[Federal Register Volume 67, Number 99 (Wednesday, May 22, 2002)]
[Notices]
[Pages 36049-36056]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-12807]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45943; File No. SR-NASD-2002-46]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 Thereto by the National Association of 
Securities Dealers, Inc. Relating to the Rule 6200 Series or the TRACE 
Rules

May 16, 2002.
    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 April 3, 2002, the National Association of Securities Dealers, Inc. 
(``NASD'' or ``Association'') 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 the NASD. The NASD submitted Amendment No. 1 to the

[[Page 36050]]

proposed rule change on May 13, 2002.\3\ The Commission is publishing 
this notice to solicit comments on the proposed rule change, as 
amended, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ In Amendment No. 1, the NASD revised the language of the 
proposed rule change regarding the time frame in which the managing 
underwriter must deliver CUSIP information to the TRACE Operations 
Center, and a member's obligations in instances in which the member 
is not required to report yield data to the NASD. See letter from 
Barbara Z. Sweeney, Senior Vice President and Corporate Secretary, 
NASD Regulation, to Katherine A. England, Assistant Director, 
Division of Market Regulation (``Division''), Commission, dated May 
13, 2002 (``Amendment No. 1'').
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The NASD is proposing to amend the Rule 6200 Series of the Rules of 
the NASD, which series provide for the reporting and dissemination of 
transaction information in eligible corporate debt securities (``TRACE 
rules''): (1) To extend the reporting period from one hour to one hour 
and fifteen minutes; (2) to incorporate standards in Rule 6250 
regarding Non-Investment Grade securities; \4\ (3) to require members 
to provide information at an earlier time under Rule 6260; (4) to 
clarify existing provisions in the TRACE rules, especially Rule 6210(a) 
regarding ``TRACE-eligible securities'' and certain reporting 
provisions in Rule 6230(c) and (d); and (5) to make other minor 
modifications to the existing requirements before the initiation of 
TRACE. Below is the text of the proposed rule change. Proposed new 
language is in italics; proposed deletions are in [brackets].
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    \4\ The term ``Non-Investment Grade'' is defined in the TRACE 
rules at Rule 6210(i).
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* * * * *

6200. Trade Reporting and Compliance Engine (TRACE)

6210. Definitions
    The terms used in this Rule 6200 Series shall have the same meaning 
as those defined in the Association's By-Laws and Rules unless 
otherwise specified.
    (a) The term ``TRACE-eligible security'' shall mean all United 
States dollar denominated debt securities that are depository eligible 
securities under Rule 11310(d); Investment Grade or Non-Investment 
Grade; issued by United States and/or foreign private corporations; 
and: (1) registered with the Securities and Exchange Commission; or (2) 
issued pursuant to Section 4(2) of the Securities Act of 1933 and 
purchased or sold pursuant to Rule 144A of the Securities Act of 1933. 
The term ``TRACE-eligible security'' excludes debt issued by 
government-sponsored entities, mortgage- or asset-backed securities, 
collateralized mortgage obligations, and money market instruments. For 
purposes of the Rule 6200 Series, the term ``money market instrument'' 
means a debt security that at issuance has a maturity of one year or 
less.
    (b) The term ``Trade Reporting and Compliance Engine'' or ``TRACE'' 
shall mean the automated system developed[owned and operated] by the 
NASD that, among other things, accommodates reporting and dissemination 
of transaction reports where applicable in TRACE-eligible securities.[ 
and which may submit ``locked-in'' trades to National Securities 
Clearing Corporation for clearance and settlement and provide 
participants with monitoring and risk management capabilities to 
facilitate a ``locked-in'' trading environment.]
    (c) The term ``reportable TRACE transaction'' shall mean any 
secondary market transaction in a TRACE-eligible security except 
transactions in TRACE-eligible securities that are listed on a national 
securities exchange registered under Section 6 of the Securities 
Exchange Act of 1934, when such transactions are executed on, and 
reported to the exchange and the transaction information is 
disseminated publicly, or transactions in convertible debt securities 
that are listed and quoted on the Nasdaq Stock Market, Inc. (Nasdaq), 
when such transactions are reported to Nasdaq and the transaction 
information is disseminated publicly.
    (d) The term ``time of execution'' for a transaction in a TRACE-
eligible security shall be the time when the parties to the transaction 
agree to all of the terms of the transaction that are sufficient to 
calculate the dollar price of the trade. The time of execution for 
transactions involving TRACE-eligible securities that are trading 
``when issued'' on a yield basis shall be when the yield for the 
transaction has been agreed to by the parties to the transaction. For a 
transaction in a TRACE-eligible security in which the actual yield for 
the transaction is established by determining the yield from one or 
more designated securities (e.g., a ``benchmark security'' such as a 
U.S. Treasury security maturing in 5 years, or a combination of such 
``benchmark securities'') and adding the agreed upon ``yield spread'' 
(e.g., 150 basis points above the benchmark security), the ``time of 
execution'' occurs when the yield has been agreed to by the parties to 
the transaction.
    (e) The term ``parties to the transaction'' shall mean the 
introducing broker-dealer, if any, and the executing broker-
dealer.[executing broker/dealer, introducing broker/dealer, and 
clearing brokers, if any.]
    (f) The term ``TRACE Participant'' shall mean any NASD member that 
reports transactions to the TRACE system, directly or indirectly.[uses 
the TRACE system.]
    (g) The term ``Introducing Broker'' shall mean the NASD member 
[firm] that has been identified in the TRACE system as a party to the 
transaction, but does not execute or clear [trades] the transaction.
    (h) No change.
    (i) The term ``Non-Investment Grade'' shall mean any TRACE-eligible 
security that is unrated, non-rated, split-rated (where one rating 
falls below Investment Grade),[investment grade),] or otherwise does 
not meet the definition of Investment Grade in paragraph (h) above.
6220. Participation in TRACE
    (a) Mandatory Member Participation--No Change.
    (b) Participant Obligations in TRACE
    [(1) Access to TRACE]
    Upon execution and receipt by the Association of the TRACE 
Participant application agreement, a TRACE Participant may commence 
input [and validation] of trade information in TRACE-eligible 
securities. TRACE Participants may access the service via an NASD-
approved facility during the hours of operation.
    [(2) Clearing Obligations]
    [If at any time a TRACE Participant fails to maintain a clearing 
arrangement, it shall be removed from the TRACE system until such time 
as a clearing arrangement is re-established and notice of such 
arrangement is provided to the Association. If, however, the 
Association finds that the TRACE Participant's failure to maintain a 
clearing arrangement is voluntary, the withdrawal will be considered 
voluntary and unexcused. This section shall not apply to TRACE 
Participants whose trading activity obviates the need for maintaining a 
clearing relationship.]
6230. Transaction Reporting
    (a) When and How Transactions are Reported
    A member that is required to report transaction information 
pursuant to paragraph (b) below must report such transaction 
information within one hour and fifteen minutes of the time of 
execution, except as otherwise provided below, or the transaction 
report will be ``late.'' The member must transmit the

