[Federal Register Volume 67, Number 129 (Friday, July 5, 2002)]
[Notices]
[Pages 44911-44914]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-16851]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-46145; File No. SR-NASD-2002-63]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change and Amendment Nos. 1 and 2 Thereto, and Notice of Filing and 
Order Granting Accelerated Approval of Amendment No. 3 Thereto, by the 
National Association of Securities Dealers, Inc., Relating to Proposed 
Fees for the Trade Reporting and Compliance Engine (TRACE) for 
Corporate Bonds

June 28, 2002.

I. Introduction

    On May 6, 2002, the National Association of Securities Dealers, 
Inc. (``NASD'' or ``Association'') filed with the Securities and 
Exchange Commission (``SEC'' or ``Commission'') a proposed rule change 
pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder \2\ to establish fees for use 
of TRACE. TRACE provides for the reporting and dissemination of 
transaction information in eligible corporate debt securities. The NASD 
submitted Amendment No. 1 to the proposed rule change on May 16, 
2002.\3\ Notice of the proposed rule change was published for comment 
in the Federal Register on May 24, 2002.\4\ The NASD submitted 
Amendment No. 2 to the proposed rule change on May 28, 2002.\5\ The 
Commission received one comment letter, from The Bond Market 
Association (``TBMA''), regarding the proposal.\6\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 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''), 
dated May 16, 2002. Amendment No. 1 corrected a typographical error 
in the filing.
    \4\ See Securities Exchange Act Release No. 45960 (May 17, 
2002), 67 FR 36654.
    \5\ See letter from T. Grant Callery, Senior Vice President and 
General Counsel, NASD, to Katherine England, Assistant Director, 
Division, dated May 24, 2002. Amendment No. 2 made the language of 
the rule internally consistent and corrected certain typographical 
errors.
    \6\ See letter from Michel de Konkoly Thege, Vice President and 
Associate General Counsel, TBMA, to Jonathan G. Katz, Secretary, 
Securities and Exchange Commission, dated June 14, 2002 (``TBMA's 
Letter''). TBMA's Letter is described in Section IV, infra.
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    On June 25, 2002, the NASD filed Amendment No. 3 to the proposed 
rule change and a response to TBMA's Letter. This order approves the 
proposed rule change, as amended by Amendment Nos. 1 and 2, accelerates 
approval of Amendment No. 3, and solicits comments from interested 
persons on Amendment No. 3.

II. Background

    On January 23, 2001, the Commission approved the Rule 6200 Series 
providing for reporting and dissemination of transaction information in 
eligible debt securities (``TRACE rules'').\7\ Subsequently, on March 
5, 2001, the Commission approved additional amendments to the TRACE 
rules requiring trade reports in transactions between two NASD members 
to be filed by each member.\8\ 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.\9\ Finally, on April 3, 
2002, the NASD filed a proposed rule change to make certain technical 
changes to the TRACE rules. The NASD subsequently submitted Amendment 
No. 1 to that filing, and the Commission published notice of the 
proposal and Amendment No. 1 thereto.\10\ The NASD subsequently 
submitted Amendment Nos. 2 and 3 to that filing. The Commission is 
approving that filing, and granting accelerated approval of Amendment 
Nos. 2 and 3, concurrently with approval of this proposal.\11\
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    \7\ See Securities Exchange Act Release No. 43873 (January 23, 
2001), 66 FR 8131 (January 29, 2001) (File No. SR-NASD-1999-65).
    \8\ See Securities Exchange Act Release No. 44039 (March 5, 
2001), 66 FR 14234 (March 9, 2001) (File No. SR-NASD-2001-04).
    \9\ See Securities Exchange Act Release No. 45229 (January 3, 
2002), 67 FR 1255 (January 9, 2002) (File No. SR-NASD-2001-91).
    \10\ See Securities Exchange Act Release No. 45943 (May 16, 
2002), 67 FR 36049 (May 22, 2002).
    \11\ See Securities Exchange Act Release No. 46144, (June 28, 
2002).
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    The TRACE rules will become effective on 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.

