Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of Proposed Rule Change To Amend FINRA Rule 6730 To Require Members To Append Modifiers to Delayed Treasury Spot and Portfolio Trades When Reporting to TRACE, 69337-69349 [2021-26452]
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Federal Register / Vol. 86, No. 232 / Tuesday, December 7, 2021 / Notices
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act. Rather, the
Exchange believes that the proposal will
promote competition by permitting the
Exchange to offer data products similar
to those offered by other competitor
equities exchanges.14 The Exchange is
proposing to introduce the Short
Volume Report in order to keep pace
with changes in the industry and
evolving customer needs, and believes
this proposed rule change would
contribute to robust competition among
national securities exchanges. As noted,
at least two other U.S. equity exchanges
offer a market data product that is
substantially similar to the proposed
Short Volume Report.15 As a result, the
Exchange believes this proposed rule
change permits fair competition among
national securities exchanges.
Therefore, the Exchange does not
believe the proposed rule change will
result in any burden on competition that
is not necessary or appropriate in
furtherance of the purposes of the Act.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
The Exchange neither solicited nor
received comments on the proposed
rule change.
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
up to 90 days (i) as the Commission may
designate if it finds such longer period
to be appropriate and publishes its
reasons for so finding or (ii) as to which
the Exchange 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.
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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:
14 See
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–
CboeBYX–2021–028 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–CboeBYX–2021–028. 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 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–CboeBYX–2021–028, and
should be submitted on or before
December 28, 2021.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.16
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021–26447 Filed 12–6–21; 8:45 am]
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[Release No. 34–93699; File No. SR–FINRA–
2021–030]
Self-Regulatory Organizations;
Financial Industry Regulatory
Authority, Inc.; Notice of Filing of
Proposed Rule Change To Amend
FINRA Rule 6730 To Require Members
To Append Modifiers to Delayed
Treasury Spot and Portfolio Trades
When Reporting to TRACE
December 1, 2021.
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 November
22, 2021, the Financial Industry
Regulatory Authority, Inc. (‘‘FINRA’’)
filed with the Securities and Exchange
Commission (‘‘SEC’’ or ‘‘Commission’’)
the proposed rule change as described
in Items I, II, and III below, which Items
have been prepared by FINRA. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
FINRA is proposing to amend FINRA
Rule 6730 to require members to append
modifiers to identify delayed Treasury
spot and portfolio trades when reporting
to FINRA’s Trade Reporting and
Compliance Engine (‘‘TRACE’’).
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.
1 15
16 17
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SECURITIES AND EXCHANGE
COMMISSION
BILLING CODE 8011–01–P
Supra notes 3 and 4.
15 Id.
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A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
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On February 10, 2020, the
Commission’s Fixed Income Market
Structure Advisory Committee
(‘‘FIMSAC’’) unanimously approved a
recommendation from its Technology
and Electronic Trading Subcommittee
for FINRA to amend its TRACE 3
reporting rules to provide additional
information on two types of trades in
corporate bond TRACE-Eligible
Securities 4 (‘‘FIMSAC
Recommendation’’).5 Specifically, the
FIMSAC recommended that FINRA
amend its TRACE reporting rules to
require members to: (1) Identify
corporate bond trades where the price of
the trade is based on a spread to a
benchmark U.S. Treasury Security 6 that
was agreed upon earlier in the day
(referred to as a ‘‘delayed Treasury spot
trade’’) and report the time at which the
spread was agreed upon; and (2)
identify corporate bond trades that are
part of a larger portfolio trade. Because
the price reported to TRACE for these
two types of trades may not reflect the
market prices at the time the trades are
reported and disseminated, the FIMSAC
believed that reporting and
disseminating this additional
information would improve price
3 TRACE is the FINRA-developed system that
facilitates the mandatory reporting of over-thecounter transactions in eligible fixed income
securities. See generally Rule 6700 Series.
4 Rule 6710(a) generally defines a ‘‘TRACEEligible Security’’ as a debt security that is United
States (‘‘U.S.’’) dollar-denominated and is: (1)
Issued by a U.S. or foreign private issuer, and, if a
‘‘restricted security’’ as defined in Securities Act
Rule 144(a)(3), sold pursuant to Securities Act Rule
144A; (2) issued or guaranteed by an Agency as
defined in Rule 6710(k) or a Government-Sponsored
Enterprise as defined in Rule 6710(n); or (3) a U.S.
Treasury Security as defined in Rule 6710(p).
‘‘TRACE-Eligible Security’’ does not include a debt
security that is issued by a foreign sovereign or a
Money Market Instrument as defined in Rule
6710(o).
5 See FIMSAC, Recommendation Regarding
Additional TRACE Reporting Indicators for
Corporate Bond Trades (February 10, 2020). https://
www.sec.gov/spotlight/fixed-income-advisorycommittee/fimsac-additional-trace-flagsrecommendation.pdf.
6 Rule 6710 defines a ‘‘U.S. Treasury Security’’ as
‘‘a security, other than a savings bond, issued by the
U.S. Department of the Treasury to fund the
operations of the federal government or to retire
such outstanding securities.’’ The term ‘‘U.S.
Treasury Security’’ also includes separate principal
and interest components of a U.S. Treasury Security
that has been separated pursuant to the Separate
Trading of Registered Interest and Principal of
Securities (STRIPS) program operated by the U.S.
Department of Treasury. See Rule 6710(p).
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transparency in the corporate bond
market.7
On July 16, 2020, FINRA published
Regulatory Notice 20–24 to solicit
public comment on potential changes to
its TRACE reporting rules in line with
the FIMSAC’s recommendations. FINRA
also sought comment on whether any
modifications to the scope of the
FIMSAC’s recommended approach
might be appropriate.8 As discussed in
greater detail below, FINRA received
seven comments in response to
Regulatory Notice 20–24. After further
consideration, FINRA is proposing the
FIMSAC-recommended changes to the
TRACE reporting rules to append
modifiers to identify both delayed
Treasury spot trades and portfolio
trades, with modifications to the
portfolio trade provision to clarify and
simplify its conditions (based on
feedback received in response to
Regulatory Notice 20–24), as further
discussed below.
Delayed Treasury Spot Trades
For purposes of the proposed
amendment, a delayed Treasury spot
trade is a transaction in a corporate
bond that occurs on the basis of a spread
to a benchmark U.S. Treasury Security,
where the agreed upon spread is later
converted to a dollar price by ‘‘spotting’’
the benchmark U.S. Treasury Security at
a designated time. For example, parties
may determine to trade a corporate bond
based on an agreed spread to a specified
U.S. Treasury Security at 10:00 a.m.
(e.g., 150 bps over the 10 Year Treasury
yield), but the dollar price is determined
later, e.g., at 3:00 p.m., when the parties
‘‘spot’’ the spread against the agreed
benchmark U.S. Treasury Security yield
(e.g., a reported dollar price of 97.5,
expressed as a percentage of par value,
calculated by applying the agreed
spread of 150 bps to the 10 Year
Treasury yield at 3:00 p.m.). The TRACE
reporting rules generally require
members to report transactions in
corporate bonds within 15 minutes of
the Time of Execution,9 which is the
time when the parties agree to all of the
terms of the transaction that are
sufficient to calculate the dollar price of
7 See FIMSAC Recommendation at 1. FINRA
reminds members that, pursuant to Rule 3110, they
must have policies and procedures in place that are
reasonably designed to ensure compliance with the
TRACE reporting rules, including the accurate
reporting of applicable trade modifiers or
indicators. Firms also must be able to demonstrate
that a transaction meets the applicable conditions
associated with a particular modifier or indicator.
8 See FINRA Requests Comment on Proposed
Changes to TRACE Reporting Relating to Delayed
Treasury Spot and Portfolio Trades, Regulatory
Notice 20–24 (July 2020).
9 See Rule 6730(a).
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the trade.10 Therefore, in the above
scenario, the delayed Treasury spot
trade is reportable at 3:00 p.m., which
is when the dollar price has been
determined. Because the spread was
negotiated earlier in the day, the dollar
price reported at 3:00 p.m. may be away
from the current market price for the
security.
The FIMSAC believed that a specific
modifier to identify delayed Treasury
spot trades, along with disseminating
the time at which the spread was agreed
(e.g., 10:00 a.m.), would both alert
market participants that the spreadbased economics of the trade had been
agreed upon earlier in the day as well
as provide market participants with the
ability to estimate the agreed-upon
spread.11
Consistent with the FIMSAC
Recommendation, FINRA is proposing
amendments to Rule 6730 to provide
additional transparency into delayed
Treasury spot trades. Specifically,
FINRA is proposing to amend Rule
6730: (1) Add new paragraph (d)(4)(H)
to require that a member append a new
modifier 12 when reporting a delayed
Treasury spot trade—i.e., a transaction
in a corporate bond,13 the price of
which is based on a spread to the yield
of a U.S. Treasury Security and where
the spread was agreed upon that day
prior to the Time of Execution of the
transaction; 14 and (2) add new
paragraph (c)(14) to require that the
member report the time at which the
spread for a delayed Treasury spot trade
was agreed upon.15 Both the new
delayed Treasury spot modifier and the
time at which the spread was agreed
would be disseminated through TRACE,
10 See
Rule 6710(d).
FIMSAC Recommendation at 2.
12 As for other TRACE modifiers and indicators
under Rule 6730, the specific format for the new
delayed Treasury spot trade modifier would be
published in TRACE technical specifications.
13 The FIMSAC Recommendation related to
delayed Treasury spot trades was limited to
corporate bond trades. See FIMSAC
Recommendation at 1. Similarly, FINRA proposes
to limit use of the new modifier to transactions in
corporate bonds (i.e., CUSIPs that are disseminated
as part of the TRACE Corporate Bond Data Set). A
CUSIP, standing for the Committee on Uniform
Security Identification Procedures, is a 9-character
alphanumeric code that identifies a North American
security for the purposes of facilitating clearing and
settlement of trades. FINRA may in the future
consider applying the delayed Treasury spot
modifier and associated requirement to report the
time at which the spread was agreed to other types
of TRACE-Eligible Securities, such as Agency Debt
Securities.
14 FINRA is also proposing a non-substantive,
stylistic change to the title of paragraph (d)(4) of
Rule 6730, so that it refers to ‘‘Modifiers and
Indicators’’ rather than ‘‘Modifiers; Indicators’’.
15 As a result of this addition, current paragraph
(c)(14) of Rule 6730 would be renumbered as
paragraph (c)(15).
11 See
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together with other information on the
transaction, immediately upon receipt
of the transaction report.16
FINRA believes that, by specifically
identifying delayed Treasury spot
trades, the proposed rule change will
enhance FINRA’s regulatory audit trail
data and improve price transparency for
corporate bond market participants by
identifying transactions whose prices
may not be at the current market for the
security.17 FINRA also believes that
disseminating the time that the spread
was agreed will further enhance price
transparency by providing market
participants with the ability to estimate
the agreed-upon-spread.18
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Portfolio Trades
FINRA also is proposing a new
modifier to identify portfolio trades.19
For purposes of the proposed
amendment, a ‘‘portfolio trade’’ is a
trade between only two parties for a
basket of corporate bonds at a single
aggregate price for the entire basket. For
example, a market participant may seek
to trade a portfolio consisting of 50
corporate bonds. The parties may obtain
mid-market prices for each of the 50
component bonds as a framework for
16 FINRA generally disseminates information on
transactions in TRACE-Eligible Securities
immediately upon receipt of the transaction report,
except as otherwise provided in Rule 6750. See
Rule 6750(a).
17 The FIMSAC considered several potential
means of improving transparency around Treasury
spot trades, including whether the terms (including
the agreed spread and applicable Treasury
benchmark) should be reported to TRACE within 15
minutes of the parties’ agreement to all of the terms
of the transaction other than the price of the
Treasury. The FIMSAC noted that, while these
alternatives would allow market participants to
fully understand the spread-based economics of the
trade at the time at which they are agreed, the
recommended approach would be simpler and
more cost-effective to implement, assuming the
need for reporting parties to enhance the initial
TRACE report with the calculated dollar price of
the trade when the delayed spot trade is ‘‘spotted’’
later in the day. See FIMSAC Recommendation at
2 n.3. Following implementation, FINRA will assess
the reported data regarding delayed Treasury spot
trades and continue to engage with industry
participants regarding whether any future changes
may be appropriate to further improve
transparency.
18 FINRA understands that the most common
pricing benchmark used for delayed Treasury spot
trades is the on-the-run U.S. Treasury Security with
the maturity that corresponds to the maturity of the
corporate bond being priced. For example, market
participants would use the most recently issued 10year U.S. Treasury Security as the benchmark to
price a 10-year corporate bond.
19 As noted below, the specific format and
requirements for both the new delayed Treasury
spot modifier and the new portfolio trade modifier
would be published in TRACE technical
specifications. Where a specific trade meets the
criteria for both modifiers, such specifications may
require the use of a third, single modifier indicating
that both the delayed Treasury spot modifier and
the portfolio trade modifier apply to the trade.
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the pricing, and, during the negotiation
process, ultimately agree on a uniform
spread, resulting in an aggregate dollar
price for the entire portfolio. In such
cases, members must report to TRACE a
trade for each individual bond in the
basket with an attributed dollar price for
each bond. While, in many cases, the
reported price for each corporate bond
in a portfolio trade is in line with the
security’s current market price, in other
cases—based on, for example, the
liquidity profile of a specific bond or
other factors—the attributed price
reported for an individual security may
deviate from its current market price.
The FIMSAC believed it would be
beneficial if market participants were
able to identify with certainty which
trades were part of a portfolio trade
because of the possibility that the
reported price may not be reflective of
the independent market for the bond.20
The FIMSAC therefore recommended
that FINRA amend its TRACE reporting
rules to identify corporate bond trades:
(i) Executed between only two parties;
(ii) involving a basket of securities of at
least 30 unique issuers; (iii) for a single
agreed price for the entire basket; and
(iv) executed on an all-or-none or mostor-none basis.21
In line with the FIMSAC’s
recommendation, FINRA is proposing to
amend Rule 6730 to provide additional
transparency into portfolio trades.
Specifically, FINRA is proposing to add
new paragraph (d)(4)(I) to Rule 6730 to
require that a member append a new
modifier 22 if reporting a transaction in
a corporate bond: 23 (i) Executed
between only two parties; (ii) involving
a basket of corporate bonds of at least
10 unique issues; and (iii) for a single
agreed price for the entire basket
(‘‘Portfolio Trade Definition’’). The new
portfolio trade modifier would be
disseminated through TRACE, together
with other information on the
transaction, immediately upon receipt
20 The FIMSAC acknowledged that market
participants currently may be able to surmise which
TRACE reports are part of a portfolio trade, based
on a common time of execution or the
characteristics of the components. See FIMSAC
Recommendation at 2.
21 See FIMSAC Recommendation at 4.
22 As for other TRACE modifiers and indicators
under Rule 6730(d)(4), the specific format for the
new portfolio trade modifier would be published in
TRACE technical specifications.
23 The FIMSAC Recommendation related to
portfolio trades was limited to corporate bond
trades. See FIMSAC Recommendation at 2.
Similarly, FINRA proposes to limit use of the new
modifier to transactions in corporate bonds (i.e.,
CUSIPs that are disseminated as part of the TRACE
Corporate Bond Data Set). FINRA may in the future
consider expanding the portfolio trade modifier to
cover other types of TRACE-Eligible Securities,
such as Agency Debt Securities.
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69339
of the transaction report. Based on
feedback from commenters, the scope of
FINRA’s proposed Portfolio Trade
Definition differs from the FIMSAC
recommended definition in two ways,
as discussed further below.