[[Page 36051]]

report to TRACE during the hours the TRACE system is open (``TRACE 
system hours''), which are 8:00 a.m. Eastern Time through 6:29:59 p.m. 
Eastern Time. Specific trade reporting obligations during a 24-hour 
cycle are set forth below.
    (1) Transactions Executed During TRACE System Hours
    [(A) Members that are required to report transaction information 
pursuant to paragraph (b) below shall, within one hour] Transactions in 
TRACE-eligible securities executed on a business day at or after 8:00 
a.m. Eastern Time through 6:29:59 p.m. Eastern Time must be reported 
within one hour and fifteen minutes of the time of execution. If a 
transaction is executed on a business day less than one hour and 
fifteen minutes before 6:30 p.m. Eastern Time, a member may report the 
transaction the next business day within one hour and fifteen minutes 
after the TRACE system opens. If reporting the next business day, the 
member must indicate ``as/of'' and provide the actual transaction date. 
[transmit through TRACE during system hours, or if TRACE is unavailable 
due to system or transmission failure, by telephone to the TRACE 
Operations Center, reports of transactions in TRACE-eligible securities 
executed between 8:00 a.m. and 6:30 p.m. Eastern Time. Transactions not 
reported within one hour after the time of execution shall be 
designated as late; provided, however, that if inadequate time remains 
prior to system close to allow a timely report, the member may report 
the transaction the next day at system open designated ``as/of.'']
    [(B) Members have an ongoing obligation to report transaction 
information promptly, accurately, and completely. The member may employ 
an agent for the purpose of submitting transaction information; 
however, the primary responsibility for the timely, accurate, and 
complete reporting of transaction information remains the non-delegable 
duty of the member obligated to report the transaction.]
    (2) Transactions Executed At or After[Transaction Reporting 
Between] 6:30 P.M. Through 11:59:59 P.M. Eastern Time[p.m. and 8:00 
a.m. Eastern Time]
    [(A) Reports of t]Transactions in TRACE-eligible securities 
executed [after] on a business day at or after 6:30 p.m. Eastern Time 
[and before 12:00 a.m.] through 11:59:59 p.m. Eastern Time [shall] must 
be reported the next business day within one hour and fifteen minutes 
after the TRACE system opens. The member must indicate ``as/of'' and 
provide the actual transaction date.[on the next day and be designated 
``as/of.'']
    (3) Transactions Executed At or After 12:00 A.M. Through 7:59:59 
A.M. Eastern Time
    [(B)][Reports of t]Transactions in TRACE-eligible securities 
executed [after] on a business day at or after 12:00 a.m. Eastern Time 
[and before 8:00] through 7:59:59 a.m. Eastern Time [shall] must be 
reported the [that] same day within one hour and 15 minutes after the 
TRACE system opens.[beginning at 8:00 a.m. Eastern Time within the 
maximum time frame mandated.]
     (4) Transactions Executed on a Non-Business Day
    Transactions in TRACE-eligible securities executed on a Saturday, 
Sunday, or a federal or religious holiday on which the TRACE system is 
closed, at any time during that day (determined using Eastern Time), 
must be reported the next business day within one hour and fifteen 
minutes after the TRACE system opens. The transaction must be reported 
as follows: the date of execution must be the first business day (the 
same day the report must be made); the execution time must be 
``12:01:00 a.m. Eastern Time'' (stated in military time as 
``00:01:00''); and the modifier, ``special price,'' must be selected. 
In addition, the transaction must not be designated ``as/of''. When the 
reporting method chosen provides a ``special price memo'' field, the 
member must enter the actual date and time of the transaction in the 
field.
    (5) Members have an ongoing obligation to report transaction 
information promptly, accurately, and completely. The member may employ 
an agent for the purpose of submitting transaction information; 
however, the primary responsibility for the timely, accurate, and 
complete reporting of transaction information remains the non-delegable 
duty of the member obligated to report the transaction.
    (6) A member may be required to report as soon as practicable to 
the Market Regulation Department on a paper form, the transaction 
information required under Rule 6230 if electronic submission into 
TRACE is not possible. Transactions that can be reported into TRACE, 
including transactions executed on a Saturday, Sunday or holiday as 
provided in (a)(4) above, and trades that can be submitted on the trade 
date or on a subsequent date on an ``as/of'' basis, shall not be 
reported on a paper form.
    (b) Which Party Reports Transaction--No Change.
    (c) Transaction Information To Be Reported
    Each TRACE trade report shall contain the following information:
    (1) CUSIP number or NASD symbol;
    (2) Number of bonds as required by paragraph (d) below;
    (3) Price of the transaction (or the elements necessary to 
calculate price, which are contract amount and accrued interest) as 
required by paragraph (d) below;
    (4) A symbol indicating whether the transaction is a buy[,] or a 
sell[ or cross];
    (5) Date of Trade Execution (as/of trades only);
    (6) Contra-party's identifier;
    (7) Capacity--Principal or Agent (with riskless principal reported 
as principal) as required by paragraph (d) below;
    (8) Time of trade execution;
    (9) Reporting side executing broker as ``give-up'' (if any);
    (10) Contra side Introducing Broker in case of ``give-up'' trade;
    (11) Stated commission;
    (12) Such trade modifiers as required by either the TRACE rules or 
the TRACE users guide; and
    (13) The lower of yield to call or yield to maturity.[Yield as 
required by SEC Rule 10b-10.] A member is not required to report yield 
when the TRACE-eligible security is a security that is in default, a 
security for which the interest rate is floating; a security for which 
the interest rate will be or may be increased (e.g., certain ``step-up 
bonds'') or decreased (e.g., certain ``step-down bonds'') and the 
amount of increase or decrease is an unknown variable; a pay-in-kind 
security (``PIK''); any other security where the principal or interest 
to be paid is an unknown variable or is an amount that is not currently 
ascertainable, or any other security that the Association designates if 
the Association determines that reporting yield would provide 
inaccurate or misleading information concerning the price of, or 
trading in, the security.
    (d) Procedures for Reporting Price, Capacity, Volume
    (1) For[agency and] principal transactions, report the price, which 
must include the mark-up or mark-down. (However, if a price field is 
not available, report the contract amount and the accrued interest.) 
[including the mark-up, mark-down] For agency transactions, report the 
price, which must exclude the commission. (However, if a price field is 
not available, report the contract amount and the accrued interest.) 
[or commission (commission entered separately). Do not include accrued 
interest.] Then, report the commission, stated in points per bond, with 
1 point equal to $10.00 per bond.
    (2) For agency and principal transactions, report the actual number 
of

