).
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IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\32\ that the proposed rule change (SR-FINRA-2020-034) is approved.
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\32\ 15 U.S.C. 78s(b)(2).
[[Page 82005]]
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For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\33\
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\33\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-27727 Filed 12-16-20; 8:45 am]
BILLING CODE 8011-01-P