Both the FIMSAC recommendation
and the proposal would limit use of the
portfolio trade modifier to instances
where the trade is executed between
only two parties at a single agreed price
for the entire basket. However, instead
of applying the portfolio modifier to
transactions involving a basket of
corporate bonds of 30 or more unique
issuers (as recommended by the
FIMSAC), FINRA is proposing to apply
the portfolio trade modifier to
transactions involving a basket of
corporate bonds of at least 10 unique
issues/securities (i.e., individual
securities counted using security
identifiers such as CUSIPs or TRACE
symbols). As described in further detail
below, FINRA received several
comments on this aspect of the
proposal. Commenters stated that basing
the numerical threshold on the number
of issuers represented in a portfolio
rather than the number of securities
would be challenging to implement and
would raise interpretive issues, and
therefore suggested instead basing the
threshold on the number of unique
corporate bond securities in the
portfolio. Commenters believed that this
alternative approach would effectively
identify portfolio trades while avoiding
challenges that would be associated
with correctly identifying bonds
associated with a particular issuer.
Commenters also stated that basing the
threshold on the number of unique
issues would be simpler and more easily
automatable for members to implement.
FINRA agrees that using individual
securities, rather than issuers, would
provide a simpler and more effective
way to identify portfolio trades for
purposes of the new modifier.
Therefore, FINRA is proposing to base
the size threshold condition in prong (ii)
of the Portfolio Trade Definition on the
number of unique issues in the basket
of corporate bonds.
Second, the FIMSAC recommended
setting the size threshold for portfolio
trades at 30 unique issuers. As
described in further detail below,
FINRA also received comments on the
appropriate basket size, with
commenters expressing a range of views
on the most appropriate threshold. After
further consideration, FINRA is
proposing to modify the size threshold
in prong (ii) of the Portfolio Trade
Definition by lowering the threshold
from 30 to 10 unique securities. FINRA
believes that lowering the threshold for
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use of the portfolio trade modifier to 10
would provide greater informational
benefits to market participants by
capturing a greater number of
transactions that satisfy the other
conditions of the Portfolio Trade
Definition.
Consistent with the FIMSAC
Recommendation, prong (iii) of the
Portfolio Trade Definition would apply
the new modifier to transactions entered
into ‘‘for a single agreed price’’ for the
entire basket. As described above, this
prong represents the key characteristic
of portfolio trades, i.e., that the
transaction is entered into at an agreed
aggregate price for the entire basket (as
opposed to individually negotiated
trades), which may result in the
attributed price reported for individual
securities in the basket being away from
their current market price.
FINRA notes that the FIMSAC also
recommended that the Portfolio Trade
Definition include a requirement that
the basket be executed on an ‘‘all-ornone or most-or-none basis.’’ 24 One
commenter suggested deleting the
reference to ‘‘most-or-none’’ in this
proposed prong because a definition of
‘‘most-or-none’’ does not currently exist
in current market practice and the
concept is not well understood. After
further consideration, FINRA believes
that removing this prong in its entirety
would reduce the proposal’s complexity
without reducing the new modifier’s
informational value. FINRA is therefore
not proposing to include an ‘‘all-or-none
or most-or-none’’ prong as part of the
Portfolio Trade Definition. Therefore, if
two parties agree on a price with respect
to a basket of bonds, the component
trades would be identified with the new
portfolio trade modifier so long as the
resulting basket trade includes the
minimum of 10 unique issues at a single
agreed price, regardless of the number of
securities that originally were
contemplated as part of the basket.
If the Commission approves the
proposed rule change, FINRA will
announce the effective date(s) of the
proposed rule change in a Regulatory
Notice.25 FINRA will publish a
Regulatory Notice announcing the
effective date(s) of the proposed
amendments pursuant to Rule
6730(d)(4)(H) and (I) no later than 90
days following Commission approval,
and the effective date(s) will be no later
than 365 days following publication of
the Regulatory Notice. FINRA will
24 See
FIMSAC Recommendation at 4.
may implement the proposed modifier
requirements (pursuant to proposed Rule
6730(d)(4)(H) and (I)) separately from the proposed
requirement to report the time at which the spread
was agreed (pursuant to proposed Rule 6730(c)(14)).
25 FINRA
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publish a Regulatory Notice announcing
the effective date of the proposed
amendments pursuant to Rule
6730(c)(14) once determined.26
2. Statutory Basis
FINRA believes that the proposed rule
change is consistent with the provisions
of Section 15A(b)(6) of the Act,27 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 delayed Treasury spot
and portfolio trades 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 rule
change will improve transparency into
pricing in the corporate bond market
and enhance FINRA’s regulatory audit
trail data by specifically identifying
delayed Treasury spot trades and
portfolio trades, which are two types of
trades where the price may not be
reflective of the current market price at
the time the trades are reported and
disseminated. FINRA also believes that
the proposed rule change will enable
market participants and investors to
better understand pricing for delayed
Treasury spot trades by requiring
members to report the time at which the
spread was agreed, which will provide
market participants with the ability to
estimate the agreed-upon-spread for
such trades.
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.
Economic Impact Assessment
Regulatory Objective
As discussed above, delayed Treasury
spot trades and portfolio trades may not
be reflective of the current market price
for the bonds and may be less
26 FINRA is currently in the process of developing
and implementing enhancements to its reporting
systems, including TRACE. Because the proposed
requirement to report the time at which the spread
was agreed for a delayed Treasury spot trade under
Rule 6730(c) would require the addition of a new
TRACE reporting field, FINRA intends to set the
effective date for this requirement at a later date
following completion of TRACE system changes.
27 15 U.S.C. 78o–3(b)(6).
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informative for market participants that
rely on TRACE for price discovery or
other analyses. The proposed modifiers
would specifically identify these types
of trades and add the time at which the
spread was agreed upon in disseminated
data.
Economic Baseline
A. Delayed Treasury Spot Trades
Because delayed Treasury spot trades
are currently not identified in the
TRACE data, the economic baseline first
establishes the TRACE reported trades
most likely to be associated with
delayed Treasury spot trades. Using
TRACE data from June 2020 to May
2021, FINRA examined the daily
average concentration of corporate bond
trades around 3:00 p.m., which FINRA
understands to be the ‘‘spotting’’ time
usually used by dealers for delayed
Treasury spot trades. Figures F1–1 and
F1–2 below compare the percentage of
trades during the 3:00 p.m. to 3:14 p.m.
time interval with: (1) The average
percentage of trades for all 15-minute
intervals before 3:00 p.m.; and (2) and
the average percentage of trades for all
15-minute intervals after 3:14 p.m.
Figures F1–1 and F1–2 also provide
these trade distributions based on the
size of trades and for all trades
combined. These data are likely to
either overcount the number of delayed
Treasury spot trades because some of
the trades executed in the time interval
are not delayed Treasury spot trades, or
undercount because they exclude
delayed Treasury spot trades executed
at other times during the day.
Nevertheless, FINRA believes this
methodology will provide a reasonable
baseline for the analysis.
Figure F1–1 provides statistics for
customer trades in investment grade
bonds and Figure F1–2 provides
statistics for inter-dealer trades in
investment grade bonds. Figures F1–1
and F1–2 show that, across all trade
sizes in investment grade bonds,
volumes in the 3:00 p.m. trade interval
are larger than both the pre-3:00 p.m.
and the post-3:14 p.m. intervals. For
investment grade customer trades, the
3:00 p.m. volumes are several times
larger than both the pre-3:00 p.m. and
the post-3:14 p.m. intervals. Figures
F1–3 and F1–4 provide similar
information for trades in noninvestment grade bonds. These figures
show that the differences in trades
across the time intervals are much less
material in non-investment grade bond
trades. Although trades during the 3:00
p.m. to 3:14 p.m. time interval may not
all be delayed spot trades, the jump in
investment grade bond volume during
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the period is consistent with FINRA’s
understanding of when delayed
Treasury spot trades are priced and
69341
reported (regardless of when the spread
was agreed upon).
BILLING CODE 4910–13–P
Figure 1: Distribution of Corporate Bond Trading Volume during Trading Hours (June 2020 to
May 2021)
Fl-1 Investment Grade Customer Trades
12.00%
10.00%
8.00%
6.00%
4.00%
2.00%
0.00%
All sizes
<1001<
1001<-1.MM
1MM-5MM
5MM-10MM
>=10MM
II Average% of volume for all 15 minute intervals pre 3 p.rn.
II Percent of volume from 3 p.m. - 3:14 p.m.
II Average% of volume for all 15 minute intervals post 3:14 p.m.
Fl-2 Investment Grade Inter-dealer Trades
6.00%
5.00%
4.00%
3.00%
2.00%
1.00%
0.00%
All sizes
<100K
100K-1MM
1MM-5MM
5MM-10MM
>=10MM
Ill Average% of volume for all 15 minute intervals pre 3 p.m.
II Percent of volume from 3 p.m. - 3:14 p.rn.
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Average% of volume for all 15 minute intervals post 3:14 p.m.
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Fl-3 Non-investment Grade Customer Trades
4.00%
-----------------------------------------------------------------~------~------------~---~~---
3.50%
_____ ,_ - --- --------- ------------------
..----~---------------~------- ------------------,. "-'-" -------
3.00%
2.50%
1.50%
1.00%
0.50%
0.00%
All sizes
<100K
100K-1MM
1MM-SMM
SMM-10MM
>=lOMM
II Average% of volume for all 15 minute intervals pre 3 p.m.
Ill! Percent of volume from 3 p.m. - 3:14 p.m.
1!11
Average% of volume for all 15 minute intervals post 3:14 p.m.
Fl-4 Non-investment Grade Inter-dealer Trades
3.50%
-------- --~- ------ -'------~-------- ----~---- -------- ---- -------------------- -~---- - ~
3.00%
2.50%
2.00%
1.50%
1.00%
0.50%
0.00%
All sizes
<100K
100K-1MM
1MM-SMM
SMM-10MM
>=10MM
II Average% of volume for all 15 minute intervals pre 3 p.m.
Ill Percent of volume from 3 p.m. - 3:14 p.m.
Average% of volume for all 15 minute intervals post 3:14 p.m.
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B. Portfolio Trades
Evidence supports the hypothesis that
portfolio trading has been increasing
over time.28 An analysis by Morgan
Stanley shows that $88 billion in
portfolio trades were executed from
January 2019 through November 2019,
compared to virtually none in 2017.29
The analysis also shows that portfolio
trades with 140 bonds or more increased
tenfold since 2018. According to a
Financial Times article citing
Greenwich Associates’ survey of 67
28 See
infra notes 29 and 30.
Jennifer Surane & Matthew Leising, Bond
Trade That’s Gone from Zero to $88 Billion in Two
Years, Bloomberg (Nov. 18, 2019), https://
www.bloomberg.com/news/articles/2019-11-18/thebond-trade-that-s-gone-from-zero-to-88-billion-intwo-years.
29 See
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bond traders, more than 50% of the
traders have executed a portfolio trade
in the past year.30
FINRA computed the annual
percentage of trades that can be
classified as portfolio trades of
increasing portfolio sizes from 2015 to
2020 using TRACE data. For purposes of
these calculations, a ‘‘portfolio trade’’ is
a trade of a basket of corporate bonds
between only two parties at the same
30 See Joe Rennison, Robert Armstrong & Robin
Wigglesworth, The New Kings of the Bond Market,
Financial Times (Jan. 22, 2020), https://
www.ft.com/content/9d6e520e-3ba8-11ea-b232000f4477fbca. Among those traders, 75% executed
the portfolio trade with dealers while the remaining
did so through other means such as an electronic
trading platform.
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execution time.31 ‘‘Portfolio size’’ is
defined as the number of unique CUSIPs
contained in the basket. This analysis
demonstrates that portfolio trades
reported to TRACE grew significantly in
the past six years. For example, Table 1
shows that the percentage of customer
portfolio trades involving at least 10
CUSIPs more than quadrupled from
31 Using current TRACE data, FINRA can only
approximate ‘‘portfolio trades’’ as defined in the
proposed rule change. Specifically, the analysis
may include trades that are not executed at a single
agreed price for the entire basket or that are not
limited to two parties. As a result, the method used
in this analysis may include as a ‘‘portfolio trade’’
some trades that would fall outside of the scope
using the criteria set forth in the proposed rule
change. However, FINRA believes that the method
used in these calculations is reasonable for
purposes of the analysis given the scope of
information currently available in TRACE.
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1.34% in 2015 to 5.64% in 2020. For
portfolio trades involving at least 30
CUSIPs, the percentage of trades
increased from 0.29% in 2015 to 3.60%
in 2020. Inter-dealer portfolio trades
69343
grew at an even higher rate, albeit from
a lower base level.
Table I: Percentage of trades by portfolio size
Economic Impact
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1. Delayed Treasury Spot Trades
A modifier identifying delayed
Treasury spot trades would add
valuable information to disseminated
TRACE data by indicating that the
reported price may not be at the current
market. The new disseminated time
field would benefit the market because
market participants can use it to
reasonably evaluate the spread at the
time when the spread was agreed upon
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and compare it to other trades at or near
the same time. Together, these additions
will increase post-trade price
transparency.
Members would be required to make
systems changes to accommodate the
new modifier and time field. This
would represent a fixed cost to FINRA
members that report corporate bond
transactions priced through a delayed
Treasury spot process. The cost may be
higher for members that house
information regarding the time of
spotting in a different platform or
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system that is not connected to its
TRACE reporting system.32 FINRA
expects that the ongoing variable cost of
reporting the new modifier and
populating the time field will be low for
firms as costs currently are incurred for
existing TRACE reporting.
2. Portfolio Trades
A modifier identifying trades
executed as part of a portfolio trade
would allow market participants to
identify with certainty which trades
32 See
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occurred at attributed prices as part of
a portfolio trade. With this information,
market participants could better identify
trade prices that may not reflect the
market price for the individual bond.
This modifier will improve post-trade
price transparency. While some market
participants may be capable of inferring
portfolio trades from current
disseminated data,33 the added modifier
may particularly benefit smaller market
participants, market observers and
researchers who may not have systems
in place to actively screen for portfolio
trades using currently available data.
FINRA members would incur costs
associated with making system changes
required to accommodate the new
modifier. This would represent a fixed
cost to FINRA members that execute
and report portfolio trades. The variable
cost of reporting the new modifier
should be minimal to firms as costs are
currently incurred for existing TRACE
reporting. In addition, while market
participants currently may infer that
some trades may be portfolio trades,
they cannot do so with certainty. The
FIMSAC noted that there may be an
increased theoretical risk that a market
participant may identify the seller of a
portfolio trade if these trades are
identified in disseminated data.34
FINRA requested comments on the
possibility of increased risk and
members did not raise concerns
regarding such risk.
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3. Effects on Competition
FINRA does not believe that the
proposed modifiers will unduly burden
competition. The costs for a firm to
modify the reporting process for the
proposed modifiers will be proportional
to the fixed cost of the firm’s reporting
system, and thus be helped by similar
factors. For example, firms with no
activities in delayed Treasury spot
trades or portfolio trades may not need
to update their system; firms with
limited activities may choose to
manually input the new modifiers; and
firms can also use third party reporting
system vendors, which are intended to
take advantage of lower costs due to
economy of scale.
Alternatives Considered
With respect to the proposed delayed
Treasury spot provisions, FINRA
considered requiring firms to report the
available terms (including the agreed
spread and applicable Treasury
benchmark) of delayed Treasury spot
trades within 15 minutes of the parties’
agreement to the spread and benchmark.
33 See
34 See
SIFMA Letter, infra note 37.
FIMSAC Recommendation at 2.
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FIMSAC noted this alternative in its
recommendation and stated that, while
this construct would allow market
participants to fully understand the
spread-based economics of the trade at
the point at which they are agreed, the
proposed approach will be simpler and
more cost-effective to implement and
would avoid the need for reporting
parties to enhance the initial TRACE
report with the calculated dollar price of
the trade when the delayed spot trade is
‘‘spotted’’ later in the day.35 FINRA
agrees and also believes that the
proposed approach is beneficial in
requiring reporting of the dollar price of
the transaction once determined, which
is then disseminated immediately upon
receipt.
