[Federal Register Volume 76, Number 227 (Friday, November 25, 2011)]
[Notices]
[Pages 72736-72738]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-30284]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65791; File No. SR-FINRA-2011-053]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Granting Approval of Proposed Rule Change to 
Amend Certain TRACE Rules

November 18, 2011.

I. Introduction

    On September 22, 2011, the Financial Industry Regulatory Authority, 
Inc. (``FINRA'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (the ``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to consolidate all TRACE-Eligible 
Securities transaction processing and data management on a single 
technology platform, the Multi Product Platform (``MPP''), and make 
various changes to the rules governing how TRACE-Eligible Securities 
other than Asset-Backed Securities are required to be reported. The 
proposed rule change was published for comment in the Federal Register 
on October 6, 2011.\3\ The Commission received two comments in response 
to the proposal.\4\ On November 10, 2011, FINRA responded to the 
comments.\5\ This order grants approval of the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 65459 (September 30, 
2011), 76 FR 62128 (``Notice'').
    \4\ See letter from Suzanne H. Shatto, dated October 20, 2011 
(``Shatto Letter''); letter from Christopher Killian, Vice 
President, Securities Industry and Financial Markets Association 
(``SIFMA''), to Elizabeth M. Murphy, Secretary, Commission, dated 
October 27, 2011 (``SIFMA Letter'').
    \5\ See letter from Sharon Zackula, Associate Vice President and 
Associate General Counsel, FINRA, to Elizabeth M. Murphy, Secretary, 
Commission, dated November 10, 2011 (``FINRA Letter'').
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II. Description of the Proposal

    Currently, transactions only in TRACE-Eligible Securities that are 
Asset-Backed Securities are processed on the MPP.\6\ The proposed rule 
change would make certain amendments to the reporting requirements of 
Rule 6730 that would permit FINRA to migrate all other TRACE-Eligible 
Securities to the MPP. These new requirements are substantially similar 
to those that currently apply to transactions in Asset-Backed 
Securities and are described below.
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    \6\ ``TRACE-Eligible Security'' and ``Asset-Backed Security'' 
are defined in, respectively, Rule 6710(a) and Rule 6710(m).
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TRACE-Eligible Securities Transactions Executed on a Non-Business Day

    Currently, as set forth in Rules 6730(a)(1)(D) and 6730(a)(2)(B), 
transactions in TRACE-Eligible Securities, except Asset-Backed 
Securities, that are executed on a weekend, holiday, or other day when 
the TRACE system is not open must be reported the next business day (T 
+ 1), designated ``as/of,'' and are subject to two unique requirements. 
First, the date of execution (``Trade Date'') reported to TRACE is not 
the actual date the trade was executed; instead, a member must report 
as the Trade Date the day (i.e., T + 1) that the report must be timely 
submitted. Second, the execution time reported must be ``12:01 a.m. 
Eastern Time'' (``00:01:00''), instead of the actual Time of 
Execution.\7\ As described in the Notice, the two requirements were 
established at the inception of TRACE because, at that time, the TRACE 
system did not recognize any day on which the TRACE system is closed as 
a valid Trade Date, and the two current required elements allow FINRA 
to distinguish transactions in TRACE-Eligible Securities executed on 
non-business days from all other reported transactions.
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    \7\ ``Time of Execution'' is defined in Rule 6710(d). Also, when 
the reporting method used includes a ``special price memo'' field, 
the member must enter the actual date of execution and Time of 
Execution in such field.
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    FINRA has enhanced the TRACE system to recognize, for all types of 
TRACE-Eligible Securities, any calendar date as a valid Trade Date. 
Accordingly, the proposed rule change would amend Rules 6730(a)(1)(D) 
and 6730(a)(2)(B) to delete in both provisions the two data elements 
described above, and instead require members to report transactions 
executed on non-business days in the same manner that transactions 
executed after or before TRACE System Hours on business days are 
reported currently.\8\ The proposal also would combine and renumber 
certain rules and incorporate minor technical changes.
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    \8\ ``TRACE System Hours'' is defined in Rule 6710(t).
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Size (Volume), Commission, and Settlement Terms