III. Description of the Proposal

    The proposed rule change establishes fees for participants and 
users of the TRACE facility and rescinds the FIPS fees. The proposed 
fees are divided into three general categories: (1) System fees paid by 
member firms based on the method chosen by the member to report 
corporate bond transactions to the NASD (members will have several 
options on how to report trades and the fees will vary accordingly); 
(2) transaction reporting fees paid by members to file trade reports 
and cancel or correct trade reports; and (3) market data fees paid by 
members and non-

[[Page 44912]]

members that use or distribute the data collected through the TRACE 
system and disseminated by the NASD.
    System Fees. The NASD proposes to charge fees to members who use 
the TRACE system based on the method the member selects to input 
transaction information to the NASD. Under the proposed rules, members 
will have three means by which to input transaction information 
directly to the NASD: (1) A web browser through the Internet, which 
will be useful primarily for low-volume firms; (2) a web browser using 
a private data network (``PDN''); or (3) a computer-to-computer 
interface (``CTCI''), which the Association anticipates will be used 
primarily by high volume firms. Members may also choose to report 
transactions indirectly to the NASD through third parties, such as 
vendors, service bureaus, clearing firms, or the National Securities 
Clearing Corporation (``NSCC''), which will in turn report to the NASD 
through one of the approved methods described above.
    Members may report transaction information manually through a web 
browser using their own Internet provider. Members using a web browser 
will be charged a monthly access fee as follows: for the first user ID 
registered, a charge of $85 per month; for the next two through nine 
user IDs registered, a charge of $75 per month, per such additional 
user ID; and for ten or more user IDs registered, a charge of $70 per 
month, per user ID from two to ten or more. Members reporting through a 
web browser may elect to report transaction information through a PDN 
that is owned and operated by Nasdaq's designated network provider, 
which is currently WorldCom, Inc. Members choosing to report 
transaction information directly to the NASD using a PDN will be 
charged a $100 per line administration fee per month by the NASD. 
Members should be aware that this fee does not include fees that will 
be charged by Nasdaq for services provided by its designated network 
provider that will be billed directly by Nasdaq.
    Members also may report transaction data through the CTCI operated 
by Nasdaq for most of its transaction reporting facilities. Nasdaq 
currently leases dedicated lines from WorldCom, Inc. and provides 
direct connection from a member firm to the NASD. The NASD monthly 
charge for reporting through a CTCI is $25 per month, per line, whether 
or not such line is used exclusively for TRACE, and does not include 
Nasdaq charges for its designated network provider.
    Transaction Reporting Fees. Members will be charged fees to file 
transaction reports and cancel or correct transaction reports. The NASD 
proposes to charge a trade reporting fee using a sliding scale, based 
upon the size of the transaction reported. A member will be charged a 
Trade Reporting Fee on a sliding scale ranging from $0.50 to $2.50 per 
trade based on the size of the reported transaction. For trades up to 
and including $200,000 par value, members will be charged a fee of 
$0.50 per trade; for trades between $201,000 par value and $999,000 par 
value, members will be charged a fee of $0.0025 multiplied by the 
number of bonds traded; and for trades of $1,000,000 par value or more, 
members will be charged a fee of $2.50 per trade.
    The NASD proposes to charge a cancel or correct trade fee of $3.00 
per trade. The NASD also proposes to charge an ``as/of'' trade late fee 
of $3.00 per trade. Under proposed rule 6230(a)(2), SR-NASD-2002-46, a 
transaction that is executed after 6:30 p.m. must be reported within 
the first 1 hour and 15 minutes after the open of the market on the 
following business day to be reported on time ``as/of.'' \12\ A member 
shall be charged an ``as/of'' trade late fee of $3.00 per transaction 
for those transactions reported beyond such time frame. To provide 
firms time to adjust to the new reporting system, the cancel or correct 
trade fee and ``as/of'' trade late fee will not be charged until the 
later of October 1, 2002 or 90 days after the effective date of TRACE. 
In addition, NASD proposes a browse and query fee of $0.05 for each 
returned page of query beyond the first page. This feature will allow 
members to review their own previously reported data.
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    \12\ The NASD has proposed generally to amend the reporting 
period from 1 hour to 1 hour and 15 minutes, and this period would 
apply to transactions executed after 6:30 p.m. and reported the next 
morning. That proposal is being approved concurrently with this 
proposal.
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    In order to standardize corporate bond reporting obligations and 
minimize industry technology burdens, NASD has proposed (as part of the 
TRACE filing with the Commission) the elimination of the separate FIPS 
system and its related rules and costs. The TRACE trade reporting fee 
will replace the flat fee of $1.00 per trade currently charged to 
report corporate bonds through FIPS.
    Market Data Fees. The NASD proposes to charge market professionals 
who subscribe to receive real-time market data as follows: (i) Bond 
Trade Dissemination Service (``BTDS'') Professional Display Fee of $60 
per month per terminal for each interrogation or display device 
receiving real-time TRACE transaction data; (ii) BTDS Internal Usage 
Authorization Fee of $500 per month per organization for internal 
dissemination of real-time TRACE transaction data used in one or more 
of the following ways: internal operational and processing systems, 
internal monitoring and surveillance systems, internal price 
validation, internal portfolio valuation services, internal analytical 
programs leading to purchase/sale or other trading decisions, and other 
related activities; \13\ (iii) BTDS External Usage Authorization Fee of 
$1,000 per month per organization for dissemination of real-time TRACE 
transaction data used in one or more of the following ways: repackaging 
of market data for delivery and dissemination outside the organization, 
such as indices or other derivative products.\14\ Non-professionals 
that subscribe to receive real-time TRACE transaction data will be 
charged $1.00 per month, per terminal. In addition, the NASD proposes a 
fee of $15.00 per month, per subscriber for the daily list fax service 
that will contain all of the daily additions, deletions, modifications 
to the list of TRACE-eligible securities.
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    \13\ Under this service, real-time TRACE transaction data may 
not be used in any interrogation display devices, any systems that 
permit end users to determine individual transaction pricing in 
real-time, or disseminated to any external source.
    \14\ Under this service, real-time TRACE transaction data may 
not be used in any interrogation display devices or any systems that 
permit end users to determine individual transaction pricing in 
real-time.
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    Market participants and others who wish to receive real-time TRACE 
data directly from the NASD will be required to enter into agreements 
with the NASD. For example, a vendor or broker/dealer firm that wishes 
to distribute TRACE real-time data externally will be required to enter 
into a vendor agreement, which among other things will standardize 
display facilities and require the vendor to collect specified 
dissemination fees from its end users for remittance to the NASD. 
Vendors or broker/dealer firms that wish to receive real-time TRACE 
data directly from the NASD and subsequently disseminate real-time 
TRACE data only internally will also be required to execute agreements 
with the NASD, which among other things, will require firms to 
represent that the TRACE real-time data will not be disseminated 
externally.