With respect to the proposed portfolio
modifier, FINRA considered other
thresholds for the number of unique
issues to qualify as a portfolio trade,
such as 30 unique issues, similar to the
FIMSAC recommendation to identify
trades involving a basket of at least 30
unique issuers (rather than issues), or as
few as 2 unique issues, as suggested by
some commenters. Lowering the
threshold generally captures more
portfolio trades and therefore provides
greater informational benefits to market
participants. It may also discourage
traders from splitting up portfolio trades
into smaller lists that do not meet the
specified criteria to avoid identifying
trades under the proposal. On the other
hand, setting the threshold too low
reduces the usefulness of the identifier.
Portfolio trades are used to diversify
individual bond risk and save on
trading costs. Most of these benefits will
diminish as the portfolio size becomes
small. The deviation of individual bond
price in a portfolio from market price
will likely be less as the number of
bonds in the portfolio decreases. The
proposed threshold of 10 strikes an
appropriate balance between the tradeoffs and is also recommended by some
commenters.36
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
The proposed rule change was
published for comment in Regulatory
Notice 20–24 (July 2020). Seven
comments were received in response to
the Regulatory Notice.37 A copy of the
35 See
36 See
note 17 supra.
Jane Street Letter and SIFMA Letter, infra
note 37.
37 See Comment submission from Melinda
Ramirez, Consultant, dated July 19, 2020 (stating
only ‘‘Thank you for the opportunity to invest.’’
[sic]); letter from Gregory Babyak, Global Head of
Regulatory Affairs, Bloomberg L.P., to Jennifer
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Regulatory Notice is available on
FINRA’s website at https://
www.finra.org. A list of the comment
letters received in response to
Regulatory Notice 20–24 is available on
FINRA’s website.38 Copies of the
comment letters received in response to
the Regulatory Notice are also available
on FINRA’s website. The comments are
summarized below.
Delayed Treasury Spot Trades
Bloomberg, Jane Street and T. Rowe
Price supported the proposal to require
members to identify corporate bond
trades where the price of the trade is
based on a spread to a benchmark U.S.
Treasury Security that was agreed upon
earlier in the day and report the time at
which the spread was agreed upon.39
Bloomberg stated that the proposal
‘‘adds an incredible amount of value,
insight and transparency into TRACE
data,’’ including by making it possible
for ‘‘market participants to derive
intraday credit spread moves in specific
corporate bond issues and issuers.’’ 40
Jane Street noted that while market
participants would initially incur costs
to modify trading reporting procedures
to provide this information, such costs
are outweighed by the benefit of
obtaining additional information about
delayed Treasury spot trades.41 T. Rowe
Price noted that the reported dollar
price for delayed Treasury spot trades
may not take into account market or
issuer-specific developments that have
occurred throughout the day, such that
Piorko Mitchell, Office of the Corporate Secretary,
FINRA, dated September 14, 2020 (‘‘Bloomberg
Letter’’); letter from Howard Meyerson, Managing
Director, Financial Information Forum, to Jennifer
Piorko Mitchell, Office of the Corporate Secretary,
FINRA, dated September 14, 2020 (‘‘FIF Letter’’);
letter from Kathleen Callahan, FIX Operations
Director, FIX Trading Community, to Jennifer
Piorko Mitchell, Office of the Corporate Secretary,
FINRA, dated September 14, 2020 (‘‘FIX Letter’’);
letter from Matt Berger, Global Head of Fixed
Income and Commodities, Jane Street Capital, LLC,
to Jennifer Piorko Mitchell, Office of the Corporate
Secretary, FINRA, dated September 14, 2020 (‘‘Jane
Street Letter’’); letter from Chris Killian, Managing
Director, Securitization and Credit, SIFMA, to
Jennifer Piorko Mitchell, Office of the Corporate
Secretary, FINRA, dated September 15, 2020
(‘‘SIFMA Letter’’); and letter from Michael Grogan,
V.P. & Head of US Fixed Income Trading—
Investment Grade, Dwayne Middleton, V.P. & Head
of Fixed Income Trading, Brian Rubin, V.P. & Head
of US Fixed Income Trading—Below Investment
Grade and Jonathan Siegel, V.P. & Senior Legal
Counsel—Legislative & Regulatory Affairs, T. Rowe
Price, to Jennifer Piorko Mitchell, Office of the
Corporate Secretary, FINRA, dated September 15,
2020 (‘‘T. Rowe Price Letter’’).
38 See SR–FINRA–2021–030 (Form 19b–4, Exhibit
2b) (available on FINRA’s website at https://
www.finra.org).
39 See Bloomberg Letter at 2; Janes Street Letter
at 1–2; T. Rowe Price Letter at 1.
40 See Bloomberg Letter at 2.
41 See Jane Street Letter at 2.
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the proposal would benefit investment
advisers and other market participant by
providing timely and definitive clarity
on whether reported transactions are
delayed Treasury spot trades, and
further would support price
formation.42 T. Rowe Price also noted
benefits of the proposal to transaction
cost analysis and the portfolio valuation
process for institutional investors.43
SIFMA expressed mixed views on the
delayed Treasury spot trade proposal.
SIFMA noted that its members ‘‘both see
benefits to this proposal but also have
material questions including the overall
benefit vs. cost balancing.’’ 44 SIFMA
stated that a potential benefit of the
proposal would be to provide a ‘‘clearer
picture, retrospectively, as to liquidity
flows throughout the day.’’ 45 However,
SIFMA noted that some of its members
indicated that the technical
implementation of this proposal is
complex, particularly around the new
time field.46 SIFMA also highlighted
that the fixed-cost burden presented by
the proposal would be more meaningful
for smaller, non-primary dealers, which
could lead such dealers to use manual
processes for trade reporting or no
longer engage in these type of trades.47
FIF did not support the delayed
Treasury spot proposal, noting that the
proposal would require firms to
implement significant system changes.48
FIF stated that its members advised that
dealer systems do not currently store the
time the original terms are agreed in a
manner that would enable reporting to
TRACE on a timely basis, such that
implementation would require
significant cost and work for firms to
upgrade various systems.49 FIF instead
proposed that FINRA consider
mandating that the
SpecialPriceIndicator tag, or another
existing TRACE tag, be marked as
instructed by FINRA to identify delayed
Treasury spot trades.50 FIF stated that
this alternative would signal to the
market that the terms of the trade were
not agreed based on current market
conditions.51
FINRA agrees with commenters that
the proposal relating to delayed
Treasury spot trades will provide
significant benefits to market
participants and investors by enhancing
transparency into corporate bond
42 See
T. Rowe Price Letter at 1–2.
T. Rowe Price Letter at 2.
44 See SIFMA Letter at 3.
45 See SIFMA Letter at 4.
46 See SIFMA Letter at 4.
47 See SIFMA Letter at 4.
48 See FIF Letter at 2.
49 See FIF Letter at 2.
50 See FIF Letter at 2.
51 See FIF Letter at 2.
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43 See
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pricing for these types of trades. FINRA
acknowledges that implementing the
proposal will require members to make
systems changes to identify Treasury
spot trades and append the modifiers, as
well as to capture and report the time
at which the spread was agreed. FINRA
believes, however, that the ongoing
transparency benefits of reporting and
disseminating this additional
information will outweigh the initial
costs required to modify trade reporting
systems to enable gathering and
reporting this new information. FINRA
does not believe that use of an existing
TRACE modifier or indicator, such as
the special price tag, would sufficiently
differentiate delayed Treasury spot
trades in disseminated TRACE data or
its regulatory audit trail data, nor would
use of such a tag provide information
about the time that the spread was
agreed such that market participants can
estimate the agreed-upon spread for
such trades.52
SIFMA also responded to two specific
requests for comment in Regulatory
Notice 20–24 concerning the proposed
Treasury spot modifier. First, FINRA
asked whether it should consider
requiring firms to report the spread,
either at the time the spread is agreed
or later in the day, and, if reported at the
time the spread is agreed, whether the
dollar price should also be reported
later in the day. SIFMA responded that
FINRA should have enough information
from the proposed trade reports to
derive an estimate of the spread without
requiring reporting of this additional
data.53 SIFMA also noted that, in any
case, dealers should not have to submit
two reports, or amend a previous report,
for the same trade.54 As described
above, FINRA is not modifying the
proposal to require reporting of the
spread or to require members to submit
two reports for the same trade.55
Second, FINRA requested comment on
its understanding that most common
pricing benchmark used for delayed
Treasury spot trades is the on-the-run
U.S. Treasury Security with the
maturity that corresponds to the
maturity of the corporate bond being
52 The ‘‘special price’’ modifier must be appended
when a transaction is executed at a price based on
arm’s length negotiation and done for investment,
commercial or trading considerations, but does not
reflect current market pricing. See FINRA Rule
6730(d)(4)(A) and Notice to Members 05–77
(November 2005). Thus a member must first make
a determination, on a trade-by-trade basis, that a
price is off-market before it appends the special
price modifier.
53 See SIFMA Letter at 4.
54 See SIFMA Letter at 4–5.
55 See note 17 supra.
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69345
priced. SIFMA stated that its members
share that understanding.56
FIX didn’t express a substantive view
on the proposed amendments but
suggested that it can assist in
developing standard solutions for
reporting of the proposed new delayed
Treasury spot trade modifier.57 For
example, FIX noted that adding the
capability for FINRA to capture the time
that the spread was agreed would be a
minimal extension to an existing
concept in FIX, specifically the
TrdRegTimestamps field.58 FINRA notes
that it supports several technical
standards for reporting of trade
information to TRACE, including FIX,
and that the specific format and
requirements for the new delayed
Treasury spot modifier and reporting
field for the time the spread was agreed
would be published in TRACE technical
specifications. As noted above, where a
specific trade meets the criteria for both
modifiers, such specifications may
require the use of a third, single
modifier indicating that both the
delayed Treasury spot modifier and the
portfolio trade modifier apply to the
trade.
Portfolio Trades
T. Rowe Price supported the proposal
to require members to identify corporate
bond trades that are components of a
larger portfolio trade, as defined in the
FIMSAC Recommendation.59 T. Rowe
Price noted that the prices reported to
TRACE for transactions that are part of
a portfolio trade may not be at the
current market for the security and that
the proposal would benefit investment
advisers and other market participants
by providing timely and definitive
clarity on whether a transaction is part
of a portfolio trade, and further would
support price formation.60 T. Rowe
Price also noted benefits of the proposal
to transaction cost analysis and the
portfolio valuation process for
institutional investors.61
FIF, Bloomberg and Jane Street
generally supported the proposal but
suggested certain modifications to the
conditions for trades that would qualify
for the proposed portfolio trade modifier
under the FIMSAC Recommendation,62
while SIFMA expressed generally mixed
views on the portfolio trade proposal.63
56 See
SIFMA Letter at 5.
FIX letter at 3.
58 See FIX letter at 2.
59 See T. Rowe Price Letter at 1.
60 See T. Rowe Price Letter at 1–2.
61 See T. Rowe Price Letter at 2.
62 See FIF Letter at 1–2; Bloomberg Letter at 3–
4; Jane Street Letter at 2.
63 See SIFMA Letter at 1–3.
57 See
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FIF and SIFMA recommended that
prong (ii) of the Portfolio Trade
Definition be changed to a threshold
based on the number of unique issues or
securities, rather than the number of
unique issuers.64 FIF noted that shifting
to a security basis for this prong would
avoid challenges in identifying and
processing which bonds are associated
with a particular issuer and would
result in more trades being reported as
portfolio trades, which would provide
greater transparency and enhance
FINRA’s audit trail.65 FIF also stated
that basing the determination of a
portfolio trade on the number of unique
issuers would raise the question of
whether bonds of affiliated issuers
should be counted as one or multiple
issuers, and highlighted in particular
bonds issued by special purpose vehicle
subsidiaries.66 SIFMA stated that while
it understands that using the number of
unique issuers is intended to scope in
diversified portfolio trades, its members
raised the concern that doing so would
be more complicated to implement than
basing the threshold on the number of
securities in the portfolio.67 SIFMA
noted several examples of potential
complications that could arise by using
unique issuers, such as determining
how to treat affiliates and subsidiaries
and how guarantees might affect the
analysis.68 SIFMA stated that these
issues would require market
participants to generate large lists of
bonds and determine how to attribute
each bond to a unique issuer, which
would not be easily automatable and
would introduce the risk of errors and
omissions in TRACE reporting.69 FINRA
agrees with these commenters that using
a threshold based on the number of
individual securities, rather than
issuers, to determine when to append
the portfolio trade modifier would result
in a clearer and easier to implement
approach to identifying portfolio trades,
and has modified the proposal
accordingly.
Jane Street, Bloomberg, FIF and
SIFMA commented on the threshold
number for appending the portfolio
trade modifier, which the FIMSAC
recommendation set at 30. FIF stated
that a trade involving fewer than 30
unique issuers should still be
considered a portfolio trade if it meets
the other conditions in the definition.70
Jane Street stated that 30 unique issuers
64 See
FIF Letter at 2; SIFMA Letter at 2–3.
FIF Letter at 2–3.
66 See FIF Letter at 3.
67 See SIFMA Letter at 2–3.
68 See SIFMA Letter at 3.
69 See SIFMA Letter at 3.
70 See FIF Letter at 2.
is too high and recommended that a
basket containing bonds from at least 10
unique issuers should be reported using
the portfolio trade modifier, which
would maximize the informational
benefit of the new modifier since many
portfolio trades contain bonds of
between 10 and 30 unique issuers.71
SIFMA stated that some of its members
believe that a lower number of securities
would be more appropriate, such as 10,
while other of its members are
comfortable with the proposed 30 or an
even higher number.72 Bloomberg
recommended that TRACE should
identify every situation where two or
more securities are transacted at an
agreed upon price where the price may
not reflect the current market price for
the bonds.73 As described above, FINRA
has modified the proposal by lowering
the threshold from 30 to 10. FINRA
believes that lowering the threshold for
portfolio trades that would be identified
by the new modifier in this manner
would provide greater informational
benefits to market participants.
However, FINRA believes that a lower
threshold than 10 issues, such as two or
more securities, would be over-inclusive
and reduce the usefulness of the
modifier.
With respect to the proposed prong
requiring that a portfolio trade must be
executed on an all or none or most or
none basis, Bloomberg noted that an
‘‘all-or-none’’ designation is ‘‘an
execution constraint that is well defined
in all markets’’ but that the concept of
‘‘most-or-none’’ does not currently exist
and would require further clarification
around what number of constituents in
the basket constitutes ‘‘most.’’ 74
Bloomberg therefore recommended
using a definition of a basket that
focuses on executions, rather than order
designations.75 As described above,
FINRA agrees that this aspect of the
initial proposal is not well-understood
and believes that the Portfolio Trade
Definition would be best implemented
without an ‘‘all-or-none or most-ornone’’ prong. Therefore, under the
current formulation, if two parties enter
into negotiations with respect to a
basket of bonds, the component trades
would be identified with the new
portfolio trade modifier so long as the
resulting basket trade meets the other
conditions specified in the Portfolio
Trade Definition.
SIFMA also commented more broadly
on the portfolio trade proposal. SIFMA
65 See
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71 See
Jane Street Letter at 2.
SIFMA Letter at 3.