[[Page 36052]]

bonds traded[.], with $1,000 par value equal to 1 bond. If a bond has a 
par value of less than $1,000 (``baby bond'') or the par value is not 
an even multiple of $1,000, report the fractional portion of $1,000 in 
decimals. [Baby bonds (those with a face value of less than $1,000) 
should be reported as a decimal.]
    (3) For in-house cross transactions, a member must report two 
transactions, which are the member's purchase transaction and the 
member's sale transaction.[report as follows: Agency cross--report once 
as an agency trade; Principal cross--report twice, once as an 
individual principal buy and once as an individual principal sell.]
    (4)(A) Special Price Modifier
    If a transaction is not executed at a price that reflects the 
current market price, select the modifier, ``special price.'' When the 
reporting method chosen provides a ``special price memo'' field, state 
why the transaction was executed at other than the current market price 
in the ``special price memo'' field (e.g., when a debt security is 
traded conventionally and in the current market does not have a due 
bill and/or a warrant attached, but in the transaction to be reported 
is traded with a due bill and/or warrant attached, the price of the 
transaction is a ``special price''). Do not select the modifier, 
``special price,'' where the transaction price is determined using a 
weighted average price.
    (B) Settlement Modifiers
    If a transaction is to be settled other than the regular way, 
report the settlement terms by selecting the appropriate modifier. If 
the parties agree to settlement on the same day the transaction is 
executed (i.e., cash settlement), select the modifier, ``.c.'' If a 
trade will be settled the next day, select the modifier, ``.nd.'' If a 
trade will be settled other than on the date of trade, the next day, or 
T+3, select the modifier, ``.sNN,'' and enter the appropriate number of 
days (e.g., if a trade will be settled in 5 business days, the 
reporting party will enter ``.s05'' in the data field).
    (C) Weighted Average Price Modifier
    If the price of the transaction is determined using a weighted 
average price method, select the modifier, ``.w.'' If one of the 
settlement modifiers and the weighted average price modifier apply to 
the transaction, select the modifier, ``.w'' for weighted average 
price, and do not report the applicable settlement modifier.
    (e) Transactions Not Required To Be Reported
    The following types of transactions shall not be required to be 
reported:
    (1) Transactions that are part of a primary distribution by an 
issuer;
    (2) Transactions in[ listed] securities that are listed on a 
national securities exchange, when such transactions are executed on 
and reported to the exchange and the transaction information is 
disseminated publicly, and transactions in convertible debt securities 
that are listed and quoted on Nasdaq, when such transactions are 
reported to Nasdaq and the transaction information is disseminated 
publicly; and [both executed on, and reported to, a national securities 
exchange; and]
    (3) Transactions where the buyer and the seller have agreed to 
trade at a price substantially unrelated to the current market for the 
TRACE-eligible security (e.g., to allow the seller to make a gift).
    (f) Compliance With Reporting Obligations--No Change.
6240. Termination of TRACE Service--No Change.
6250. Dissemination of Corporate Bond Trade Information
    (a) General Dissemination Standard
    Immediately upon receipt of transaction reports received at or 
after[between] 8:00 a.m. [and 6:30] through 6:29:59 p.m. Eastern Time, 
the Association will disseminate transaction information (except that 
market aggregate information and last sale information will not be 
updated after 5:15 p.m. Eastern Time) relating to transactions in:
    (1) a TRACE-eligible security having an initial issuance size of $1 
billion or greater that is Investment Grade at the time of receipt of 
the transaction report; and
    (2) a TRACE-eligible security that is [denominated] designated for 
dissemination according to the following criteria and is Non-Investment 
Grade at the time of receipt of the transaction report. [as a ``Fixed 
Income Pricing System (FIPS)'' security under NASD Rules relating to 
FIPS securities immediately prior to the time that such rules are 
rescinded.]
    (A) The staff of NASD will designate fifty of the most actively 
