[Federal Register Volume 69, Number 83 (Thursday, April 29, 2004)]
[Notices]
[Pages 23549-23553]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-9715]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49607; File No. SR-NASD-2004-057]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment Nos. 1 and 2 by the National Association of 
Securities Dealers, Inc. Relating to Proposed Amendments To Reduce the 
Reporting Period for Transactions in TRACE-Eligible Securities

April 23, 2004.
    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 1, 2004, the National Association of Securities Dealers, Inc. 
(``NASD'') filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission'') the proposed rule change as described

[[Page 23550]]

in Items I, II, and III below, which Items have been prepared by NASD. 
On April 16, 2004, NASD filed Amendment No. 1 to the proposed rule 
change.\3\ On April 22, 2004, NASD filed Amendment No. 2 to the 
proposed rule change.\4\ The Commission is publishing this notice to 
solicit comments on the proposed rule change, as amended, from 
interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter from Sharon K. Zackula, Assistant General 
Counsel, NASD, to Katharine A. England, Assistant Director, Division 
of Market Regulation, SEC, dated April 16, 2004 (``Amendment No. 
1''). Amendment No. 1 clarifies the effective dates that NASD will 
establish for the proposed rule change upon approval by the 
Commission.
    \4\ See letter from Sharon K. Zackula, Assistant General 
Counsel, NASD, to Katharine A. England, Assistant Director, Division 
of Market Regulation, SEC, dated April 22, 2004 (``Amendment No. 
2''). Amendment No. 2 amends the discussion of industry and 
regulatory trends in the securities industry favoring more ``real-
time'' reporting and ``real-time'' transmission of transaction 
information for clearance and settlement.
---------------------------------------------------------------------------

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

    NASD is proposing to amend Rule 6230(a) to reduce the period to 
report a transaction in a TRACE-eligible debt security in two stages: 
(i) from 45 to 30 minutes in stage one (``Stage One''), and (ii) 
subsequently, from 30 to 15 minutes in stage two (``Stage Two''). Rule 
6230 is one of the Trade Reporting and Compliance Engine (``TRACE'') 
rules. Below is the text of the proposed rule change. Proposed new 
language is in italics; proposed deletions are in brackets.
    Stage One Rule Text:
* * * * *

6200. Trade Reporting and Compliance Engine (TRACE)

* * * * *
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 30[45] minutes of the time of execution, except as 
otherwise provided below, or the transaction report will be ``late.'' 
The member must transmit the report to TRACE during the hours the TRACE 
system is open (``TRACE system hours''), which are 8 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
    Transactions in TRACE-eligible securities executed on a business 
day at or after 8 a.m. eastern time through 6:29:59 p.m. eastern time 
must be reported within 30[45] minutes of the time of execution. If a 
transaction is executed on a business day less than 30[45] minutes 
before 6:30 p.m. eastern time, a member may report the transaction the 
next business day within 30[45] minutes after the TRACE system opens. 
If reporting the next business day, the member must indicate ``as/of'' 
and provide the actual transaction date.
(2) Transactions Executed At or After 6:30 p.m. Through 11:59:59 p.m. 
Eastern Time
    Transactions in TRACE-eligible securities executed on a business 
day at or after 6:30 p.m. eastern time through 11:59:59 p.m. eastern 
time must be reported the next business day within 30[45] minutes after 
the TRACE system opens. The member must indicate ``as/of'' and provide 
the actual transaction date.
(3) Transactions Executed At or After 12 a.m. Through 7:59:59 a.m. 
Eastern Time
    Transactions in TRACE-eligible securities executed on a business 
day at or after 12 a.m. eastern time through 7:59:59 a.m. eastern time 
must be reported the same day within 30[45] minutes after the TRACE 
system opens.
(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 30[45] 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) and (6) No Change.
    (b) through (f) No Change.
* * * * *
    Stage Two Rule Text:
* * * * *