73 See Bloomberg Letter at 4.
74 See Bloomberg Letter at 3–4.
75 See Bloomberg Letter at 4.
72 See
PO 00000
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Fmt 4703
Sfmt 4703
stated that its members see two aspects
to the portfolio trade proposal: (1) The
identification of portfolio trades vs.
other kinds of trades and (2) the
identification of potentially off-market
trades.76 With respect to the first aspect,
SIFMA noted that, while the proposal
would make it easier to identify
portfolio trades, some of its members
believe it is already fairly easy to
identify portfolio trades today without
the specific modifier.77 However,
SIFMA also noted that other of its
members believe that the proposal
would benefit smaller market
participants, market observers and
researchers, who may not have systems
in place to actively screen for portfolio
trades using currently available data.78
SIFMA noted that some of its members
have concerns about the potential
impact on liquidity resulting from
disclosure of trading strategies, while
other members did not believe that this
is a material concern. With respect to
the second aspect, SIFMA stated that
some of its members have questioned
the appropriateness of a flag that does
not provide definitive information
regarding whether the price is offmarket, since a price in a portfolio trade
may or may not be off-market.79 SIFMA
noted that dealers are already expected
to review each line item in a portfolio
trade to determine if it is off-market and,
if so, append the existing special price
indicator in TRACE reports. SIFMA
stated that one potential benefit of the
proposal could be to reduce compliance
burdens if the new portfolio trade
modifier replaces the special price
indicator for components of portfolio
trades.80 On a related point, SIFMA
asked FINRA to confirm that the
portfolio trade modifier would be taken
into account in fair pricing reviews.81
SIFMA also stated dealers should not
face an undue burden to explain why a
price on a trade identified as a portfolio
trade was off-market.82 FINRA confirms
that the portfolio trade modifier would
be taken into account in FINRA’s
reviews of members’ trading activities,
including fair pricing reviews, along
with any other indicators or modifiers
that may be appended to individual
trades (such as the special price
indicator, where applicable). However,
the new portfolio trade modifier would
76 See
SIFMA Letter at 1.
SIFMA Letter at 2. SIFMA also expressed
concern that the proposal shifts TRACE away from
being a price transparency tool into a tool that
provides trading strategy details. See id.
78 See SIFMA Letter at 2.
79 See SIFMA Letter at 2.
80 See SIFMA Letter at 2.
81 See SIFMA Letter at 2.
82 See SIFMA Letter at 2.
77 See
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not replace any other applicable
indicators or modifiers, including the
special price indicator, where
applicable. FINRA continues to believe
that, on balance, identification of
portfolio trades through the proposed
portfolio trade modifier would improve
market transparency and provide greater
certainty to market participants and
investors regarding such trades.
Bloomberg also commented more
generally on the portfolio trade
proposal. Bloomberg stated that it has
significant reservations about the
portfolio trade proposal because there
would be significant incentives for
liquidity seekers to avoid sending
baskets that meet criteria.83 Specifically,
Bloomberg noted that dissemination of
individual components of portfolio
trades as unrelated transactions in
TRACE data, as it is today, protects
liquidity seekers, while appending the
proposed modifier could lead to
significant information leakage such
that market participants would
understand both why and how the trade
was executed.84 Bloomberg expressed
concern that the modifier would
therefore be problematic because it
would alert the market that a change in
portfolio strategy had occurred, for
example by allowing participants to
reverse engineer a particular
institution’s views on a particular issue,
which could dampen liquidity.
Bloomberg stated that these concerns
would reduce the transparency benefits
sought by the proposal because liquidity
seekers and providers may simply split
up their baskets into smaller lists that
do not meet the proposed criteria for the
portfolio trade modifier.85 Bloomberg
also suggested that transparency could
be enhanced by instead identifying
every situation where two or more
securities are transacted at an agreed
upon price where the price may not
reflect the current market price for the
bonds, drawing an analogy to reporting
modifiers used for equities in the public
data feeds to indicate transactions with
special circumstances that impact
price.86 As discussed above, FINRA
believes that, on balance, identification
of portfolio trades through the new
proposed portfolio trade modifier would
improve market transparency and
provide greater certainty to market
participants and investors regarding
such trades. With respect to
Bloomberg’s suggestion to identify any
portfolio trades involving two or more
securities, as discussed above FINRA
83 See
Bloomberg Letter at 3.
Bloomberg Letter at 3.
85 See Bloomberg Letter at 3.
86 See Bloomberg Letter at 4.
84 See
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believes such a low threshold would be
over-inclusive and would reduce the
usefulness of the modifier, while a
threshold of 10 securities as proposed
would benefit market participants by
providing greater transparency into
pricing in the corporate bond market,
while avoiding capturing transactions
that are not portfolio trades, as that term
is commonly understood in the market.
In addition, as discussed above, FINRA
believes lowering the threshold to 10
unique issues (from the threshold of 30
set forth in the FIMSAC
Recommendation) may discourage
traders from splitting up portfolio trades
into smaller lists that do not meet the
specified criteria for the proposed
modifier to avoid identifying the trade
under the proposal.
FIF requested guidance on application
of the portfolio trade proposal in certain
scenarios. Specifically, FIF stated that
its members request guidance on
whether non-TRACE-Eligible Securities
should be counted toward the portfolio
basket size threshold where a portfolio
trade involves some bonds that are
TRACE-Eligible Securities and other
bonds that are not TRACE-Eligible
Securities.87 FINRA confirms that a
security that is a non-TRACE Eligible
Security, as well as a security other than
a corporate bond that is a TRACE
Eligible Security, should not be counted
toward the portfolio basket size
threshold. FIF also asked for guidance
on the definition of a ‘‘single agreed
price’’ in the context of a portfolio
trade.88 FINRA is clarifying that a
portfolio trade would be considered to
be executed for a ‘‘single agreed price’’
for the entire basket where the overall
price for the basket has been negotiated
or agreed on an aggregate basis,
including where the parties used a
pricing list or pricing service as the
starting point for negotiations but the
final price was determined by applying
a uniform spread to all securities in the
basket. However, where the parties
simply aggregate individual prices
obtained from a pricing list or service
without further negotiation, this would
not be considered within the scope of
the proposed portfolio trade modifier.89
FIF further asked whether a portfolio
trade involving a delayed spotting
process would qualify as a portfolio
87 See
FIF Letter at 3.
FIF Letter at 3.
89 For example, consistent with the FIMSAC’s
recommendation, the ‘‘single agreed price’’ prong
would ‘‘exclude normal multi-dealer list trades that
originate as either an electronic OWIC or a BWIC
as such protocols result in a competitively
negotiated price for each security in the list.’’ See
FIMSAC Recommendation at 3 n.5.
88 See
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69347
trade.90 FINRA notes that, where a trade
meets the conditions for applying
multiple modifiers, all applicable
modifiers should be appended unless
otherwise provided for in the TRACE
technical specifications. Thus, in the
scenario presented by FIF, the trade may
qualify for the delayed Treasury spot
modifier if the trades are based on a
spread to the yield of a U.S. Treasury
Security and the spread was agreed
upon that day prior to the Time of
Execution of the transaction. If the trade
also involved at least 10 unique
securities and was transacted for a
single agreed price for the entire basket
and the other conditions of the Portfolio
Trade Definition have been met, the
trade must also be appended with the
portfolio trade modifier. The specific
format and requirements for the new
modifiers would be published in
TRACE technical specifications, which
may require the use of a third, single
modifier indicating that both the
delayed Treasury spot modifier and the
portfolio trade modifier apply to the
trade. As noted below, FINRA will work
with members to provide further
interpretive guidance, where needed.
FIX suggested that it can assist in
developing standard solutions for
reporting the proposed new portfolio
trade modifier.91 For example, FIX
noted that the TrdType and
TrdSubType fields could be used to
identify portfolio trades.92 FINRA notes
that it supports several technical
standards for reporting of trade
information to TRACE, including FIX,
and that the specific format and
requirements for the new portfolio trade
modifier would be published in TRACE
technical specifications.
Implementation Period
FIF, Bloomberg and SIFMA
commented on the implementation
period that would be necessary with
respect to both the delayed Treasury
spot and portfolio trade aspects of the
proposal. FIF requested that the
implementation timeline for the changes
90 See FIF Letter at 3. Specifically, FIF asked
whether the following scenario would constitute a
portfolio trade: (i) A third-party publishes reference
prices for a universe of bonds at a set time each day
at 3 p.m.; (ii) at 10 a.m. two firms agree to trade
a basket of securities that represents a subset of this
universe based upon the as-of-yet unpublished 3
p.m. reference price; and (iii) at 3:30 p.m. the two
firms review the prices published at 3 p.m. for the
basket constituents and come to consensus on the
final price, which is an aggregate of the constituent
prices. FIF further asked whether the existence of
any offset to the price (e.g., the 3pm reference price
plus a fixed markup) would change whether the
basket in this scenario would be considered a
portfolio trade.
91 See FIX letter at 3.
92 See FIX letter at 2.
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commence upon the publication of
updated technical specifications and the
issuance of FAQs by FINRA, given the
significant technical work that will be
required to implement the proposal and
various issues where the industry will
require interpretive guidance from
FINRA.93 SIFMA stated that a
significant amount of lead time would
be needed before the implementation
date for the delayed Treasury spot trade
proposal, ‘‘on the order of 18 months or
more.’’ 94 Bloomberg noted the
‘‘significant change in workflow’’ that
would be required to implement the
delayed Treasury spot proposal,
particularly with respect to recording
and reporting the time that the spread
was agreed.95 Bloomberg also noted that
consumers of TRACE data will need
specifications in advance to make
changes to systems to ingest the updated
data feed and interpret the data.96
Bloomberg therefore recommended that
FINRA provide the industry with
‘‘plenty of time’’ to accommodate the
changes and that FINRA should conduct
outreach with members to determine an
appropriate amount of lead time
following FINRA’s release of FAQs and
TRACE messaging specifications needed
to code, test and implement the
necessary changes.97 Bloomberg also
noted similar implementation issues
and made the same recommendation
with respect to the portfolio trade aspect
of the proposal.98
FINRA acknowledges that members
reporting to TRACE require an
appropriate amount of time to
implement the systems and other
changes necessary to report the
additional information required under
the proposed rule change. As noted
above, if the Commission approves the
proposed rule change, FINRA will
announce the effective date(s) of the
proposed rule change in a Regulatory
Notice.99 FINRA will publish a
Regulatory Notice announcing the
effective date(s) of the proposed
amendments pursuant to Rule
6730(d)(4)(H) and (I) no later than 90
days following Commission approval,
and the effective date(s) will be no later
than 365 days following publication of
the Regulatory Notice. FINRA will
publish a Regulatory Notice announcing
the effective date of the proposed
amendments pursuant to Rule
93 See
FIF Letter at 3.
SIFMA Letter at 4.
95 See Bloomberg Letter at 2–3.
96 See Bloomberg Letter at 3.
97 See Bloomberg Letter at 3.
98 See Bloomberg Letter at 5.
99 See supra note 25.
94 See
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17:30 Dec 06, 2021
6730(c)(14) once determined.100 As is
generally the case for TRACE rule
changes, FINRA will endeavor to
publish updated technical specifications
as far as possible in advance of the
effective date(s) and will work with
members to provide interpretive
guidance, where needed.
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. In
particular, the Commission requests
comment on whether the proposal
should be expanded to require FINRA
members to report, with respect to
delayed Treasury spot trades, the actual
yield spread (‘‘spread’’) between the
corporate bond and the U.S. Treasury
Security that is agreed between the
counterparties; and (2) the CUSIP
number (or another identifier) of the
specific U.S. Treasury Security that
serves as the basis for the spread
calculation. Presently, with respect to
Treasury spot trades, FINRA is
proposing to require only that a member
append a new modifier when reporting
a delayed Treasury spot trade and the
time at which the spread for the delayed
Treasury spot trade was agreed upon.
FINRA discussed earlier in this notice
that the FIMSAC considered these
additional options but ultimately did
not recommend them. FINRA also
discussed the SIFMA comment to its
Regulatory Notice preceding this filing,
where SIFMA stated that market
observers ‘‘should have enough
information from the proposed trade
reports to derive an estimate of the
spread without requiring reporting of
this additional data.’’ FINRA also stated
that it requested comment on its
understanding that most common
100 See
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Frm 00130
Fmt 4703
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pricing benchmark used for delayed
Treasury spot trades is the on-the-run
U.S. Treasury Security with the
maturity that corresponds to the
maturity of the corporate bond being
priced; SIFMA stated that its members
share that understanding. Therefore,
FINRA has not proposed to require
these additional two data elements but
stated above that it ‘‘will assess the
reported data regarding delayed
Treasury spot trades and continue to
engage with industry participants
regarding whether any future changes
may be appropriate to further improve
transparency.’’ In light of this
background, commenters are invited to
provide views on the following:
1. How easy or difficult would it be
for market observers to ‘‘derive an
estimate of the spread’’ having only the
time that the spread was agreed between
the counterparties to the delayed
Treasury spot trade? How confident are
market observers that their estimates are
accurate? Would reporting and public
dissemination of the actual spread for
each specific delayed Treasury spot
trade and the benchmark CUSIP used
for the spread be preferable?
2. Do FINRA members who engage in
delayed Treasury spot trades keep a
record of the agreed upon spread and
the benchmark CUSIP for a specific
trade in any internal systems? Could
FINRA members who engage in delayed
Treasury spot trades capture the agreed
upon spread and the benchmark CUSIP
used for the spread on a specific trade
in the same location as the time the
spread was agreed to that FINRA is
proposing to be reported in this
proposal? Whatever the case, please
describe the burdens that would be
associated with reporting the actual
spread and the CUSIP number (or other
identifier) of the benchmark U.S.
Treasury Security.
3. The current proposal, if approved
by the Commission, would require
members to add a new modifier to a
delayed Treasury spot trade and to
report the time at which the spread for
the delayed Treasury spot trade was
agreed upon. Affected reporting
members would have to make systems
changes to report these additional data
elements for all delayed Treasury spot
trades. What would be the incremental
burden of the systems changes
necessary to report two additional data
elements—the agreed upon spread and
the CUSIP or other identifier of the
benchmark U.S. Treasury Security—at
same time? What would be the costs of
adding these two additional data
elements in the future, as part of a
separate systems upgrade, relative to
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Federal Register / Vol. 86, No. 232 / Tuesday, December 7, 2021 / Notices
implementing all four data elements as
part of the same upgrade?
4. How confident are market observers
that they share the same understanding
as the counterparties to a delayed
Treasury spot trade of the specific U.S.
Treasury Security used as the
benchmark? Are there delayed Treasury
spot trades where the time to maturity
for the corporate bond does not
correspond exactly to any U.S. Treasury
Security so there is ambiguity as to what
U.S. Treasury Security would serve as
the benchmark? Is there a clear market
convention for benchmarking off-therun corporate securities for which the
maturities fall between two on-the-run
Treasury securities (for example, 4-year
maturities, 6-year maturities, etc.)?
5. Do you believe it would be
appropriate for FINRA to disseminate its
assumption of the U.S. Treasury
Security used as the benchmark for a
delayed Treasury spot trade, even if
FINRA does not require it to be reported
by members? Why or why not?
Comments may be submitted by any of
the following methods:
lotter on DSK11XQN23PROD with NOTICES1
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
FINRA–2021–030 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–2021–030. 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
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17:30 Dec 06, 2021
Jkt 256001
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–
2021–030 and should be submitted on
or before December 28, 2021.
69349
Contiguous Counties (Economic Injury
Loans Only): All contiguous
counties have previously been
declared.
All other information in the original
declaration remains unchanged.
(Catalog of Federal Domestic Assistance
Number 59008)
James Rivera,
Associate Administrator for Disaster
Assistance.
[FR Doc. 2021–26520 Filed 12–6–21; 8:45 am]
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.101
J. Matthew DeLesDernier,
Assistant Secretary.