    In addition, the proposed rule change would amend the technical 
requirements for reporting the size (volume) of a transaction, the 
commission (if any), and the settlement of transactions in TRACE-
Eligible Securities, other than Asset-Backed Securities.
    Currently, FINRA requires members to report the size (volume) of a 
transaction in a TRACE-Eligible Security, other than an Asset-Backed 
Security, by reporting the number of bonds transacted.\9\ For example, 
a sale of corporate bonds having a par or principal value of $10,000 is 
reported as a sale of ten bonds. The proposal would amend Rules 
6730(c)(2) and 6730(d)(2) to require a member to report the size of 
such transactions using the total par value or principal value traded, 
rather than the number of bonds.\10\
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    \9\ See Rules 6730(c)(2) and 6730(d)(2).
    \10\ Previously, FINRA adopted similar provisions for reporting 
the size (volume) of transactions in Asset-Backed Securities that do 
not amortize. See Securities Exchange Act Release No. 61566 
(February 22, 2010), 75 FR 9262 (March 1, 2010) (order approving 
File No. SR-FINRA-2009-065).
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    The proposed rule change would make similar change to the reporting 
of commissions. Under current Rules 6730(c)(11) and 6730(d)(1), in 
cases where a commission is charged in a transaction in a TRACE-
Eligible Security, the commission must be reported ``stated in points 
per bond (e.g., for corporate bonds, 1 point equals $10.00 per bond).'' 
\11\ As amended by the proposal, Rules 6730(c)(11) and 6730(d)(1) would 
require members to report the total dollar amount of the

[[Page 72737]]

commission, rather than the points per bond.\12\
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    \11\ Rule 6730(d)(1).
    \12\ Previously, FINRA adopted similar provisions for reporting 
a commission in a transaction in an Asset-Backed Security. See 
Securities Exchange Act Release No. 61566 (February 22, 2010), 75 FR 
9262 (March 1, 2010) (order approving File No. SR-FINRA-2009-065).
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    The proposed rule change also would simplify the requirements for 
reporting the settlement of a transaction in a TRACE-Eligible Security. 
Currently, as provided in Rule 6730(d)(4)(B)(i), if a transaction, 
other than a transaction in an Asset-Backed Security, will not settle 
on T + 3, a member must report the settlement using one of three 
modifiers.\13\ To streamline the requirements regarding settlement, new 
Rule 6730(c)(12) would require a member simply to report the date of 
settlement.\14\ In addition, the proposal would delete Rule 
6730(d)(4)(B), which sets forth the three settlement modifiers that 
will no longer be used in TRACE reporting, delete certain obsolete 
references, and renumber certain related rules.
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    \13\ Current Rule 6730(c)(12) will be renumbered as Rule 
6730(c)(13). If a trade will not settle on T + 3, the three 
modifiers that are used to indicate the day the transaction will be 
settled are ``.c'' (date of execution), ``.nd'' (T + 1), or ``.sNN'' 
(settlement on a date other than the date of execution, T + 1 or T + 
3).
    \14\ Previously, FINRA adopted a similar requirement in 
connection with transactions in Asset-Backed Securities. See 
Securities Exchange Act Release No. 61566 (February 22, 2010), 75 FR 
9262 (March 1, 2010) (order approving File No. SR-FINRA-2009-065); 
Securities Exchange Act Release No. 64364 (April 28, 2011), 76 FR 
25385 (May 4, 2011) (order approving File No. SR-FINRA-2011-012).
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    Finally, the proposed rule change would make minor technical 
amendments to Rule 6730(a) through (d).
    In the Notice, FINRA stated that it would announce the effective 
date of the proposed rule change in a Regulatory Notice to be published 
no later than 60 days following Commission approval, and that the 
effective date would be no later than 180 days following publication of 
that Regulatory Notice. In its response to comments, FINRA stated that 
it had several communications with its members about the migration to 
the MPP.\15\ In connection with these communications, FINRA noted that, 
although subject to Commission approval of the proposed rule change, 
FINRA anticipates that the MPP migration would occur on February 6, 
2012.\16\
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    \15\ See FINRA Letter at note 3.
    \16\ See id.
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III. Summary of Comments and FINRA's Response