traded Non-Investment Grade securities that are TRACE-eligible 
securities for dissemination under this rule, based on (i) the 
security's volume; (ii) the security's price; (iii) the security's name 
recognition; (iv) the research following of the security; (v) the 
security having a minimum number of bonds outstanding; (vi) the 
security being traded routinely by at least two dealers; and (vii) the 
security contributing to a representation of diverse industry groups in 
the group of securities designated for dissemination.
    (B) A Non-Investment Grade security will not be designated, and may 
be immediately withdrawn from designation, for dissemination under this 
rule if the security: (i) has matured; (ii) has been called; (iii) has 
been upgraded to Investment Grade; or (iv) has been downgraded to an 
extent that the security's trading characteristics do not warrant 
designation for dissemination.
    (b) Transactions Excluded From Market Aggregate, Last Sale
    All trade reports in TRACE-eligible securities that are approved 
for dissemination and submitted to TRACE at or after 8:00 a.m. Eastern 
Time and prior to 5:15 p.m. Eastern Time will be included in the 
calculation of market aggregates and last sale except:
    (1) trades reported on an ``as/of'' basis,
    (2) ``when issued'' trades executed on a yield basis,
    (3) trades in baby bonds with a par value of less than $1,000, [or]
    (4) trades in which the price is determined by a weighted average 
price[.]; and
    (5) trades in which the price is a ``special price,'' as indicated 
by the use of the special price modifier.
    (c) Dissemination of Certain Trades Executed on A Business Day
    (1) Reports of transactions in TRACE-eligible securities that are 
subject to dissemination, are executed on a business day at or after 
6:30 p.m. Eastern Time [and before 12:00 a.m.]through 11:59:59 p.m. 
Eastern Time, and are[that are] reported pursuant to Rule 
6230(a)(2)[Rule 6230(a)(2)(A)] on the next business day and designated 
``as/of'' [will not be included in daily market aggregates and] will be 
disseminated beginning at 8:00 a.m. Eastern Time on the day of receipt. 
The reported information will not be included in the calculation of the 
day's market aggregates.
    [(d)] (2) Reports of transactions in TRACE-eligible securities that 
are subject to dissemination, are executed on a business day at or 
after 12:00 a.m. Eastern Time [and before 8:00]through 7:59:59 a.m. 
Eastern Time, and are reported pursuant to Rule 6230(a)(3) on the[that] 
same day beginning at 8:00 a.m. Eastern Time [pursuant to Rule 
6230(a)(2)(B)] will be disseminated upon receipt. The reported 
information will be included in the calculation of the day's market 
aggregates, except as otherwise provided in Rule 6250(b)(1) through 
(5).[included in that day's market aggregates and disseminated upon 
receipt.]
    (d) Dissemination of Trades Executed on Non-Business Days

[[Page 36053]]

    Reports of transactions in TRACE-eligible securities that are 
subject to dissemination, are executed on a non-business day at any 
time during the day, and are reported pursuant to Rule 6230(a)(4) on 
the next business day will be disseminated upon receipt. The reported 
information will not be included in the calculation of the day's market 
aggregates.
6260. [Lead] Managing Underwriter [Information] Obligation To Obtain 
CUSIP
    In order to facilitate trade reporting of secondary transactions in 
TRACE-eligible securities, the member that is the [lead] managing 
underwriter of any newly issued TRACE-eligible security shall obtain 
the CUSIP number for the TRACE-eligible security and provide it to the 
TRACE Operations Center not later than 5:00 p.m. on the business day 
preceding the day that the registration statement will become 
effective, or, if registration is not required, the day that the 
securities will be priced initially.[provide to the TRACE Operations 
Center the CUSIP number of any debt issue no later than on the 
effective date of the offering.] If a managing underwriter is not 
appointed, the group of underwriters has an obligation to obtain and 
provide the CUSIP number to the TRACE Operations Center within the time 
required. A member must make a good faith determination that a security 
is a TRACE-eligible security before submitting the CUSIP number for 
such security to the TRACE Operations Center.
* * * * *