BILLING CODE 8026–03–P
[FR Doc. 2021–26452 Filed 12–6–21; 8:45 am]
[Disaster Declaration #17147 and #17148;
NEW YORK Disaster Number NY–00208]
BILLING CODE 8011–01–P
SMALL BUSINESS ADMINISTRATION
SMALL BUSINESS ADMINISTRATION
Presidential Declaration Amendment of
a Major Disaster for the State of New
York
[Disaster Declaration #17258 and #17259;
Connecticut Disaster Number CT–00054]
AGENCY:
Presidential Declaration Amendment of
a Major Disaster for the State of
Connecticut
SUMMARY:
U.S. Small Business
Administration.
ACTION: Amendment 1.
AGENCY:
This is an amendment of the
Presidential declaration of a major
disaster for the State of Connecticut
(FEMA–4629–DR), dated 10/30/2021.
Incident: Remnants of Hurricane Ida.
Incident Period: 09/01/2021 through
09/02/2021.
DATES: Issued on 12/01/2021.
Physical Loan Application Deadline
Date: 12/29/2021.
Economic Injury (EIDL) Loan
Application Deadline Date: 08/01/2022.
ADDRESSES: Submit completed loan
applications to: U.S. Small Business
Administration, Processing and
Disbursement Center, 14925 Kingsport
Road, Fort Worth, TX 76155.
FOR FURTHER INFORMATION CONTACT: A.
Escobar, Office of Disaster Assistance,
U.S. Small Business Administration,
409 3rd Street SW, Suite 6050,
Washington, DC 20416, (202) 205–6734.
SUPPLEMENTARY INFORMATION: The notice
of the President’s major disaster
declaration for the State of Connecticut,
dated 10/30/2021, is hereby amended to
include the following areas as adversely
affected by the disaster:
Primary Counties (Physical Damage and
Economic Injury Loans): New
Haven.
SUMMARY:
101 17
PO 00000
CFR 200.30–3(a)(12).
Frm 00131
Fmt 4703
Sfmt 4703
U.S. Small Business
Administration.
ACTION: Amendment 6.
This is an amendment of the
Presidential declaration of a major
disaster for the State of New York
(FEMA–4615–DR), dated 09/05/2021.
Incident: Remnants of Hurricane Ida.
Incident Period: 09/01/2021 through
09/03/2021.
DATES: Issued on 12/01/2021.
Physical Loan Application Deadline
Date: 12/06/2021.
Economic Injury (EIDL) Loan
Application Deadline Date: 06/06/2022.
ADDRESSES: Submit completed loan
applications to: U.S. Small Business
Administration, Processing and
Disbursement Center, 14925 Kingsport
Road, Fort Worth, TX 76155.
FOR FURTHER INFORMATION CONTACT: A.
Escobar, Office of Disaster Assistance,
U.S. Small Business Administration,
409 3rd Street SW, Suite 6050,
Washington, DC 20416, (202) 205–6734.
SUPPLEMENTARY INFORMATION: The notice
of the President’s major disaster
declaration for the State of New York,
dated 09/05/2021, is hereby amended to
include the following areas as adversely
affected by the disaster:
Primary Counties (Physical Damage and
Economic Injury Loans): Orange
Contiguous Counties (Economic Injury
Loans Only):
New York: Sullivan
New Jersey: Sussex
Pennsylvania: Pike
All other information in the original
declaration remains unchanged.
E:\FR\FM\07DEN1.SGM
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]]>Agencies
[Federal Register Volume 86, Number 232 (Tuesday, December 7, 2021)]
[Notices]
[Pages 69337-69349]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-26452]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-93699; File No. SR-FINRA-2021-030]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing of Proposed Rule Change To Amend
FINRA Rule 6730 To Require Members To Append Modifiers to Delayed
Treasury Spot and Portfolio Trades When Reporting to TRACE
December 1, 2021.
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 November 22, 2021, the Financial Industry Regulatory Authority, Inc.
(``FINRA'') filed with the Securities and Exchange Commission (``SEC''
or ``Commission'') the proposed rule change as described in Items I,
II, and III below, which Items have been prepared by FINRA. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
FINRA is proposing to amend FINRA Rule 6730 to require members to
append modifiers to identify delayed Treasury spot and portfolio trades
when reporting to FINRA's Trade Reporting and Compliance Engine
(``TRACE'').
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.
[[Page 69338]]
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
On February 10, 2020, the Commission's Fixed Income Market
Structure Advisory Committee (``FIMSAC'') unanimously approved a
recommendation from its Technology and Electronic Trading Subcommittee
for FINRA to amend its TRACE \3\ reporting rules to provide additional
information on two types of trades in corporate bond TRACE-Eligible
Securities \4\ (``FIMSAC Recommendation'').\5\ Specifically, the FIMSAC
recommended that FINRA amend its TRACE reporting rules to require
members to: (1) Identify corporate bond trades where the price of the
trade is based on a spread to a benchmark U.S. Treasury Security \6\
that was agreed upon earlier in the day (referred to as a ``delayed
Treasury spot trade'') and report the time at which the spread was
agreed upon; and (2) identify corporate bond trades that are part of a
larger portfolio trade. Because the price reported to TRACE for these
two types of trades may not reflect the market prices at the time the
trades are reported and disseminated, the FIMSAC believed that
reporting and disseminating this additional information would improve
price transparency in the corporate bond market.\7\
---------------------------------------------------------------------------
\3\ TRACE is the FINRA-developed system that facilitates the
mandatory reporting of over-the-counter transactions in eligible
fixed income securities. See generally Rule 6700 Series.
\4\ Rule 6710(a) generally defines a ``TRACE-Eligible Security''
as a debt security that is United States (``U.S.'') dollar-
denominated and is: (1) Issued by a U.S. or foreign private issuer,
and, if a ``restricted security'' as defined in Securities Act Rule
144(a)(3), sold pursuant to Securities Act Rule 144A; (2) issued or
guaranteed by an Agency as defined in Rule 6710(k) or a Government-
Sponsored Enterprise as defined in Rule 6710(n); or (3) a U.S.
Treasury Security as defined in Rule 6710(p). ``TRACE-Eligible
Security'' does not include a debt security that is issued by a
foreign sovereign or a Money Market Instrument as defined in Rule
6710(o).
\5\ See FIMSAC, Recommendation Regarding Additional TRACE
Reporting Indicators for Corporate Bond Trades (February 10, 2020).
https://www.sec.gov/spotlight/fixed-income-advisory-committee/fimsac-additional-trace-flags-recommendation.pdf.
\6\ Rule 6710 defines a ``U.S. Treasury Security'' as ``a
security, other than a savings bond, issued by the U.S. Department
of the Treasury to fund the operations of the federal government or
to retire such outstanding securities.'' The term ``U.S. Treasury
Security'' also includes separate principal and interest components
of a U.S. Treasury Security that has been separated pursuant to the
Separate Trading of Registered Interest and Principal of Securities
(STRIPS) program operated by the U.S. Department of Treasury. See
Rule 6710(p).
\7\ See FIMSAC Recommendation at 1. FINRA reminds members that,
pursuant to Rule 3110, they must have policies and procedures in
place that are reasonably designed to ensure compliance with the
TRACE reporting rules, including the accurate reporting of
applicable trade modifiers or indicators. Firms also must be able to
demonstrate that a transaction meets the applicable conditions
associated with a particular modifier or indicator.
---------------------------------------------------------------------------
On July 16, 2020, FINRA published Regulatory Notice 20-24 to
solicit public comment on potential changes to its TRACE reporting
rules in line with the FIMSAC's recommendations. FINRA also sought
comment on whether any modifications to the scope of the FIMSAC's
recommended approach might be appropriate.\8\ As discussed in greater
detail below, FINRA received seven comments in response to Regulatory
Notice 20-24. After further consideration, FINRA is proposing the
FIMSAC-recommended changes to the TRACE reporting rules to append
modifiers to identify both delayed Treasury spot trades and portfolio
trades, with modifications to the portfolio trade provision to clarify
and simplify its conditions (based on feedback received in response to
Regulatory Notice 20-24), as further discussed below.
---------------------------------------------------------------------------
\8\ See FINRA Requests Comment on Proposed Changes to TRACE
Reporting Relating to Delayed Treasury Spot and Portfolio Trades,
Regulatory Notice 20-24 (July 2020).
---------------------------------------------------------------------------
Delayed Treasury Spot Trades
For purposes of the proposed amendment, a delayed Treasury spot
trade is a transaction in a corporate bond that occurs on the basis of
a spread to a benchmark U.S. Treasury Security, where the agreed upon
spread is later converted to a dollar price by ``spotting'' the
benchmark U.S. Treasury Security at a designated time. For example,
parties may determine to trade a corporate bond based on an agreed
spread to a specified U.S. Treasury Security at 10:00 a.m. (e.g., 150
bps over the 10 Year Treasury yield), but the dollar price is
determined later, e.g., at 3:00 p.m., when the parties ``spot'' the
spread against the agreed benchmark U.S. Treasury Security yield (e.g.,
a reported dollar price of 97.5, expressed as a percentage of par
value, calculated by applying the agreed spread of 150 bps to the 10
Year Treasury yield at 3:00 p.m.). The TRACE reporting rules generally
require members to report transactions in corporate bonds within 15
minutes of the Time of Execution,\9\ which is the time when the parties
agree to all of the terms of the transaction that are sufficient to
calculate the dollar price of the trade.\10\ Therefore, in the above
scenario, the delayed Treasury spot trade is reportable at 3:00 p.m.,
which is when the dollar price has been determined. Because the spread
was negotiated earlier in the day, the dollar price reported at 3:00
p.m. may be away from the current market price for the security.
---------------------------------------------------------------------------
\9\ See Rule 6730(a).
\10\ See Rule 6710(d).
---------------------------------------------------------------------------
The FIMSAC believed that a specific modifier to identify delayed
Treasury spot trades, along with disseminating the time at which the
spread was agreed (e.g., 10:00 a.m.), would both alert market
participants that the spread-based economics of the trade had been
agreed upon earlier in the day as well as provide market participants
with the ability to estimate the agreed-upon spread.\11\
---------------------------------------------------------------------------
\11\ See FIMSAC Recommendation at 2.
---------------------------------------------------------------------------
Consistent with the FIMSAC Recommendation, FINRA is proposing
amendments to Rule 6730 to provide additional transparency into delayed
Treasury spot trades. Specifically, FINRA is proposing to amend Rule
6730: (1) Add new paragraph (d)(4)(H) to require that a member append a
new modifier \12\ when reporting a delayed Treasury spot trade--i.e., a
transaction in a corporate bond,\13\ the price of which is based on a
spread to the yield of a U.S. Treasury Security and where the spread
was agreed upon that day prior to the Time of Execution of the
transaction; \14\ and (2) add new paragraph (c)(14) to require that the
member report the time at which the spread for a delayed Treasury spot
trade was agreed upon.\15\ Both the new delayed Treasury spot modifier
and the time at which the spread was agreed would be disseminated
through TRACE,
[[Page 69339]]
together with other information on the transaction, immediately upon
receipt of the transaction report.\16\
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\12\ As for other TRACE modifiers and indicators under Rule
6730, the specific format for the new delayed Treasury spot trade
modifier would be published in TRACE technical specifications.
\13\ The FIMSAC Recommendation related to delayed Treasury spot
trades was limited to corporate bond trades. See FIMSAC
Recommendation at 1. Similarly, FINRA proposes to limit use of the
new modifier to transactions in corporate bonds (i.e., CUSIPs that
are disseminated as part of the TRACE Corporate Bond Data Set). A
CUSIP, standing for the Committee on Uniform Security Identification
Procedures, is a 9-character alphanumeric code that identifies a
North American security for the purposes of facilitating clearing
and settlement of trades. FINRA may in the future consider applying
the delayed Treasury spot modifier and associated requirement to
report the time at which the spread was agreed to other types of
TRACE-Eligible Securities, such as Agency Debt Securities.
\14\ FINRA is also proposing a non-substantive, stylistic change
to the title of paragraph (d)(4) of Rule 6730, so that it refers to
``Modifiers and Indicators'' rather than ``Modifiers; Indicators''.
\15\ As a result of this addition, current paragraph (c)(14) of
Rule 6730 would be renumbered as paragraph (c)(15).
\16\ FINRA generally disseminates information on transactions in
TRACE-Eligible Securities immediately upon receipt of the
transaction report, except as otherwise provided in Rule 6750. See
Rule 6750(a).
---------------------------------------------------------------------------
FINRA believes that, by specifically identifying delayed Treasury
spot trades, the proposed rule change will enhance FINRA's regulatory
audit trail data and improve price transparency for corporate bond
market participants by identifying transactions whose prices may not be
at the current market for the security.\17\ FINRA also believes that
disseminating the time that the spread was agreed will further enhance
price transparency by providing market participants with the ability to
estimate the agreed-upon-spread.\18\
---------------------------------------------------------------------------
\17\ The FIMSAC considered several potential means of improving
transparency around Treasury spot trades, including whether the
terms (including the agreed spread and applicable Treasury
benchmark) should be reported to TRACE within 15 minutes of the
parties' agreement to all of the terms of the transaction other than
the price of the Treasury. The FIMSAC noted that, while these
alternatives would allow market participants to fully understand the
spread-based economics of the trade at the time at which they are
agreed, the recommended approach would be simpler and more cost-
effective to implement, assuming the need for reporting parties to
enhance the initial TRACE report with the calculated dollar price of
the trade when the delayed spot trade is ``spotted'' later in the
day. See FIMSAC Recommendation at 2 n.3. Following implementation,
FINRA will assess the reported data regarding delayed Treasury spot
trades and continue to engage with industry participants regarding
whether any future changes may be appropriate to further improve
transparency.
\18\ FINRA understands that the most common pricing benchmark
used for delayed Treasury spot trades is the on-the-run U.S.
Treasury Security with the maturity that corresponds to the maturity
of the corporate bond being priced. For example, market participants
would use the most recently issued 10-year U.S. Treasury Security as
the benchmark to price a 10-year corporate bond.
---------------------------------------------------------------------------
Portfolio Trades
FINRA also is proposing a new modifier to identify portfolio
trades.\19\ For purposes of the proposed amendment, a ``portfolio
trade'' is a trade between only two parties for a basket of corporate
bonds at a single aggregate price for the entire basket. For example, a
market participant may seek to trade a portfolio consisting of 50
corporate bonds. The parties may obtain mid-market prices for each of
the 50 component bonds as a framework for the pricing, and, during the
negotiation process, ultimately agree on a uniform spread, resulting in
an aggregate dollar price for the entire portfolio. In such cases,
members must report to TRACE a trade for each individual bond in the
basket with an attributed dollar price for each bond. While, in many
cases, the reported price for each corporate bond in a portfolio trade
is in line with the security's current market price, in other cases--
based on, for example, the liquidity profile of a specific bond or
other factors--the attributed price reported for an individual security
may deviate from its current market price.
---------------------------------------------------------------------------
\19\ As noted below, the specific format and requirements for
both the new delayed Treasury spot modifier and the new portfolio
trade modifier would be published in TRACE technical specifications.
Where a specific trade meets the criteria for both modifiers, such
specifications may require the use of a third, single modifier
indicating that both the delayed Treasury spot modifier and the
portfolio trade modifier apply to the trade.
---------------------------------------------------------------------------
The FIMSAC believed it would be beneficial if market participants
were able to identify with certainty which trades were part of a
portfolio trade because of the possibility that the reported price may
not be reflective of the independent market for the bond.\20\ The
FIMSAC therefore recommended that FINRA amend its TRACE reporting rules
to identify corporate bond trades: (i) Executed between only two
parties; (ii) involving a basket of securities of at least 30 unique
issuers; (iii) for a single agreed price for the entire basket; and
(iv) executed on an all-or-none or most-or-none basis.\21\
---------------------------------------------------------------------------
\20\ The FIMSAC acknowledged that market participants currently
may be able to surmise which TRACE reports are part of a portfolio
trade, based on a common time of execution or the characteristics of
the components. See FIMSAC Recommendation at 2.