6200. Trade Reporting and Compliance Engine (TRACE)

* * * * *
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 15[30] minutes of the time of execution, except as 
otherwise provided below, or the transaction report will be ``late.'' 
The member must transmit the report to TRACE during the hours the TRACE 
system is open (``TRACE system hours''), which are 8 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
    Transactions in TRACE-eligible securities executed on a business 
day at or after 8 a.m. eastern time through 6:29:59 p.m. eastern time 
must be reported within 15[30] minutes of the time of execution. If a 
transaction is executed on a business day less than 15[30] minutes 
before 6:30 p.m. Eastern Time, a member may report the transaction the 
next business day within 15[30] minutes after the TRACE system opens. 
If reporting the next business day, the member must indicate ``as/of'' 
and provide the actual transaction date.
(2) Transactions Executed At or After 6:30 p.m. Through 11:59:59 p.m. 
eastern time
    Transactions in TRACE-eligible securities executed on a business 
day at or after 6:30 p.m. eastern time through 11:59:59 p.m. eastern 
time must be reported the next business day within 15[30] minutes after 
the TRACE system opens. The member must indicate ``as/of'' and provide 
the actual transaction date.
(3) Transactions Executed At or After 12 a.m. Through 7:59:59 a.m. 
eastern time
    Transactions in TRACE-eligible securities executed on a business 
day at or after 12 a.m. eastern time through 7:59:59 a.m. eastern time 
must be reported the same day within 15[30] minutes after the TRACE 
system opens.
(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,

[[Page 23551]]

at any time during that day (determined using eastern time), must be 
reported the next business day within 15[30] 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) and (6) No Change.
    (b) through (f) No Change.
* * * * *

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
    NASD Rule 6230(a) currently requires a member that is a party to a 
transaction in a TRACE-eligible security to report the transaction 
information to TRACE within 45 minutes of the time of execution.\5\ 
NASD is proposing to reduce the period to report a transaction in two 
stages. In Stage One, the reporting period will be reduced from 45 
minutes to 30 minutes, and, in Stage Two, the reporting period will be 
reduced from 30 minutes to 15 minutes.
---------------------------------------------------------------------------

    \5\ Limited exceptions to the general requirement are stated in 
Rule 6230(a)(1) through (4), which provide for reporting a 
transaction the next business day that the TRACE system is open in 
certain circumstances. Specifically, in Rule 6230(a)(1), a member 
currently may elect to report a transaction the next business day 
that the TRACE system is open at any time within 45 minutes after 
the TRACE system opens, if the member executed the trade the prior 
business day less than 45 minutes before the TRACE system closed. 
(Currently, on a business day, the TRACE system is open from 8 a.m. 
eastern time to 6:30 p.m. eastern time to receive reports.) In Rule 
6230(a)(2) through (4), members are directed how to report trades 
that occur (1) after TRACE system hours, (2) before TRACE system 
hours, or (3) on a weekend or a holiday. In each case, the member 
must report the transaction the next business day that the TRACE 
system is open within 45 minutes of the opening.
---------------------------------------------------------------------------

Stage One: Reduction of Reporting Period to 30 Minutes

    NASD is proposing to amend Rule 6230 to reduce the reporting period 
from 45 minutes to 30 minutes during Stage One. In Rule 6230(a), the 
general requirement to report transaction information within 45 minutes 
of the time of execution is restated as 30 minutes. In addition, NASD 
is proposing to amend the next-day reporting exceptions in Rules 
6230(a)(1) through (4) to require that the report be filed within 30 
minutes of the time the TRACE system opens instead of the current 45 
minutes. Specifically, in Rule 6230(a)(1), a member could elect to 
report the next business day if a transaction occurs within 30 minutes 
before the TRACE system closing. If the member elects to report the 
following business day that the TRACE system is open, the member must 
report the transaction within 30 minutes after the TRACE system 
opens.\6\ In addition, in Rule 6230(a)(2) through (4), a member would 
be required to report transaction information for specified 
transactions the next business day that the TRACE system is open and 
would be required to do so within 30 minutes after the system's 
opening.
---------------------------------------------------------------------------

    \6\ On days when NASD announces that the TRACE System will close 
early (e.g., at 2 p.m. on the day after Thanksgiving or the day 
before Independence Day), NASD will announce the early closing and 
specify when the TRACE System will cease accepting reports. When 
early closings in TRACE occur, NASD interprets Rule 6230(a)(1), as 
allowing a member (for a transaction that occurs just before the end 
of the TRACE System closing) to report the transaction on the day of 
execution before the system closes or the next business day, to 
provide the member the same flexibility that is provided when the 
TRACE System closes at 6:30 p.m. eastern time. For example, if NASD 
announces that the TRACE System will close at 2 p.m. eastern time 
and will not accept reports after that time, a 30-minute reporting 
period is in effect, and a member executes a transaction at 1:40 
p.m. eastern time, the member may report the transaction on the day 
of execution (through 2 p.m. eastern time) or may report the 
transaction the next business day that the TRACE System is open 
within 30 minutes of the opening.
---------------------------------------------------------------------------

    The effective date of Stage One, the 30-minute reporting period, 
will be October 1, 2004.