IV. Discussion

    After careful consideration, the Commission finds that the proposed 
rule change is consistent with the Act and the rules and regulations 
under the Act applicable to a registered securities

[[Page 44913]]

association. In particular, the Commission believes that the proposed 
rule change is consistent with the requirement of section 15A(b)(5)\15\ 
that the rules of an association provide for the equitable allocation 
of reasonable fees, dues, and other charges among its members and 
issuers and other persons using its facilities; and the requirement of 
section 15A(b)(6) \16\ that the rules of the association are not 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.\17\ The Commission believes that the fees allow 
users great flexibility in how they will interact with the system, and 
are scaled according to objective criteria applied across-the-board to 
all categories of users.
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    \15\ 15 U.S.C. 78f(b)(4).
    \16\ 15 U.S.C. 78f(b)(5).
    \17\ In approving this proposed rule change, the Commission has 
considered the proposal's impact on efficiency, competition, and 
capital formation. 15 U.S.C. 78c(f).
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1. Equitable Allocation and Unfair Discrimination

    The Commission believes that the proposal provides for the 
equitable allocation of reasonable fees, dues, and other charges, and 
does not permit unfair discrimination between customers, issuers, 
brokers, or dealers. For example, in several instances, the TRACE fee 
structure adopts a sliding scale approach. The Commission believes that 
this sliding scale structure promotes an equitable distribution of the 
relevant fees while reducing the possibility of unfair discrimination 
between customers, issuers, brokers, or dealers.\18\ For example, 
transaction reporting fees vary depending on the size of the 
transaction reported by the member, with fees ranging from $0.50 per 
trade (for the smallest trades) to $2.50 per trade (for the largest 
trades). Similarly, system fees for members who report to TRACE through 
a web browser are scaled so that the amount of the fee decreases in 
proportion to the number of user identification members registered to 
the member. This permits members to take advantage of economies of 
scale.
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    \18\ As vendors and other market participants who review 
transaction information could be considered customers of TRACE, the 
Commission believes that the statutory provision prohibiting unfair 
discrimination against customers prohibits the NASD from unfairly 
discriminating against those vendors and market participants.
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    In other instances, the TRACE fees vary according to the way in 
which the user intends to use the disseminated TRACE data. For example, 
market data fees are lower for users who limit their use of the 
information to internal distribution, and relatively higher for users 
who repackage the data for delivery outside of the organization. The 
Commission believes that this use-based approach is consistent with 
equitable distribution of fees.