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, NASD 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. NASD has prepared summaries, set forth in Sections A, B, 
and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
Introduction
    The proposed amendments to the Rule 6200 Series \5\ are intended to 
extend the reporting period from one hour to one hour and 15 minutes, 
to incorporate certain FIPS standards in Rule 6250, to require members 
to provide new CUSIP numbers to TRACE at an earlier time under Rule 
6260, to clarify existing provisions in the Rule 6200 Series, 
especially Rule 6210(a) regarding ``TRACE-eligible securities'' and 
certain reporting provisions in Rule 6230(c) and (d), and to make other 
minor modifications to the existing requirements. Many of these changes 
are in response to industry requests for additional guidance and 
extended response times.
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    \5\ The Rule 6200 Series providing for reporting and 
dissemination of transaction information in eligible debt securities 
(``TRACE rules'') was approved by the SEC on January 23, 2001. 
Securities Exchange Act Release No. 43873 (January 23, 2001), 66 FR 
8131 (January 29, 2001) (approval order) (File No. SR-NASD-1999-65). 
The Commission approved additional amendments to the TRACE rules on 
March 5, 2001. Securities Exchange Act Release No. 44039 (March 5, 
2001), 66 FR 14234 (March 9, 2001) (approval order) (File No. SR-
NASD-2001-04). In addition, on January 3, 2002, the Commission 
issued a notice stating that certain other amendments to the TRACE 
rules had become effective on filing. Securities Exchange Act 
Release No. 45229 (January 3, 2002), 67 FR 1255 (January 9, 2002) 
(notice of filing and immediate effectiveness of proposed rule 
change) (File No. SR-NASD-2001-91). As noted above, the TRACE rules 
will not become effective until July 1, 2002. On that day, members 
must begin to report transactions in TRACE-eligible securities, and 
the TRACE system will begin the dissemination of certain reported 
information. (The Rule 6200 Series that is currently in effect 
establishes the reporting requirements for members engaged in 
trading high yield securities, describes the Fixed Income Pricing 
System (``FIPS''), and requires the dissemination of certain 
transaction information through FIPS (``FIPS rules'').) When the 
TRACE rules take effect on July 1, 2002, the FIPS rules will be 
rescinded and the FIPS system will cease operating.
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Extension of the Reporting Period to One Hour and 15 Minutes
    The most significant proposed change is the NASD's proposal to 
extend the maximum time frame for reporting a transaction. The NASD is 
proposing to extend the reporting period from one hour to one hour and 
15 minutes. Rule 6230(a). The proposed amendment will allow certain 
portions of the industry to engage a major industry participant as an 
agent for TRACE reporting. The proposed change will allow the NASD and 
members to achieve certain short-term operational efficiencies as 
reporting is initiated. In the future, the NASD expects to reduce the 
reporting period substantially.
Inclusion of FIPS Standards for Designating Certain Securities for 
Dissemination
    The NASD is proposing to incorporate in Rule 6250(a)(2) the actual 
standards in the FIPS rules currently used to designate certain 
securities as ``FIPS securities'' (which then subjects certain 
transaction information in such securities to dissemination), and to 
delete the specific reference in Rule 6250 to ``FIPS securities.''\6\ 
The NASD proposes this amendment because the standards now in use in 
the FIPS rules are intended to be the applicable standards under the 
TRACE rules.
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    \6\ Fifty FIPS securities are selected as representative of the 
most liquid high yield securities. Certain price and volume 
information for the 50 securities that are designated is 
disseminated on an hourly basis and at the end of the day. The list 
of designated securities is updated and published approximately 
every four months.
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    The Association will use the standards, as needed, to designate 
Non-Investment Grade securities for dissemination under TRACE. On July 
1, 2002, the first day of TRACE, approximately 50 securities will 
already be designated for dissemination because they were previously 
designated FIPS 50 securities. If, after the FIPS rules are rescinded, 
there are fewer than 50 Non-Investment Grade (high yield) securities 
for which transaction information is being disseminated, the NASD will 
designate additional Non-Investment Grade securities, up to 50, to be 
disseminated. The NASD will do so using the standards set forth in the 
FIPS rules, which the NASD proposes to incorporate in the TRACE 
rules.\7\
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    \7\ On July 1, 2002, those securities that were designated the 
FIPS 50 securities prior to the termination of FIPS will be subject 
to dissemination under TRACE Rule 6250. However, from time to time 
after July 1, 2002, a security designated may cease trading or may 
no longer meet the standards for dissemination (e.g., a security 
that was designated as a FIPS 50 security may mature or may be 
upgraded to an Investment Grade security, or the issuer may file for 
bankruptcy or otherwise default on its obligations). When this 
occurs, the Association staff will replace the security with another 
Non-Investment Grade security using the standards incorporated in 
the TRACE rules to maintain dissemination of transaction information 
relating to 50 Non-Investment Grade securities.
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    The actual standards in the current Rule 6200 Series were not 
included previously in the TRACE rules because when TRACE was filed 
originally, the Association planned to release bonds for dissemination 
on a substantially different timetable and plan. In that environment, 
standards for designating only 50 Non-Investment Grade securities for 
dissemination were unnecessary. Under the current rules for