Stage Two

    In addition, NASD is proposing to amend Rule 6230 a second time to 
reduce the reporting period from 30 minutes to 15 minutes. The amended 
rule text set forth above as Stage Two contains the proposed changes.
    The proposed rule change set forth in Stage Two also includes 
proposed amendments to Rule 6230(a)(1) through (a)(4) to reduce the 
reporting periods referenced therein from 30 minutes to 15 minutes; 
they are parallel to the amendments to paragraphs (a)(1) through (a)(4) 
of Rule 6230 that are proposed as part of Stage One and described 
above. Thus, NASD is proposing to amend the next-day reporting 
provisions in Rules 6230(a)(1) through (4) to require that a 
transaction report be filed within 15 minutes of the time the TRACE 
system opens instead of the 30-minute period that would then be in 
effect.\7\
---------------------------------------------------------------------------

    \7\ Specifically, in Rule 6230(a)(1), a member could elect to 
report the next business day if a transaction occurred within 15 
minutes before the TRACE system closing. If the member elected to 
report the following business day that the TRACE system is open, the 
member must report the transaction within 15 minutes after the TRACE 
system opens. In addition, in Rule 6230(a)(2) through (4), a member 
would be required to report transaction information for specified 
transactions the next business day that the TRACE system is open and 
would be required to do so within 15 minutes after the system's 
opening.
---------------------------------------------------------------------------

    The effective date of Stage Two, 15-minute reporting, will be July 
1, 2005. Under the proposal, members will have nine months after 30-
minute reporting is implemented to prepare for Stage Two 15-minute 
reporting.

Rationale for Reducing the Reporting Period

    Consistent with longstanding NASD and SEC goals, NASD is proposing 
to reduce the reporting period from 45 minutes to 30 minutes, and from 
30 minutes to 15 minutes, to improve transparency in the corporate debt 
securities markets for the benefit of investors and market 
participants. Reducing the reporting period to 30, then 15 minutes, 
will allow investors and market participants to obtain and evaluate 
pricing information more quickly than under the current reporting 
requirements, improving the timeliness and value of the information to 
investors and creating a qualitative increase in corporate bond market 
transparency.
    By reducing the reporting period to 30, then 15 minutes, the 
reporting goal originally set forth in the proposed TRACE Rules in 1999 
will be achieved.\8\ In 2001, when the SEC approved the proposed TRACE 
Rules (then containing a 60-minute reporting period), the SEC stated 
its expectation that NASD would file a rule proposal within six months 
from the start date of TRACE to reduce the reporting period to 15 
minutes. The SEC said, ``NASD plans to reduce the time frame for 
reporting bond trades--from one hour to 15 minutes. * * *

[[Page 23552]]

This will ensure that transaction information is reported to TRACE and 
released to the public before it becomes ``stale.' '' \9\ The NASD's 
15-minute reporting goal was also restated in SR-NASD-2003-78, which is 
the proposed rule change to reduce the reporting period from 75 minutes 
to 45 minutes that the SEC approved on June 18, 2003.\10\
---------------------------------------------------------------------------

    \8\ See SR-NASD-99-65, filed on October 27, 1999, and amendments 
thereto.
    \9\ See Securities Exchange Act Release No. 43873 (January 23, 
2001), 66 FR 8131, 8135 (January 29, 2001) (SEC Order approving SR-
NASD-99-65). There were a number of technical, operational, and 
regulatory issues to resolve before NASD believed it was appropriate 
to propose 15-minute reporting. Shortly before TRACE began, at the 
SEC's request, NASD developed a proposal to extend, rather than 
reduce, the reporting period from 60 minutes to 75 minutes to 
accommodate the DTCC's participation in TRACE for those firms that 
wished to report TRACE transactions via DTCC. (At that time, DTCC's 
system had certain operational limits, and 60-minute reporting would 
not have been possible using that system.) On October 1, 2003, 15 
months after TRACE operated using a 75-minute reporting regimen, 
NASD reduced the reporting period to 45 minutes. This proposed rule 
change will reduce the reporting period to 15 minutes ultimately, in 
two stages.
    \10\ See Securities Exchange Act Release No. 47856 (May 14, 
2003); 68 FR 27605 (May 20, 2003) (Notice of Filing of SR-NASD-2003-
78 and Request for Comment), n. 7. SR-NASD-2003-78 was approved in 
Securities Exchange Act Release No. 48056 (June 18, 2003), 68 FR 
37886 (June 25, 2003).
---------------------------------------------------------------------------