    The Commission received two comments on the proposed rule 
change.\17\
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    \17\ See supra note 4.
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    One commenter was generally supportive of the proposed rule change, 
but raised concerns that FINRA's anticipated implementation date of 
February 6, 2012 would not provide firms adequate time to develop new 
systems and processes.\18\ According to the commenter, many firms have 
internal information technology policies that include a year-end ``code 
freeze,'' which would make it difficult to engage in development or 
testing for some portion of December 2011 and/or January 2012.\19\ The 
commenter requested that the MPP migration and the proposed rule 
changes be implemented not earlier than the end of the first quarter of 
2012.\20\
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    \18\ See SIFMA Letter.
    \19\ See id. at 1-2.
    \20\ See id. at 2. The commenter also made minor comments 
inquiring about: (1) whether both current and future reporting 
systems protocols could be used simultaneously during the 
transition; and (2) how certain transactions involving ``sinking 
bonds'' should be reported. See id. at 2-3.
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    In response, FINRA stated that it believed the February 6, 2012 
implementation date for the proposed rule change and the MPP migration 
``provides firms sufficient time to take the steps necessary to make 
system and procedural changes, test and successfully convert to MPP for 
reporting corporate bonds and Agency Debt Securities to TRACE.'' \21\ 
In support of its assertion, FINRA noted that MPP is already part of 
some firms' interface with TRACE with regard to Asset-Backed Securities 
reporting.\22\ Further, FINRA stated that it has provided and will 
continue to provide the technical specifications that members need to 
prepare for MPP migration and the implementation of the proposed rule 
change.\23\
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    \21\ See FINRA Letter at 3.
    \22\ See id.
    \23\ See id.
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    FINRA also stated that it will continue to give guidance and 
assistance to members to prepare for the MPP migration and ``will 
continue to work with members to provide sufficient opportunities to 
test systems'' before implementation.\24\ Finally, in arguing that the 
migration of corporate bonds and Agency Debt Securities to MPP should 
not be delayed, FINRA highlighted the ``significant benefits that MPP 
offers regarding the processing of transactions and the management of 
important TRACE data.'' \25\ FINRA responded to the commenter's request 
that FINRA permit the legacy TRACE system to run in parallel with the 
FIX protocols and revised CTCI protocols (used in connection with MPP) 
by explaining that FINRA is not able to support these two reporting 
formats simultaneously, but that if a firm has a system-related issue 
during the MPP migration, the firm should contact the appropriate 
department in FINRA.\26\
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    \24\ Id. at 4.
    \25\ Id.
    \26\ See id. at 5.
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    FINRA also clarified, in response the commenter's request for 
guidance regarding the reporting of certain bonds with sinking funds, 
that ``FINRA is engaged in an ongoing review of issues raised by the 
MPP migration, and will address this and other specific trade reporting 
questions prior to the MPP migration in its usual and periodic 
communications with members.'' \27\
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    \27\ See id.
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    Another commenter raised issues not germane to the proposed rule 
change and to which FINRA did not respond.\28\
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    \28\ See Shatto Letter.
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IV. Discussion

    After carefully considering the proposal, the comments submitted, 
and FINRA's response to those comments, the Commission finds that the 
proposed rule change is consistent with the requirements of the Act and 
the rules and regulations thereunder applicable to a national 
securities association.\29\ In particular, the Commission finds that 
the proposed rule change is consistent with Section 15A(b)(6) of the 
Act,\30\ which requires, among other things, that FINRA rules be 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, and, in general, to 
protect investors and the public interest.
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    \29\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
    \30\ 15 U.S.C. 78o-3(b)(6).
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    Transactions in TRACE-Eligible Securities that are Asset-Backed 
Securities already are processed on the MPP. FINRA now proposes to 
migrate all other TRACE-Eligible Securities to the MPP and consolidate 
the reporting of TRACE-Eligible Securities on a single technology 
platform using common reporting formats. The Commission believes that 
this change will support more timely and accurate reporting of all 
transactions in TRACE-Eligible Securities and enhance FINRA's ability 
to surveil the debt markets for the protection of investors and in 
furtherance of the public interest. The

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Commission notes that the proposed changes being approved today are 
substantially similar to requirements that already apply to 
transactions in Asset-Backed Securities that previously have been 
approved by the Commission.\31\ The Commission believes, therefore, 
that it is reasonable and consistent with the Act for FINRA to modify 
the TRACE reporting rules to facilitate MPP migration for corporate 
bond and Agency Debt Securities in the manner set forth in the 
proposal.
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    \31\ See Securities Exchange Act Release No. 61566 (February 22, 
2010), 75 FR 9262 (March 1, 2010) (order approving File No. SR-
FINRA-2009-065); Securities Exchange Act Release No. 64364 (April 
28, 2011), 76 FR 25385 (May 4, 2011) (order approving File No. SR-
FINRA-2011-012).
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    The Commission does not believe that the commenters raise any issue 
that would preclude approval of the proposal. The Commission 
acknowledges the potential for firms covered by these new reporting 
requirements to incur certain compliance burdens and notes one 
commenter's objection to FINRA's suggested implementation date of 
February 6, 2012. The Commission notes that FINRA has indicated a 
willingness to continue to provide guidance and assistance to market 
participants throughout the implementation process, including providing 
ample testing opportunities.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\32\ that the proposed rule change (SR-FINRA-2011-053) be, and 
hereby is, approved.
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    \32\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
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pursuant to delegated authority.\33\

    \33\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2011-30284 Filed 11-23-11; 8:45 am]
BILLING CODE 8011-01-P