[[Page 36054]]

dissemination of certain TRACE-eligible securities transactions, 
however, the Association believes that it should have transparent 
standards or criteria for maintaining the list of 50 Non-Investment 
Grade securities that will be subject to dissemination, and, therefore, 
is proposing that the standards be incorporated in the TRACE rules.
Requirement To Timely Provide CUSIP Numbers
    The Association is proposing to reduce the period during which an 
underwriter of a security must obtain and notify TRACE of the CUSIP 
number(s) of newly issued or distributed securities. Rule 6260 
currently requires that the lead underwriter provide to the ``TRACE 
Operation Center'' the CUSIP number of any debt issue no later than on 
the effective date of the offering. The NASD proposes to shorten the 
period to not later than the end of the business day prior to the 
effective date of the offering, or, if registration is not required, 
the end of the business day prior to the day the securities will be 
priced initially. In addition, in those offerings in which there is no 
lead or managing underwriter, the group of underwriters has an 
obligation to obtain and provide the CUSIP number to the TRACE 
Operations Center within the period described above.
``TRACE-Eligible Security''
    The Association has received a number of queries concerning the 
scope of the exclusions to the term, ``TRACE-eligible security,'' in 
Rule 6210(a). Generally, unless a debt security is excluded from the 
definition set forth in Rule 6210(a), a transaction in the security 
must be reported to TRACE by any member that is a party to the 
transaction. To further clarify which securities are subject to the 
TRACE rules, the Association proposes to amend Rule 6210(a) to 
specifically exclude from the definition of ``TRACE-eligible security'' 
a debt security issued by a government-sponsored entity (``GSE'').
    Money Market Instrument. In addition, for purposes of Rule 6210(a), 
the Association clarifies that ``money market instrument'' means an 
instrument that at issuance has a maturity of one year or less. For 
purposes of the TRACE rules, the term excludes those instruments that 
were originally issued with longer maturities, but may be treated by 
certain market participants as short term instruments in certain 
trading contexts as the instruments approach maturity. For example, a 
five year security would not be considered a ``money market 
instrument'' for purposes of TRACE if there were only 6 months 
remaining until the instrument matured.\8\
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    \8\ The term, ``TRACE-eligible security,'' as currently 
approved, excludes sovereign debt. Also, the Association intends to 
exclude any debt security that is issued by a supranational 
organization, such as the World Bank, the International Monetary 
Fund, and the European Bank for Reconstruction and Development.
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Other Changes
    A series of additional, minor proposed changes are explained 
briefly below, including the Association's proposed clarification of 
certain defined terms.
Rule 6210 Proposed Changes
    Rule 6210(b), ``Trade Reporting and Compliance Engine.'' 
Previously, the NASD modified the name of the TRACE system to ``Trade 
Reporting and Compliance Engine.'' \9\ The NASD amended the name to 
more accurately reflect the compliance purposes that TRACE will further 
and to eliminate references to the functions that are no longer part of 
the TRACE initiative. In this proposed rule filing, the Association is 
also deleting those functions that are no longer within TRACE from the 
definition, ``Trade Reporting and Compliance Engine.'' Rule 6210(b).
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    \9\ See SR-NASD-2001-91.
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    Rule 6210(c), ``Reportable TRACE Transaction.'' The Association has 
proposed amendments to the term, ``reportable TRACE transaction,'' to 
make clear that a limited class of transactions in certain debt 
securities will not be subject to reporting (and dissemination) under 
TRACE. These are transactions in debt securities that are listed on a 
national securities exchange, when such transactions are executed on 
and reported to the exchange and the transaction information is 
disseminated publicly, and transactions in convertible debt securities 
that are listed and quoted on Nasdaq, when such transactions are 
reported to Nasdaq and the transaction information is disseminated 
publicly. The NASD is also proposing parallel changes to Rule 
6230(a)(2). The NASD does not intend to capture transactions in debt 
securities that are listed, currently subject to reporting for 
regulatory purposes to another self-regulatory organization (``SRO''), 
and disseminated by such SRO. This is consistent with the underlying 
purpose of TRACE, which is to increase transparency in those debt 
securities transactions for which there is currently no regulatory 
reporting mechanism and no dissemination.
    Rule 6210(d), ``Time of Execution.'' The NASD proposes additional 
language to the definition of ``time of execution'' to clarify when the 
time of execution of a transaction occurs for securities that are 
priced off, or for which yield is determined by, reference to a 
benchmark security. The NASD proposes that the time of execution for 
these securities transactions shall be deemed to occur when the yield 
for the security is agreed upon by the parties to the transaction. For 
example, if the parties agree to determine the specific yield of 
Security A based upon a spread that is 150 points ``off'' (above) or 
``through'' (below) the yield of a comparable U.S. Treasury security, 
and agree to measure the yield of the comparable U.S. Treasury security 
at 3:30 p.m. on the day of the transaction, the parties will be 
expected to agree upon the yield of Security A at 3:30 p.m. when the 
information becomes available. As of that time, the parties have 
knowledge of all of the elements of the trade necessary to calculate 
the dollar price of the trade and are obligated to report the trade 
within 1 hour and 15 minutes.
TRACE Time Frames
    The TRACE rules recognize that transactions in TRACE-eligible 
securities may occur at any time during a 24 hour period. The times set 
forth in Rule 6230 and related rules have been clarified. Generally, 
the business day is broken into three periods for purposes of the 
reporting provisions in Rule 6230 and the dissemination provisions in 
Rule 6250. The three periods of a business day are: (a) At or after 
8:00 a.m. through 6:29:59 p.m. Eastern Time (the period during a 
business day that the TRACE system will be ``open'' and receiving 
reports); (b) at or after 6:30 p.m. Eastern Time through 11:59:59 p.m. 
Eastern Time; and (c) at or after 12:00 a.m. Eastern Time (midnight) 
through 7:59:59 a.m. Eastern Time. Holidays and weekends are treated 
separately, as discussed further below. Requirements for reporting 
generally, designation of ``late'' trades and ``as/of'' trades, and the 
timetables for dissemination are governed generally by these three 
periods. See, e.g., proposed changes to the structure of Rule 6230 in 
paragraphs (a)(1), (2) and (3).
Reporting Transactions Executed on Weekends and Holidays
    In proposed Rule 6230, the Association is proposing an additional 
paragraph, new paragraph (a)(4), to clarify how to report transactions 
that are executed during a weekend or on a holiday. At the initiation 
of TRACE, the