\21\ See FIMSAC Recommendation at 4.
---------------------------------------------------------------------------
In line with the FIMSAC's recommendation, FINRA is proposing to
amend Rule 6730 to provide additional transparency into portfolio
trades. Specifically, FINRA is proposing to add new paragraph (d)(4)(I)
to Rule 6730 to require that a member append a new modifier \22\ if
reporting a transaction in a corporate bond: \23\ (i) Executed between
only two parties; (ii) involving a basket of corporate bonds of at
least 10 unique issues; and (iii) for a single agreed price for the
entire basket (``Portfolio Trade Definition''). The new portfolio trade
modifier would be disseminated through TRACE, together with other
information on the transaction, immediately upon receipt of the
transaction report. Based on feedback from commenters, the scope of
FINRA's proposed Portfolio Trade Definition differs from the FIMSAC
recommended definition in two ways, as discussed further below.
---------------------------------------------------------------------------
\22\ As for other TRACE modifiers and indicators under Rule
6730(d)(4), the specific format for the new portfolio trade modifier
would be published in TRACE technical specifications.
\23\ The FIMSAC Recommendation related to portfolio trades was
limited to corporate bond trades. See FIMSAC Recommendation at 2.
Similarly, FINRA proposes to limit use of the new modifier to
transactions in corporate bonds (i.e., CUSIPs that are disseminated
as part of the TRACE Corporate Bond Data Set). FINRA may in the
future consider expanding the portfolio trade modifier to cover
other types of TRACE-Eligible Securities, such as Agency Debt
Securities.
---------------------------------------------------------------------------
Both the FIMSAC recommendation and the proposal would limit use of
the portfolio trade modifier to instances where the trade is executed
between only two parties at a single agreed price for the entire
basket. However, instead of applying the portfolio modifier to
transactions involving a basket of corporate bonds of 30 or more unique
issuers (as recommended by the FIMSAC), FINRA is proposing to apply the
portfolio trade modifier to transactions involving a basket of
corporate bonds of at least 10 unique issues/securities (i.e.,
individual securities counted using security identifiers such as CUSIPs
or TRACE symbols). As described in further detail below, FINRA received
several comments on this aspect of the proposal. Commenters stated that
basing the numerical threshold on the number of issuers represented in
a portfolio rather than the number of securities would be challenging
to implement and would raise interpretive issues, and therefore
suggested instead basing the threshold on the number of unique
corporate bond securities in the portfolio. Commenters believed that
this alternative approach would effectively identify portfolio trades
while avoiding challenges that would be associated with correctly
identifying bonds associated with a particular issuer. Commenters also
stated that basing the threshold on the number of unique issues would
be simpler and more easily automatable for members to implement. FINRA
agrees that using individual securities, rather than issuers, would
provide a simpler and more effective way to identify portfolio trades
for purposes of the new modifier. Therefore, FINRA is proposing to base
the size threshold condition in prong (ii) of the Portfolio Trade
Definition on the number of unique issues in the basket of corporate
bonds.
Second, the FIMSAC recommended setting the size threshold for
portfolio trades at 30 unique issuers. As described in further detail
below, FINRA also received comments on the appropriate basket size,
with commenters expressing a range of views on the most appropriate
threshold. After further consideration, FINRA is proposing to modify
the size threshold in prong (ii) of the Portfolio Trade Definition by
lowering the threshold from 30 to 10 unique securities. FINRA believes
that lowering the threshold for
[[Page 69340]]
use of the portfolio trade modifier to 10 would provide greater
informational benefits to market participants by capturing a greater
number of transactions that satisfy the other conditions of the
Portfolio Trade Definition.
Consistent with the FIMSAC Recommendation, prong (iii) of the
Portfolio Trade Definition would apply the new modifier to transactions
entered into ``for a single agreed price'' for the entire basket. As
described above, this prong represents the key characteristic of
portfolio trades, i.e., that the transaction is entered into at an
agreed aggregate price for the entire basket (as opposed to
individually negotiated trades), which may result in the attributed
price reported for individual securities in the basket being away from
their current market price.
FINRA notes that the FIMSAC also recommended that the Portfolio
Trade Definition include a requirement that the basket be executed on
an ``all-or-none or most-or-none basis.'' \24\ One commenter suggested
deleting the reference to ``most-or-none'' in this proposed prong
because a definition of ``most-or-none'' does not currently exist in
current market practice and the concept is not well understood. After
further consideration, FINRA believes that removing this prong in its
entirety would reduce the proposal's complexity without reducing the
new modifier's informational value. FINRA is therefore not proposing to
include an ``all-or-none or most-or-none'' prong as part of the
Portfolio Trade Definition. Therefore, if two parties agree on a price
with respect to a basket of bonds, the component trades would be
identified with the new portfolio trade modifier so long as the
resulting basket trade includes the minimum of 10 unique issues at a
single agreed price, regardless of the number of securities that
originally were contemplated as part of the basket.
---------------------------------------------------------------------------
\24\ See FIMSAC Recommendation at 4.
---------------------------------------------------------------------------
If the Commission approves the proposed rule change, FINRA will
announce the effective date(s) of the proposed rule change in a
Regulatory Notice.\25\ FINRA will publish a Regulatory Notice
announcing the effective date(s) of the proposed amendments pursuant to
Rule 6730(d)(4)(H) and (I) no later than 90 days following Commission
approval, and the effective date(s) will be no later than 365 days
following publication of the Regulatory Notice. FINRA will publish a
Regulatory Notice announcing the effective date of the proposed
amendments pursuant to Rule 6730(c)(14) once determined.\26\
---------------------------------------------------------------------------
\25\ FINRA may implement the proposed modifier requirements
(pursuant to proposed Rule 6730(d)(4)(H) and (I)) separately from
the proposed requirement to report the time at which the spread was
agreed (pursuant to proposed Rule 6730(c)(14)).
\26\ FINRA is currently in the process of developing and
implementing enhancements to its reporting systems, including TRACE.
Because the proposed requirement to report the time at which the
spread was agreed for a delayed Treasury spot trade under Rule
6730(c) would require the addition of a new TRACE reporting field,
FINRA intends to set the effective date for this requirement at a
later date following completion of TRACE system changes.
---------------------------------------------------------------------------
2. Statutory Basis
FINRA believes that the proposed rule change is consistent with the
provisions of Section 15A(b)(6) of the Act,\27\ 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 delayed Treasury spot and portfolio trades 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.
---------------------------------------------------------------------------
\27\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------
FINRA believes that the proposed rule change will improve
transparency into pricing in the corporate bond market and enhance
FINRA's regulatory audit trail data by specifically identifying delayed
Treasury spot trades and portfolio trades, which are two types of
trades where the price may not be reflective of the current market
price at the time the trades are reported and disseminated. FINRA also
believes that the proposed rule change will enable market participants
and investors to better understand pricing for delayed Treasury spot
trades by requiring members to report the time at which the spread was
agreed, which will provide market participants with the ability to
estimate the agreed-upon-spread for such trades.
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.
Economic Impact Assessment
Regulatory Objective
As discussed above, delayed Treasury spot trades and portfolio
trades may not be reflective of the current market price for the bonds
and may be less informative for market participants that rely on TRACE
for price discovery or other analyses. The proposed modifiers would
specifically identify these types of trades and add the time at which
the spread was agreed upon in disseminated data.
Economic Baseline
A. Delayed Treasury Spot Trades
Because delayed Treasury spot trades are currently not identified
in the TRACE data, the economic baseline first establishes the TRACE
reported trades most likely to be associated with delayed Treasury spot
trades. Using TRACE data from June 2020 to May 2021, FINRA examined the
daily average concentration of corporate bond trades around 3:00 p.m.,
which FINRA understands to be the ``spotting'' time usually used by
dealers for delayed Treasury spot trades. Figures F1-1 and F1-2 below
compare the percentage of trades during the 3:00 p.m. to 3:14 p.m. time
interval with: (1) The average percentage of trades for all 15-minute
intervals before 3:00 p.m.; and (2) and the average percentage of
trades for all 15-minute intervals after 3:14 p.m. Figures F1-1 and F1-
2 also provide these trade distributions based on the size of trades
and for all trades combined. These data are likely to either overcount
the number of delayed Treasury spot trades because some of the trades
executed in the time interval are not delayed Treasury spot trades, or
undercount because they exclude delayed Treasury spot trades executed
at other times during the day. Nevertheless, FINRA believes this
methodology will provide a reasonable baseline for the analysis.
Figure F1-1 provides statistics for customer trades in investment
grade bonds and Figure F1-2 provides statistics for inter-dealer trades
in investment grade bonds. Figures F1-1 and F1-2 show that, across all
trade sizes in investment grade bonds, volumes in the 3:00 p.m. trade
interval are larger than both the pre-3:00 p.m. and the post-3:14 p.m.
intervals. For investment grade customer trades, the 3:00 p.m. volumes
are several times larger than both the pre-3:00 p.m. and the post-3:14
p.m. intervals. Figures F1-3 and F1-4 provide similar information for
trades in non-investment grade bonds. These figures show that the
differences in trades across the time intervals are much less material
in non-investment grade bond trades. Although trades during the 3:00
p.m. to 3:14 p.m. time interval may not all be delayed spot trades, the
jump in investment grade bond volume during
[[Page 69341]]
the period is consistent with FINRA's understanding of when delayed
Treasury spot trades are priced and reported (regardless of when the
spread was agreed upon).
BILLING CODE 4910-13-P
[GRAPHIC] [TIFF OMITTED] TN07DE21.000
[[Page 69342]]
[GRAPHIC] [TIFF OMITTED] TN07DE21.001
B. Portfolio Trades
Evidence supports the hypothesis that portfolio trading has been
increasing over time.\28\ An analysis by Morgan Stanley shows that $88
billion in portfolio trades were executed from January 2019 through
November 2019, compared to virtually none in 2017.\29\ The analysis
also shows that portfolio trades with 140 bonds or more increased
tenfold since 2018. According to a Financial Times article citing
Greenwich Associates' survey of 67 bond traders, more than 50% of the
traders have executed a portfolio trade in the past year.\30\
---------------------------------------------------------------------------
\28\ See infra notes 29 and 30.
\29\ See Jennifer Surane & Matthew Leising, Bond Trade That's
Gone from Zero to $88 Billion in Two Years, Bloomberg (Nov. 18,
2019), https://www.bloomberg.com/news/articles/2019-11-18/the-bond-trade-that-s-gone-from-zero-to-88-billion-in-two-years.
\30\ See Joe Rennison, Robert Armstrong & Robin Wigglesworth,
The New Kings of the Bond Market, Financial Times (Jan. 22, 2020),
https://www.ft.com/content/9d6e520e-3ba8-11ea-b232-000f4477fbca.
Among those traders, 75% executed the portfolio trade with dealers
while the remaining did so through other means such as an electronic
trading platform.
---------------------------------------------------------------------------
FINRA computed the annual percentage of trades that can be
classified as portfolio trades of increasing portfolio sizes from 2015
to 2020 using TRACE data. For purposes of these calculations, a
``portfolio trade'' is a trade of a basket of corporate bonds between
only two parties at the same execution time.\31\ ``Portfolio size'' is
defined as the number of unique CUSIPs contained in the basket. This
analysis demonstrates that portfolio trades reported to TRACE grew
significantly in the past six years. For example, Table 1 shows that
the percentage of customer portfolio trades involving at least 10
CUSIPs more than quadrupled from
[[Page 69343]]
1.34% in 2015 to 5.64% in 2020. For portfolio trades involving at least
30 CUSIPs, the percentage of trades increased from 0.29% in 2015 to
3.60% in 2020. Inter-dealer portfolio trades grew at an even higher
rate, albeit from a lower base level.
---------------------------------------------------------------------------
\31\ Using current TRACE data, FINRA can only approximate
``portfolio trades'' as defined in the proposed rule change.
Specifically, the analysis may include trades that are not executed
at a single agreed price for the entire basket or that are not
limited to two parties. As a result, the method used in this
analysis may include as a ``portfolio trade'' some trades that would
fall outside of the scope using the criteria set forth in the
proposed rule change. However, FINRA believes that the method used
in these calculations is reasonable for purposes of the analysis
given the scope of information currently available in TRACE.
[GRAPHIC] [TIFF OMITTED] TN07DE21.002
BILLING CODE 4910-13-C
Economic Impact
1. Delayed Treasury Spot Trades
A modifier identifying delayed Treasury spot trades would add
valuable information to disseminated TRACE data by indicating that the
reported price may not be at the current market. The new disseminated
time field would benefit the market because market participants can use
it to reasonably evaluate the spread at the time when the spread was
agreed upon and compare it to other trades at or near the same time.
Together, these additions will increase post-trade price transparency.
Members would be required to make systems changes to accommodate
the new modifier and time field. This would represent a fixed cost to
FINRA members that report corporate bond transactions priced through a
delayed Treasury spot process. The cost may be higher for members that
house information regarding the time of spotting in a different
platform or system that is not connected to its TRACE reporting
system.\32\ FINRA expects that the ongoing variable cost of reporting
the new modifier and populating the time field will be low for firms as
costs currently are incurred for existing TRACE reporting.
---------------------------------------------------------------------------
\32\ See SIFMA Letter, infra note 37.
---------------------------------------------------------------------------
2. Portfolio Trades
A modifier identifying trades executed as part of a portfolio trade
would allow market participants to identify with certainty which trades
[[Page 69344]]
occurred at attributed prices as part of a portfolio trade. With this
information, market participants could better identify trade prices
that may not reflect the market price for the individual bond. This
modifier will improve post-trade price transparency. While some market
participants may be capable of inferring portfolio trades from current
disseminated data,\33\ the added modifier may particularly benefit
smaller market participants, market observers and researchers who may
not have systems in place to actively screen for portfolio trades using
currently available data.
---------------------------------------------------------------------------
\33\ See SIFMA Letter, infra note 37.
---------------------------------------------------------------------------
FINRA members would incur costs associated with making system
changes required to accommodate the new modifier. This would represent
a fixed cost to FINRA members that execute and report portfolio trades.
The variable cost of reporting the new modifier should be minimal to
firms as costs are currently incurred for existing TRACE reporting. In
addition, while market participants currently may infer that some
trades may be portfolio trades, they cannot do so with certainty. The
FIMSAC noted that there may be an increased theoretical risk that a
market participant may identify the seller of a portfolio trade if
these trades are identified in disseminated data.\34\ FINRA requested
comments on the possibility of increased risk and members did not raise
concerns regarding such risk.
---------------------------------------------------------------------------
\34\ See FIMSAC Recommendation at 2.
---------------------------------------------------------------------------
3. Effects on Competition
FINRA does not believe that the proposed modifiers will unduly
burden competition. The costs for a firm to modify the reporting
process for the proposed modifiers will be proportional to the fixed
cost of the firm's reporting system, and thus be helped by similar
factors. For example, firms with no activities in delayed Treasury spot
trades or portfolio trades may not need to update their system; firms
with limited activities may choose to manually input the new modifiers;
and firms can also use third party reporting system vendors, which are
intended to take advantage of lower costs due to economy of scale.
Alternatives Considered
With respect to the proposed delayed Treasury spot provisions,
FINRA considered requiring firms to report the available terms
(including the agreed spread and applicable Treasury benchmark) of
delayed Treasury spot trades within 15 minutes of the parties'
agreement to the spread and benchmark. FIMSAC noted this alternative in
its recommendation and stated that, while this construct would allow
market participants to fully understand the spread-based economics of
the trade at the point at which they are agreed, the proposed approach
will be simpler and more cost-effective to implement and would avoid
the need for reporting parties to enhance the initial TRACE report with
the calculated dollar price of the trade when the delayed spot trade is
``spotted'' later in the day.\35\ FINRA agrees and also believes that
the proposed approach is beneficial in requiring reporting of the
dollar price of the transaction once determined, which is then
disseminated immediately upon receipt.