2. Reasonableness

    The Commission believes that the TRACE fee structure is reasonable 
under the Act. In its initial filing, the NASD represented that it 
believes the TRACE fees are reasonably related to the costs of 
developing the new facility and to meeting the estimated operating 
expenses of the TRACE system. Specifically, the NASD represented that 
developmental costs of TRACE, to date, were roughly $7.2 million. In 
addition, the NASD represented that total operating costs for TRACE are 
estimated to be approximately $6 million annually. The NASD represented 
that the proposed fees are intended to help the NASD recover the 
developmental costs of the new system, fund ongoing operational costs, 
and fund the regulatory activities necessary for surveillance of the 
market, with a view towards making TRACE financially self-sustaining. 
The NASD also represented that the various levels of market data fees 
are intended to provide market participants with the flexibility to 
select the usage level that best meets their needs. In determining the 
proposed market data fees, the NASD represented that its staff reviewed 
comparable industry fees for market data. Finally, recognizing that the 
TRACE system is new and that participants will need time to adjust to 
the requirements of the TRACE Rules, the NASD proposed that the 
``cancel and correct'' and ``as/of'' late fee not be charged until the 
later of October 1, 2002 or 90 days from the effective date of TRACE.

3. TBMA's Letter

    TBMA stated that the NASD has not provided sufficient basis to 
determine whether the TRACE fees meet the requirements of the Act 
regarding equitable allocation and reasonableness. TBMA stated that the 
NASD failed to: (1) Reasonably substantiate its costs; (2) match 
revenue streams from the various fees with the costs it seeks to 
recover; (3) explain the relative allocation of the different 
categories of fees on a total revenue basis; and (4) recognize that 
historical trade information should be distributed and commercialized 
separately from real-time data. TBMA further suggested that the TRACE 
fees be reassessed as soon as possible after TRACE becomes effective 
and that the proposal be amended to reflect a pilot status.

4. NASD Amendment No. 3 and Response to TBMA's Letter

    In response, the NASD submitted Amendment No. 3 establishing the 
TRACE fees as a six-month pilot program; the NASD also agreed to 
reassess the fees within six months or less after the effective date of 
TRACE.
    In addition, the NASD addressed the issue of whether the TRACE fees 
meet the standards set forth in the Act. With respect to equitable 
allocation and unfair discrimination, the NASD noted that it has 
adopted a sliding scale to more equitably allocate transaction 
reporting fees. It noted that its fee structure allows participants to 
report required information according to the method that best meets 
their requirements based on volume, cost, and other individual needs. 
In addition, the NASD noted that its market data fees permit users to 
select the level of real-time TRACE data that they would like to 
receive and set up a system accordingly. Finally, the NASD provided 
additional justification for the reasonableness of its fees. It stated 
that its staff has determined the fee structure based on the best 
available information regarding the number of participants, debt 
securities transaction volume, potential use of data, etc. It 
represented that a number of analyses have been conducted to estimate 
revenue, including requesting a sample of NASD members to estimate 
transaction volumes and consulting market data vendors about 
appropriate pricing levels for market data distribution. Finally, it 
stated that the only development costs included in its cost estimates 
are those specifically related to the operation of the current TRACE 
system; and that, in preparing its estimates, it has projected to 
recover developmental costs related to TRACE over a four-year period.
    The Commission believes that the NASD has adequately addressed 
TBMA's concerns regarding whether the TRACE fees satisfy the statutory 
standards regarding equitable allocation, unfair discrimination, and 
reasonableness. In any event, because the NASD proposes to implement 
the TRACE fees on a six-month pilot basis, the Commission will be able 
to address any concerns that arise regarding consistency with the Act 
at the end of the pilot program. Moreover, the NASD itself has agreed 
to revisit these issues prior to the expiration of the pilot.

V. Accelerated Approval of Amendment No. 3

    For these reasons, the Commission finds good cause, consistent with 
sections 15A(b)(6) and 19(b)(2) of the

[[Page 44914]]

Act, to accelerate approval of Amendment No. 3 to the proposed rule 
change prior to the thirtieth day after the date of publication of 
notice of filing thereof in the Federal Register. Amendment No. 3 
provides that TRACE fees will operate as a six-month pilot program. 
Conversion of the fee filing to a pilot program will enable the 
Commission to re-evaluate issues relating to consistency with the Act 
at the end of the pilot program and recommend any needed changes to the 
NASD at the end of that time.

VI. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment No. 3, including whether Amendment No. 3 
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 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 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 No. SR-NASD-2002-63 and should be 
submitted by July 26, 2002.

VII. Conclusion

    For the reasons discussed above, the Commission finds that the 
proposal is consistent with the Act and the rules and regulations 
thereunder.
    It is therefore ordered, pursuant to section 19(b)(2) of the Act, 
that the proposed rule change (SR-NASD-2002-63), as amended, be and 
hereby is approved, and that Amendment No. 3 thereto is approved on an 
accelerated basis.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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J. Lynn Taylor,
Assistant Secretary.
[FR Doc. 02-16851 Filed 7-3-02; 8:45 am]
BILLING CODE 8010-01-P