[[Page 36055]]

TRACE system will not be able to recognize, and would reject a 
transaction report that included, a calendar date that is a Saturday, 
Sunday, or a federal or religious holiday on which the TRACE system is 
closed. In addition, the system would reject a date in the ``as/of'' 
field for the same reason. Therefore, the actual date of transactions 
that are executed on a non-business day cannot be captured 
electronically at this time. Until the system is revised, the 
Association proposes to require members to report transactions that are 
executed on a non-business day as follows under proposed Rule 
6230(a)(4). A member must report the transaction on the first business 
day following the actual date of the transaction, and the transaction 
must be reported within one hour and fifteen minutes of the opening of 
the TRACE system. The transaction date must be reported as the first 
business day after which the transaction occurred (the same day of the 
report). The time of execution must be reported as ``00:01:00'' 
(Eastern Time) (which is the military time for ``12:01:00'' a.m. 
Eastern Time). This will distinguish these limited number of weekend 
and holiday transactions from transactions actually occurring on the 
business day. The modifier, ``special price,'' must be selected. In 
addition, when the reporting method chosen provides a ``special price 
memo'' field, the member must enter the actual date and time that the 
transaction occurred. Rule 6230(a)(4).
    The Association is also proposing parallel clarifying changes 
regarding the dissemination of such trades in proposed Rule 6250(d).
Other Clarifications to Rule 6230 Reporting Provisions
    The Association made several clarifying changes to Rule 6230 in 
addition to the changes regarding the reporting extension and periods 
that are discussed above. Several questions and issues arose with 
respect to reporting price, mark-ups, mark-downs, and commissions. The 
changes have been proposed to respond to an operational issue raised by 
the industry and reduce the industry's costs of participating in TRACE, 
to clarify the provisions, and answer various questions.
    Rule 6230(c)(3), Alternative ``Price'' Reporting. First, in order 
to address basic software differences identified in certain external 
systems in widespread use in the industry, the NASD has agreed to 
provide an alternative to the reporting of ``price'' in Rule 
6230(c)(3). The proposed change to Rule 6230(c)(3), if approved, will 
allow a member to report either the ``price of the transaction'' or 
``the elements necessary to calculate price, which are contract amount 
and accrued interest.'' This change will increase the efficiencies and 
reduce the costs of complying with TRACE for a substantial number of 
TRACE participants.
    Rule 6230(d)(1), Reporting Price, Capacity and Volume. In addition, 
the NASD proposes several clarifying changes to Rule 6230(d). None of 
these changes are substantive. In Rule 6230(d)(1), the NASD proposes 
changes to describe more clearly how to report principal transaction 
prices (i.e., the price reported must include the mark-up or mark-down) 
and agency transaction prices (i.e., the price must exclude a 
commission, if any, and the commission must be reported in a second, 
separate field). In addition, where a party will use an external system 
that does not allow for the reporting of price (as described above), 
the NASD has clarified the language in paragraph (d)(1) to make it 
consistent with the proposed changes to Rule 6230(c)(3).
    Rule 6230(d), ``Special Price,'' ``Weighted Average Price,'' and 
``Cash,'' ``T + 1'' and Other Settlement Modifiers. In Rule 
6230(d)(4)(A) through (C), the NASD has clarified that a member must 
report transactions using modifiers, if applicable, to report certain 
aspects of a transaction. The modifiers are used to designate a special 
price, pricing determined by using weighted average pricing, and 
settlement that will occur other than regular way.
    Special Price. In Rule 6230(d)(4)(A), the Association has specified 
that a member must indicate on a trade report when a non-market price, 
i.e., a ``special price,'' applies to the trade (other than when a 
weighted average price applies to the trade, which is indicated using a 
different modifier). In addition, the reporting party must explain in 
the memo field, when available, why the transaction was executed at 
other than a current market price. For example, if a debt security is 
traded conventionally and in the current market with neither a due bill 
nor a warrant attached, but, in the relevant transaction, is traded 
with a due bill and/or warrant attached, the price of the transaction 
is a ``special price,'' which reflects the special conditions of the 
trade.
    Weighted Average Price. If the price of a transaction is determined 
using a weighted average price method, the Association proposes that a 
member must indicate this with the modifier ``.w.'' in Rule 
6230(d)(4)(C). The member is required to select the modifier ``.w'' and 
may not select the ``special price'' modifier. The weighted average 
price modifier has priority over the modifiers indicating settlement 
other than regular way, which are discussed below. If both the weighted 
average price modifier and one of the settlement term modifiers are 
applicable to the transaction, the weighted average price modifier must 
be selected when reporting the transaction.
    Settlement Other Than Regular Way. If a transaction is to be 
settled other than regular way, the Association proposes the member 
must report the settlement term by selecting the appropriate modifier, 
as set forth in Rule 6230(d)(4)(B). If the transaction will settle the 
same day (i.e., same day cash settlement), the member must use the 
modifier ``.c''; if the transaction will settle the next day, the 
member must use the modifer ``.nd''; or, if the transaction will settle 
other than on the same day, the next day or T+ 3, the member must use 
the modifier ``.sNN'' and enter the appropriate number of days (e.g., 
``.s05'' indicates that settlement will occur 5 business days after the 
transaction is executed). Finally, as noted above, if one of the 
settlement modifiers and the weighted average price modifier apply to 
the transaction, the member must select the modifier, ``.w,'' for 
weighted average price, and the applicable settlement modifier is not 
reported.
    Rule 6230(c)(13), Yield. The industry sought additional guidance on 
how to report yield as required in Rule 6230(c)(13). The Association 
proposes clarifying changes to Rule 6230(c)(13) to eliminate the 
ambiguity of the prior provision. The Association proposes that a 
member report the lower of yield to call or yield to maturity.
    Reporting the yield is mandatory. However, in response to 
questions, the Association has identified a number of instances where 
it is appropriate to provide an exception to the mandatory yield 
reporting requirement. The exception is stated in the proposed 
amendment. For example, a member is not required to report yield when 
the TRACE-eligible security is a security that is in default, a 
security for which the interest rate is floating or the interest rate 
will be or may be increased (e.g., certain ``step-up bonds'') or 
decreased (e.g., certain ``step-down bonds'') and the amount of 
increase or decrease is an unknown variable, the security is a pay-in-
kind (``PIK''), or any other security where the principal or interest 
to be paid is an unknown variable or is an amount that is not currently 
ascertainable. The NASD has not assumed that the Association may 
identify, before each occurrence, all the