    In this proposed rule change, NASD is proposing to achieve 15-
minute reporting in two stages for several reasons. Firms have 
expressed concern about their ability to achieve a 15-minute reporting 
standard, and a two-stage process will allow firms to make incremental 
improvements in their reporting processes and provide time for them to 
adjust to the shorter periods. In addition, NASD is proposing both 
stages of the reduction in this proposed rule change, rather than in 
two separate rule proposals, to provide notice to the industry of the 
NASD's general plan to achieve 15-minute reporting. By doing so, the 
industry has a longer period to prepare for the changes and should be 
able to make the technical and operational changes needed to achieve 
15-minute reporting more efficiently. In fact, many transactions are 
currently reported to TRACE within the 30- and 15-minute timeframes. 
Approximately eighty-four percent (84%) of all trades reported to TRACE 
in the first two months of 2004 were reported within 30 minutes. In 
addition, during the same period approximately seventy-three percent 
(73%) of all trades were reported within 15 minutes.
    NASD's proposal to reduce the reporting period is also timely, 
because it moves the corporate debt markets closer to general industry 
and regulatory trends favoring more ``real-time'' reporting, and 
``real-time'' transmission of transaction information for clearance and 
settlement. The Depository Trust and Clearing Corporation (``DTCC'') is 
working with the industry in an initiative called RTTM. Broker-dealers 
currently transmit trade information ``real-time'' using RTTM's 
interactive messaging, on more than 50% of all mortgage-backed 
securities transactions and on approximately 95% of all government 
securities transactions processed through DTCC.\11\
---------------------------------------------------------------------------

    \11\ Government securities transactions are processed at DTCC's 
Fixed Income Clearing Corporation (``FICC'') in its Government 
Securities Division, and mortgage-backed securities transactions are 
processed in FICC's Mortgage-Backed Securities Division.
---------------------------------------------------------------------------

    Finally, NASD's proposed rule change to reduce the reporting period 
is in accordance with SEC and industry requests for some degree of 
coordination regarding the reporting of debt securities. To accommodate 
TRACE participants' requests for a ``single DTCC pipeline'' to process 
and report both corporate and municipal securities transactions, NASD 
has worked with the industry and DTCC to coordinate the timing of the 
implementation of the 15-minute reporting requirement with DTCC's 
connection of RTTM directly to TRACE.
2. Statutory Basis
    NASD believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\12\ which requires, among 
other things, that NASD'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. NASD believes that the proposed rule change will 
provide NASD with heightened capabilities to regulate and provide 
surveillance of the debt securities markets to prevent fraudulent and 
manipulative acts and practices, will improve transparency for the 
benefit of customers and other market participants by reducing the 
period between the time of execution of a transaction and the 
dissemination of transaction information for securities subject to 
dissemination in furtherance of the public interest and for the 
protection of investors.
---------------------------------------------------------------------------

    \12\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

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

    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

    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, or
    A. Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:
    Electronic comments:
     Use the Commission's Internet comment form 
(http://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to [email protected]. Please 
include File Number SR-NASD-2004-057 on the subject line.
    Paper comments:
     Send paper comments in triplicate to Jonathan G. 
Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street, 
NW., Washington, DC 20549-0609.
    All submissions should refer to File Number SR-NASD-2004-057. This 
file number should be included on the subject line if e-mail 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 Web site (http://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

[[Page 23553]]

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 also will be available for inspection and copying at the 
principal office of NASD. All comments received will be posted without 
change; the Commission does not edit personal identifying information 
from submissions. You should submit only information that you wish to 
make available publicly. All submissions should refer to File Number 
SR-NASD-2004-057 and should be submitted on or before May 20, 2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\
---------------------------------------------------------------------------

    \13\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-9715 Filed 4-28-04; 8:45 am]
BILLING CODE 8010-01-P