---------------------------------------------------------------------------
\35\ See note 17 supra.
---------------------------------------------------------------------------
With respect to the proposed portfolio modifier, FINRA considered
other thresholds for the number of unique issues to qualify as a
portfolio trade, such as 30 unique issues, similar to the FIMSAC
recommendation to identify trades involving a basket of at least 30
unique issuers (rather than issues), or as few as 2 unique issues, as
suggested by some commenters. Lowering the threshold generally captures
more portfolio trades and therefore provides greater informational
benefits to market participants. It may also discourage traders from
splitting up portfolio trades into smaller lists that do not meet the
specified criteria to avoid identifying trades under the proposal. On
the other hand, setting the threshold too low reduces the usefulness of
the identifier. Portfolio trades are used to diversify individual bond
risk and save on trading costs. Most of these benefits will diminish as
the portfolio size becomes small. The deviation of individual bond
price in a portfolio from market price will likely be less as the
number of bonds in the portfolio decreases. The proposed threshold of
10 strikes an appropriate balance between the trade-offs and is also
recommended by some commenters.\36\
---------------------------------------------------------------------------
\36\ See Jane Street Letter and SIFMA Letter, infra note 37.
---------------------------------------------------------------------------
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The proposed rule change was published for comment in Regulatory
Notice 20-24 (July 2020). Seven comments were received in response to
the Regulatory Notice.\37\ A copy of the Regulatory Notice is available
on FINRA's website at https://www.finra.org. A list of the comment
letters received in response to Regulatory Notice 20-24 is available on
FINRA's website.\38\ Copies of the comment letters received in response
to the Regulatory Notice are also available on FINRA's website. The
comments are summarized below.
---------------------------------------------------------------------------
\37\ See Comment submission from Melinda Ramirez, Consultant,
dated July 19, 2020 (stating only ``Thank you for the opportunity to
invest.'' [sic]); letter from Gregory Babyak, Global Head of
Regulatory Affairs, Bloomberg L.P., to Jennifer Piorko Mitchell,
Office of the Corporate Secretary, FINRA, dated September 14, 2020
(``Bloomberg Letter''); letter from Howard Meyerson, Managing
Director, Financial Information Forum, to Jennifer Piorko Mitchell,
Office of the Corporate Secretary, FINRA, dated September 14, 2020
(``FIF Letter''); letter from Kathleen Callahan, FIX Operations
Director, FIX Trading Community, to Jennifer Piorko Mitchell, Office
of the Corporate Secretary, FINRA, dated September 14, 2020 (``FIX
Letter''); letter from Matt Berger, Global Head of Fixed Income and
Commodities, Jane Street Capital, LLC, to Jennifer Piorko Mitchell,
Office of the Corporate Secretary, FINRA, dated September 14, 2020
(``Jane Street Letter''); letter from Chris Killian, Managing
Director, Securitization and Credit, SIFMA, to Jennifer Piorko
Mitchell, Office of the Corporate Secretary, FINRA, dated September
15, 2020 (``SIFMA Letter''); and letter from Michael Grogan, V.P. &
Head of US Fixed Income Trading--Investment Grade, Dwayne Middleton,
V.P. & Head of Fixed Income Trading, Brian Rubin, V.P. & Head of US
Fixed Income Trading--Below Investment Grade and Jonathan Siegel,
V.P. & Senior Legal Counsel--Legislative & Regulatory Affairs, T.
Rowe Price, to Jennifer Piorko Mitchell, Office of the Corporate
Secretary, FINRA, dated September 15, 2020 (``T. Rowe Price
Letter'').
\38\ See SR-FINRA-2021-030 (Form 19b-4, Exhibit 2b) (available
on FINRA's website at https://www.finra.org).
---------------------------------------------------------------------------
Delayed Treasury Spot Trades
Bloomberg, Jane Street and T. Rowe Price supported the proposal to
require members to identify corporate bond trades where the price of
the trade is based on a spread to a benchmark U.S. Treasury Security
that was agreed upon earlier in the day and report the time at which
the spread was agreed upon.\39\ Bloomberg stated that the proposal
``adds an incredible amount of value, insight and transparency into
TRACE data,'' including by making it possible for ``market participants
to derive intraday credit spread moves in specific corporate bond
issues and issuers.'' \40\ Jane Street noted that while market
participants would initially incur costs to modify trading reporting
procedures to provide this information, such costs are outweighed by
the benefit of obtaining additional information about delayed Treasury
spot trades.\41\ T. Rowe Price noted that the reported dollar price for
delayed Treasury spot trades may not take into account market or
issuer-specific developments that have occurred throughout the day,
such that
[[Page 69345]]
the proposal would benefit investment advisers and other market
participant by providing timely and definitive clarity on whether
reported transactions are delayed Treasury spot trades, and further
would support price formation.\42\ T. Rowe Price also noted benefits of
the proposal to transaction cost analysis and the portfolio valuation
process for institutional investors.\43\
---------------------------------------------------------------------------
\39\ See Bloomberg Letter at 2; Janes Street Letter at 1-2; T.
Rowe Price Letter at 1.
\40\ See Bloomberg Letter at 2.
\41\ See Jane Street Letter at 2.
\42\ See T. Rowe Price Letter at 1-2.
\43\ See T. Rowe Price Letter at 2.
---------------------------------------------------------------------------
SIFMA expressed mixed views on the delayed Treasury spot trade
proposal. SIFMA noted that its members ``both see benefits to this
proposal but also have material questions including the overall benefit
vs. cost balancing.'' \44\ SIFMA stated that a potential benefit of the
proposal would be to provide a ``clearer picture, retrospectively, as
to liquidity flows throughout the day.'' \45\ However, SIFMA noted that
some of its members indicated that the technical implementation of this
proposal is complex, particularly around the new time field.\46\ SIFMA
also highlighted that the fixed-cost burden presented by the proposal
would be more meaningful for smaller, non-primary dealers, which could
lead such dealers to use manual processes for trade reporting or no
longer engage in these type of trades.\47\
---------------------------------------------------------------------------
\44\ See SIFMA Letter at 3.
\45\ See SIFMA Letter at 4.
\46\ See SIFMA Letter at 4.
\47\ See SIFMA Letter at 4.
---------------------------------------------------------------------------
FIF did not support the delayed Treasury spot proposal, noting that
the proposal would require firms to implement significant system
changes.\48\ FIF stated that its members advised that dealer systems do
not currently store the time the original terms are agreed in a manner
that would enable reporting to TRACE on a timely basis, such that
implementation would require significant cost and work for firms to
upgrade various systems.\49\ FIF instead proposed that FINRA consider
mandating that the SpecialPriceIndicator tag, or another existing TRACE
tag, be marked as instructed by FINRA to identify delayed Treasury spot
trades.\50\ FIF stated that this alternative would signal to the market
that the terms of the trade were not agreed based on current market
conditions.\51\
---------------------------------------------------------------------------
\48\ See FIF Letter at 2.
\49\ See FIF Letter at 2.
\50\ See FIF Letter at 2.
\51\ See FIF Letter at 2.
---------------------------------------------------------------------------
FINRA agrees with commenters that the proposal relating to delayed
Treasury spot trades will provide significant benefits to market
participants and investors by enhancing transparency into corporate
bond pricing for these types of trades. FINRA acknowledges that
implementing the proposal will require members to make systems changes
to identify Treasury spot trades and append the modifiers, as well as
to capture and report the time at which the spread was agreed. FINRA
believes, however, that the ongoing transparency benefits of reporting
and disseminating this additional information will outweigh the initial
costs required to modify trade reporting systems to enable gathering
and reporting this new information. FINRA does not believe that use of
an existing TRACE modifier or indicator, such as the special price tag,
would sufficiently differentiate delayed Treasury spot trades in
disseminated TRACE data or its regulatory audit trail data, nor would
use of such a tag provide information about the time that the spread
was agreed such that market participants can estimate the agreed-upon
spread for such trades.\52\
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\52\ The ``special price'' modifier must be appended when a
transaction is executed at a price based on arm's length negotiation
and done for investment, commercial or trading considerations, but
does not reflect current market pricing. See FINRA Rule
6730(d)(4)(A) and Notice to Members 05-77 (November 2005). Thus a
member must first make a determination, on a trade-by-trade basis,
that a price is off-market before it appends the special price
modifier.
---------------------------------------------------------------------------
SIFMA also responded to two specific requests for comment in
Regulatory Notice 20-24 concerning the proposed Treasury spot modifier.
First, FINRA asked whether it should consider requiring firms to report
the spread, either at the time the spread is agreed or later in the
day, and, if reported at the time the spread is agreed, whether the
dollar price should also be reported later in the day. SIFMA responded
that FINRA should have enough information from the proposed trade
reports to derive an estimate of the spread without requiring reporting
of this additional data.\53\ SIFMA also noted that, in any case,
dealers should not have to submit two reports, or amend a previous
report, for the same trade.\54\ As described above, FINRA is not
modifying the proposal to require reporting of the spread or to require
members to submit two reports for the same trade.\55\ Second, FINRA
requested comment on its understanding that most common pricing
benchmark used for delayed Treasury spot trades is the on-the-run U.S.
Treasury Security with the maturity that corresponds to the maturity of
the corporate bond being priced. SIFMA stated that its members share
that understanding.\56\
---------------------------------------------------------------------------
\53\ See SIFMA Letter at 4.
\54\ See SIFMA Letter at 4-5.
\55\ See note 17 supra.
\56\ See SIFMA Letter at 5.
---------------------------------------------------------------------------
FIX didn't express a substantive view on the proposed amendments
but suggested that it can assist in developing standard solutions for
reporting of the proposed new delayed Treasury spot trade modifier.\57\
For example, FIX noted that adding the capability for FINRA to capture
the time that the spread was agreed would be a minimal extension to an
existing concept in FIX, specifically the TrdRegTimestamps field.\58\
FINRA notes that it supports several technical standards for reporting
of trade information to TRACE, including FIX, and that the specific
format and requirements for the new delayed Treasury spot modifier and
reporting field for the time the spread was agreed would be published
in TRACE technical specifications. As noted above, where a specific
trade meets the criteria for both modifiers, such specifications may
require the use of a third, single modifier indicating that both the
delayed Treasury spot modifier and the portfolio trade modifier apply
to the trade.
---------------------------------------------------------------------------
\57\ See FIX letter at 3.
\58\ See FIX letter at 2.
---------------------------------------------------------------------------
Portfolio Trades
T. Rowe Price supported the proposal to require members to identify
corporate bond trades that are components of a larger portfolio trade,
as defined in the FIMSAC Recommendation.\59\ T. Rowe Price noted that
the prices reported to TRACE for transactions that are part of a
portfolio trade may not be at the current market for the security and
that the proposal would benefit investment advisers and other market
participants by providing timely and definitive clarity on whether a
transaction is part of a portfolio trade, and further would support
price formation.\60\ T. Rowe Price also noted benefits of the proposal
to transaction cost analysis and the portfolio valuation process for
institutional investors.\61\
---------------------------------------------------------------------------
\59\ See T. Rowe Price Letter at 1.
\60\ See T. Rowe Price Letter at 1-2.
\61\ See T. Rowe Price Letter at 2.
---------------------------------------------------------------------------
FIF, Bloomberg and Jane Street generally supported the proposal but
suggested certain modifications to the conditions for trades that would
qualify for the proposed portfolio trade modifier under the FIMSAC
Recommendation,\62\ while SIFMA expressed generally mixed views on the
portfolio trade proposal.\63\
---------------------------------------------------------------------------
\62\ See FIF Letter at 1-2; Bloomberg Letter at 3-4; Jane Street
Letter at 2.
\63\ See SIFMA Letter at 1-3.
---------------------------------------------------------------------------
[[Page 69346]]
FIF and SIFMA recommended that prong (ii) of the Portfolio Trade
Definition be changed to a threshold based on the number of unique
issues or securities, rather than the number of unique issuers.\64\ FIF
noted that shifting to a security basis for this prong would avoid
challenges in identifying and processing which bonds are associated
with a particular issuer and would result in more trades being reported
as portfolio trades, which would provide greater transparency and
enhance FINRA's audit trail.\65\ FIF also stated that basing the
determination of a portfolio trade on the number of unique issuers
would raise the question of whether bonds of affiliated issuers should
be counted as one or multiple issuers, and highlighted in particular
bonds issued by special purpose vehicle subsidiaries.\66\ SIFMA stated
that while it understands that using the number of unique issuers is
intended to scope in diversified portfolio trades, its members raised
the concern that doing so would be more complicated to implement than
basing the threshold on the number of securities in the portfolio.\67\
SIFMA noted several examples of potential complications that could
arise by using unique issuers, such as determining how to treat
affiliates and subsidiaries and how guarantees might affect the
analysis.\68\ SIFMA stated that these issues would require market
participants to generate large lists of bonds and determine how to
attribute each bond to a unique issuer, which would not be easily
automatable and would introduce the risk of errors and omissions in
TRACE reporting.\69\ FINRA agrees with these commenters that using a
threshold based on the number of individual securities, rather than
issuers, to determine when to append the portfolio trade modifier would
result in a clearer and easier to implement approach to identifying
portfolio trades, and has modified the proposal accordingly.
---------------------------------------------------------------------------
\64\ See FIF Letter at 2; SIFMA Letter at 2-3.
\65\ See FIF Letter at 2-3.
\66\ See FIF Letter at 3.
\67\ See SIFMA Letter at 2-3.
\68\ See SIFMA Letter at 3.
\69\ See SIFMA Letter at 3.
---------------------------------------------------------------------------
Jane Street, Bloomberg, FIF and SIFMA commented on the threshold
number for appending the portfolio trade modifier, which the FIMSAC
recommendation set at 30. FIF stated that a trade involving fewer than
30 unique issuers should still be considered a portfolio trade if it
meets the other conditions in the definition.\70\ Jane Street stated
that 30 unique issuers is too high and recommended that a basket
containing bonds from at least 10 unique issuers should be reported
using the portfolio trade modifier, which would maximize the
informational benefit of the new modifier since many portfolio trades
contain bonds of between 10 and 30 unique issuers.\71\ SIFMA stated
that some of its members believe that a lower number of securities
would be more appropriate, such as 10, while other of its members are
comfortable with the proposed 30 or an even higher number.\72\
Bloomberg recommended that TRACE should identify every situation where
two or more securities are transacted at an agreed upon price where the
price may not reflect the current market price for the bonds.\73\ As
described above, FINRA has modified the proposal by lowering the
threshold from 30 to 10. FINRA believes that lowering the threshold for
portfolio trades that would be identified by the new modifier in this
manner would provide greater informational benefits to market
participants. However, FINRA believes that a lower threshold than 10
issues, such as two or more securities, would be over-inclusive and
reduce the usefulness of the modifier.
---------------------------------------------------------------------------
\70\ See FIF Letter at 2.
\71\ See Jane Street Letter at 2.
\72\ See SIFMA Letter at 3.
\73\ See Bloomberg Letter at 4.
---------------------------------------------------------------------------
With respect to the proposed prong requiring that a portfolio trade
must be executed on an all or none or most or none basis, Bloomberg
noted that an ``all-or-none'' designation is ``an execution constraint
that is well defined in all markets'' but that the concept of ``most-
or-none'' does not currently exist and would require further
clarification around what number of constituents in the basket
constitutes ``most.'' \74\ Bloomberg therefore recommended using a
definition of a basket that focuses on executions, rather than order
designations.\75\ As described above, FINRA agrees that this aspect of
the initial proposal is not well-understood and believes that the
Portfolio Trade Definition would be best implemented without an ``all-
or-none or most-or-none'' prong. Therefore, under the current
formulation, if two parties enter into negotiations with respect to a
basket of bonds, the component trades would be identified with the new
portfolio trade modifier so long as the resulting basket trade meets
the other conditions specified in the Portfolio Trade Definition.