[[Page 36056]]

instances in which it is not appropriate or useful to report yield. 
Instead, the Association has clarified that in those instances where 
the reported yield would provide inaccurate or misleading information 
concerning the price of, or trading in the security, yield is not 
required to be reported.
    There were several other minor amendments to Rule 6230. In 
paragraph (d)(3) of Rule 6230, the Association proposes to eliminate 
the reporting of certain transactions as ``crosses.'' A corresponding 
change is proposed to Rule 6230(c)(4). In addition, in paragraph (d)(2) 
of Rule 6230, the Association has clarified the term ``baby bond'' and 
how to report a fractional par value of a debt instrument.
2. Statutory Basis
    The NASD believes that the proposed rule change is consistent with 
the provisions of Section 15A(b)(6) of the Act, which requires, among 
other things, that the Association's 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. The NASD believes that the proposed rule 
change, if approved, will amend rules for the reporting of information 
on eligible debt securities transactions that will provide the NASD, as 
the self-regulatory organization designated to regulate the over-the-
counter markets, with heightened capabilities to regulate the debt 
securities markets in order to prevent fraudulent and manipulative acts 
and practices. The proposed rule change, by requiring reporting of such 
transaction information, will protect investors and the public interest 
by, among other things, increasing transparency in the fixed income 
markets.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The NASD 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, as amended.

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

    While comments were neither solicited nor received concerning this 
rule proposal, several commenters on SR-NASD-99-65 indicated that the 
NASD should consider proposing reporting rules that would allow the 
members of the fixed income markets to use, with modifications, some of 
the reporting arrangements and linkages in place for the reporting of 
municipal securities transactions. In light of these comments, the 
Association is proposing that the one hour reporting period set forth 
in Rule 6230(a) be amended to one hour and 15 minutes and an 
alternative method for reporting ``price'' be provided in Rule 
6230(c)(3) and (d)(1). The proposed extension of the reporting period 
and the alternative for reporting ``price'' will allow certain firms 
that have communication links to a registered clearing agency to report 
to TRACE using the reporting processes that are in place through the 
registered clearing agency. Otherwise, written comments were neither 
solicited nor received.

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

    Within 35 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 such proposed rule change, as amended, or
    B. Institute proceedings to determine whether the proposed rule 
change, as amended, 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, as amended, is consistent with the Act. Persons making written 
submissions should file six copies thereof with the Secretary, 
Securities and Exchange Commission, 450 Fifth Street, NW, Washington, 
DC 20549-0609. Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change, as 
amended, that are filed with the Commission, and all written 
communications relating to the proposed rule change, as amended, 
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 inspection and copying in the Commission's 
Public Reference Room. Copies of such filing will also be available for 
inspection and copying at the principal office of the NASD. All 
submissions should refer to file number SR-NASD-2002-46 and should be 
submitted by June 12, 2002.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-12807 Filed 5-21-02; 8:45 am]
BILLING CODE 8010-01-P