---------------------------------------------------------------------------
\74\ See Bloomberg Letter at 3-4.
\75\ See Bloomberg Letter at 4.
---------------------------------------------------------------------------
SIFMA also commented more broadly on the portfolio trade proposal.
SIFMA stated that its members see two aspects to the portfolio trade
proposal: (1) The identification of portfolio trades vs. other kinds of
trades and (2) the identification of potentially off-market trades.\76\
With respect to the first aspect, SIFMA noted that, while the proposal
would make it easier to identify portfolio trades, some of its members
believe it is already fairly easy to identify portfolio trades today
without the specific modifier.\77\ However, SIFMA also noted that other
of its members believe that the proposal would benefit smaller market
participants, market observers and researchers, who may not have
systems in place to actively screen for portfolio trades using
currently available data.\78\ SIFMA noted that some of its members have
concerns about the potential impact on liquidity resulting from
disclosure of trading strategies, while other members did not believe
that this is a material concern. With respect to the second aspect,
SIFMA stated that some of its members have questioned the
appropriateness of a flag that does not provide definitive information
regarding whether the price is off-market, since a price in a portfolio
trade may or may not be off-market.\79\ SIFMA noted that dealers are
already expected to review each line item in a portfolio trade to
determine if it is off-market and, if so, append the existing special
price indicator in TRACE reports. SIFMA stated that one potential
benefit of the proposal could be to reduce compliance burdens if the
new portfolio trade modifier replaces the special price indicator for
components of portfolio trades.\80\ On a related point, SIFMA asked
FINRA to confirm that the portfolio trade modifier would be taken into
account in fair pricing reviews.\81\ SIFMA also stated dealers should
not face an undue burden to explain why a price on a trade identified
as a portfolio trade was off-market.\82\ FINRA confirms that the
portfolio trade modifier would be taken into account in FINRA's reviews
of members' trading activities, including fair pricing reviews, along
with any other indicators or modifiers that may be appended to
individual trades (such as the special price indicator, where
applicable). However, the new portfolio trade modifier would
[[Page 69347]]
not replace any other applicable indicators or modifiers, including the
special price indicator, where applicable. FINRA continues to believe
that, on balance, identification of portfolio trades through the
proposed portfolio trade modifier would improve market transparency and
provide greater certainty to market participants and investors
regarding such trades.
---------------------------------------------------------------------------
\76\ See SIFMA Letter at 1.
\77\ See SIFMA Letter at 2. SIFMA also expressed concern that
the proposal shifts TRACE away from being a price transparency tool
into a tool that provides trading strategy details. See id.
\78\ See SIFMA Letter at 2.
\79\ See SIFMA Letter at 2.
\80\ See SIFMA Letter at 2.
\81\ See SIFMA Letter at 2.
\82\ See SIFMA Letter at 2.
---------------------------------------------------------------------------
Bloomberg also commented more generally on the portfolio trade
proposal. Bloomberg stated that it has significant reservations about
the portfolio trade proposal because there would be significant
incentives for liquidity seekers to avoid sending baskets that meet
criteria.\83\ Specifically, Bloomberg noted that dissemination of
individual components of portfolio trades as unrelated transactions in
TRACE data, as it is today, protects liquidity seekers, while appending
the proposed modifier could lead to significant information leakage
such that market participants would understand both why and how the
trade was executed.\84\ Bloomberg expressed concern that the modifier
would therefore be problematic because it would alert the market that a
change in portfolio strategy had occurred, for example by allowing
participants to reverse engineer a particular institution's views on a
particular issue, which could dampen liquidity. Bloomberg stated that
these concerns would reduce the transparency benefits sought by the
proposal because liquidity seekers and providers may simply split up
their baskets into smaller lists that do not meet the proposed criteria
for the portfolio trade modifier.\85\ Bloomberg also suggested that
transparency could be enhanced by instead identifying every situation
where two or more securities are transacted at an agreed upon price
where the price may not reflect the current market price for the bonds,
drawing an analogy to reporting modifiers used for equities in the
public data feeds to indicate transactions with special circumstances
that impact price.\86\ As discussed above, FINRA believes that, on
balance, identification of portfolio trades through the new proposed
portfolio trade modifier would improve market transparency and provide
greater certainty to market participants and investors regarding such
trades. With respect to Bloomberg's suggestion to identify any
portfolio trades involving two or more securities, as discussed above
FINRA believes such a low threshold would be over-inclusive and would
reduce the usefulness of the modifier, while a threshold of 10
securities as proposed would benefit market participants by providing
greater transparency into pricing in the corporate bond market, while
avoiding capturing transactions that are not portfolio trades, as that
term is commonly understood in the market. In addition, as discussed
above, FINRA believes lowering the threshold to 10 unique issues (from
the threshold of 30 set forth in the FIMSAC Recommendation) may
discourage traders from splitting up portfolio trades into smaller
lists that do not meet the specified criteria for the proposed modifier
to avoid identifying the trade under the proposal.
---------------------------------------------------------------------------
\83\ See Bloomberg Letter at 3.
\84\ See Bloomberg Letter at 3.
\85\ See Bloomberg Letter at 3.
\86\ See Bloomberg Letter at 4.
---------------------------------------------------------------------------
FIF requested guidance on application of the portfolio trade
proposal in certain scenarios. Specifically, FIF stated that its
members request guidance on whether non-TRACE-Eligible Securities
should be counted toward the portfolio basket size threshold where a
portfolio trade involves some bonds that are TRACE-Eligible Securities
and other bonds that are not TRACE-Eligible Securities.\87\ FINRA
confirms that a security that is a non-TRACE Eligible Security, as well
as a security other than a corporate bond that is a TRACE Eligible
Security, should not be counted toward the portfolio basket size
threshold. FIF also asked for guidance on the definition of a ``single
agreed price'' in the context of a portfolio trade.\88\ FINRA is
clarifying that a portfolio trade would be considered to be executed
for a ``single agreed price'' for the entire basket where the overall
price for the basket has been negotiated or agreed on an aggregate
basis, including where the parties used a pricing list or pricing
service as the starting point for negotiations but the final price was
determined by applying a uniform spread to all securities in the
basket. However, where the parties simply aggregate individual prices
obtained from a pricing list or service without further negotiation,
this would not be considered within the scope of the proposed portfolio
trade modifier.\89\ FIF further asked whether a portfolio trade
involving a delayed spotting process would qualify as a portfolio
trade.\90\ FINRA notes that, where a trade meets the conditions for
applying multiple modifiers, all applicable modifiers should be
appended unless otherwise provided for in the TRACE technical
specifications. Thus, in the scenario presented by FIF, the trade may
qualify for the delayed Treasury spot modifier if the trades are based
on a spread to the yield of a U.S. Treasury Security and the spread was
agreed upon that day prior to the Time of Execution of the transaction.
If the trade also involved at least 10 unique securities and was
transacted for a single agreed price for the entire basket and the
other conditions of the Portfolio Trade Definition have been met, the
trade must also be appended with the portfolio trade modifier. The
specific format and requirements for the new modifiers would be
published in TRACE technical specifications, which may require the use
of a third, single modifier indicating that both the delayed Treasury
spot modifier and the portfolio trade modifier apply to the trade. As
noted below, FINRA will work with members to provide further
interpretive guidance, where needed.
---------------------------------------------------------------------------
\87\ See FIF Letter at 3.
\88\ See FIF Letter at 3.
\89\ For example, consistent with the FIMSAC's recommendation,
the ``single agreed price'' prong would ``exclude normal multi-
dealer list trades that originate as either an electronic OWIC or a
BWIC as such protocols result in a competitively negotiated price
for each security in the list.'' See FIMSAC Recommendation at 3 n.5.
\90\ See FIF Letter at 3. Specifically, FIF asked whether the
following scenario would constitute a portfolio trade: (i) A third-
party publishes reference prices for a universe of bonds at a set
time each day at 3 p.m.; (ii) at 10 a.m. two firms agree to trade a
basket of securities that represents a subset of this universe based
upon the as-of-yet unpublished 3 p.m. reference price; and (iii) at
3:30 p.m. the two firms review the prices published at 3 p.m. for
the basket constituents and come to consensus on the final price,
which is an aggregate of the constituent prices. FIF further asked
whether the existence of any offset to the price (e.g., the 3pm
reference price plus a fixed markup) would change whether the basket
in this scenario would be considered a portfolio trade.
---------------------------------------------------------------------------
FIX suggested that it can assist in developing standard solutions
for reporting the proposed new portfolio trade modifier.\91\ For
example, FIX noted that the TrdType and TrdSubType fields could be used
to identify portfolio trades.\92\ FINRA notes that it supports several
technical standards for reporting of trade information to TRACE,
including FIX, and that the specific format and requirements for the
new portfolio trade modifier would be published in TRACE technical
specifications.
---------------------------------------------------------------------------
\91\ See FIX letter at 3.
\92\ See FIX letter at 2.
---------------------------------------------------------------------------
Implementation Period
FIF, Bloomberg and SIFMA commented on the implementation period
that would be necessary with respect to both the delayed Treasury spot
and portfolio trade aspects of the proposal. FIF requested that the
implementation timeline for the changes
[[Page 69348]]
commence upon the publication of updated technical specifications and
the issuance of FAQs by FINRA, given the significant technical work
that will be required to implement the proposal and various issues
where the industry will require interpretive guidance from FINRA.\93\
SIFMA stated that a significant amount of lead time would be needed
before the implementation date for the delayed Treasury spot trade
proposal, ``on the order of 18 months or more.'' \94\ Bloomberg noted
the ``significant change in workflow'' that would be required to
implement the delayed Treasury spot proposal, particularly with respect
to recording and reporting the time that the spread was agreed.\95\
Bloomberg also noted that consumers of TRACE data will need
specifications in advance to make changes to systems to ingest the
updated data feed and interpret the data.\96\ Bloomberg therefore
recommended that FINRA provide the industry with ``plenty of time'' to
accommodate the changes and that FINRA should conduct outreach with
members to determine an appropriate amount of lead time following
FINRA's release of FAQs and TRACE messaging specifications needed to
code, test and implement the necessary changes.\97\ Bloomberg also
noted similar implementation issues and made the same recommendation
with respect to the portfolio trade aspect of the proposal.\98\
---------------------------------------------------------------------------
\93\ See FIF Letter at 3.
\94\ See SIFMA Letter at 4.
\95\ See Bloomberg Letter at 2-3.
\96\ See Bloomberg Letter at 3.
\97\ See Bloomberg Letter at 3.
\98\ See Bloomberg Letter at 5.
---------------------------------------------------------------------------
FINRA acknowledges that members reporting to TRACE require an
appropriate amount of time to implement the systems and other changes
necessary to report the additional information required under the
proposed rule change. As noted above, if the Commission approves the
proposed rule change, FINRA will announce the effective date(s) of the
proposed rule change in a Regulatory Notice.\99\ FINRA will publish a
Regulatory Notice announcing the effective date(s) of the proposed
amendments pursuant to Rule 6730(d)(4)(H) and (I) no later than 90 days
following Commission approval, and the effective date(s) will be no
later than 365 days following publication of the Regulatory Notice.
FINRA will publish a Regulatory Notice announcing the effective date of
the proposed amendments pursuant to Rule 6730(c)(14) once
determined.\100\ As is generally the case for TRACE rule changes, FINRA
will endeavor to publish updated technical specifications as far as
possible in advance of the effective date(s) and will work with members
to provide interpretive guidance, where needed.
---------------------------------------------------------------------------
\99\ See supra note 25.
\100\ See supra note 26.
---------------------------------------------------------------------------
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. In particular, the Commission
requests comment on whether the proposal should be expanded to require
FINRA members to report, with respect to delayed Treasury spot trades,
the actual yield spread (``spread'') between the corporate bond and the
U.S. Treasury Security that is agreed between the counterparties; and
(2) the CUSIP number (or another identifier) of the specific U.S.
Treasury Security that serves as the basis for the spread calculation.
Presently, with respect to Treasury spot trades, FINRA is proposing to
require only that a member append a new modifier when reporting a
delayed Treasury spot trade and the time at which the spread for the
delayed Treasury spot trade was agreed upon.
FINRA discussed earlier in this notice that the FIMSAC considered
these additional options but ultimately did not recommend them. FINRA
also discussed the SIFMA comment to its Regulatory Notice preceding
this filing, where SIFMA stated that market observers ``should have
enough information from the proposed trade reports to derive an
estimate of the spread without requiring reporting of this additional
data.'' FINRA also stated that it requested comment on its
understanding that most common pricing benchmark used for delayed
Treasury spot trades is the on-the-run U.S. Treasury Security with the
maturity that corresponds to the maturity of the corporate bond being
priced; SIFMA stated that its members share that understanding.
Therefore, FINRA has not proposed to require these additional two data
elements but stated above that it ``will assess the reported data
regarding delayed Treasury spot trades and continue to engage with
industry participants regarding whether any future changes may be
appropriate to further improve transparency.'' In light of this
background, commenters are invited to provide views on the following:
1. How easy or difficult would it be for market observers to
``derive an estimate of the spread'' having only the time that the
spread was agreed between the counterparties to the delayed Treasury
spot trade? How confident are market observers that their estimates are
accurate? Would reporting and public dissemination of the actual spread
for each specific delayed Treasury spot trade and the benchmark CUSIP
used for the spread be preferable?
2. Do FINRA members who engage in delayed Treasury spot trades keep
a record of the agreed upon spread and the benchmark CUSIP for a
specific trade in any internal systems? Could FINRA members who engage
in delayed Treasury spot trades capture the agreed upon spread and the
benchmark CUSIP used for the spread on a specific trade in the same
location as the time the spread was agreed to that FINRA is proposing
to be reported in this proposal? Whatever the case, please describe the
burdens that would be associated with reporting the actual spread and
the CUSIP number (or other identifier) of the benchmark U.S. Treasury
Security.
3. The current proposal, if approved by the Commission, would
require members to add a new modifier to a delayed Treasury spot trade
and to report the time at which the spread for the delayed Treasury
spot trade was agreed upon. Affected reporting members would have to
make systems changes to report these additional data elements for all
delayed Treasury spot trades. What would be the incremental burden of
the systems changes necessary to report two additional data elements--
the agreed upon spread and the CUSIP or other identifier of the
benchmark U.S. Treasury Security--at same time? What would be the costs
of adding these two additional data elements in the future, as part of
a separate systems upgrade, relative to
[[Page 69349]]
implementing all four data elements as part of the same upgrade?
4. How confident are market observers that they share the same
understanding as the counterparties to a delayed Treasury spot trade of
the specific U.S. Treasury Security used as the benchmark? Are there
delayed Treasury spot trades where the time to maturity for the
corporate bond does not correspond exactly to any U.S. Treasury
Security so there is ambiguity as to what U.S. Treasury Security would
serve as the benchmark? Is there a clear market convention for
benchmarking off-the-run corporate securities for which the maturities
fall between two on-the-run Treasury securities (for example, 4-year
maturities, 6-year maturities, etc.)?
5. Do you believe it would be appropriate for FINRA to disseminate
its assumption of the U.S. Treasury Security used as the benchmark for
a delayed Treasury spot trade, even if FINRA does not require it to be
reported by members? Why or why not? 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-2021-030 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-2021-030. 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 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-2021-030 and should be submitted
on or before December 28, 2021.
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\101\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\101\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-26452 Filed 12-6-21; 8:45 am]
BILLING CODE 8011-01-P
