[Federal Register Volume 83, Number 101 (Thursday, May 24, 2018)]
[Notices]
[Pages 24143-24145]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-11093]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-83290; File No. SR-FINRA-2018-020]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule Change To Modify the Definition of ``Agency Debt 
Security''

May 18, 2018.
    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 May 17, 2018, the Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been prepared by FINRA. The Commission is 
publishing this notice to solicit comments on the proposed rule change 
from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing to amend FINRA Rule 6710 to modify the 
definition of ``Agency Debt Security.''
    The text of the proposed rule change is available on FINRA's 
website at http://www.finra.org, at the principal office of FINRA and 
at the Commission's Public Reference Room.

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

    In its filing with the Commission, FINRA included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. FINRA has prepared summaries, set forth in sections A, 
B, and C below, of the most significant aspects of such statements.

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

1. Purpose
    FINRA requires members to report to the Trade Reporting and 
Compliance Engine (``TRACE'') transactions in Agency Debt 
Securities,\3\ which includes those debt securities issued or 
guaranteed by a Government-Sponsored Enterprise (``GSE''). Fannie Mae 
(``Fannie'') and Freddie Mac (``Freddie''), both of which are GSEs, 
announced changes relating to the issuance structure of their credit 
risk transfer securities (``CRTs'').\4\ Currently, Fannie and Freddie 
issue CRTs as direct debt obligations, and therefore CRTs fall within 
the definition of ``Agency Debt Security'' for purposes of TRACE data 
categorization and dissemination. FINRA understands that under the new 
issuance structure, CRTs will be issued by a Fannie- or Freddie-
sponsored trust rather than directly by Fannie or Freddie, and proceeds 
from the sale of the CRTs will be placed in a trust account and managed 
by a third-party trustee. As a result of CRTs being issued by a trust 
sponsored by a GSE instead of directly issued by a GSE, CRTs would no 
longer fall within the technical definition of ``Agency Debt Security'' 
and would be considered corporate debt for TRACE data and dissemination 
purposes. This outcome would be problematic for TRACE subscribers 
consuming data related to CRTs because transactions in CRTs would no 
longer be disseminated as part of the Agency Debt data set. In 
addition, the TRACE system would apply the corporate, rather than 
Agency, debt transaction size dissemination cap for unrated securities, 
specifically a $1 million dissemination cap for unrated corporate debt 
versus $5 million for unrated Agency Debt Securities. Thus, classifying 
CRTs as corporate debt would decrease transparency as to the actual 
size of the transaction given that unrated corporate debt is 
disseminated with the $1, rather than $5, million dissemination cap.
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    \3\ ``Agency Debt Security'' generally includes a debt security 
(i) issued or guaranteed by an Agency as defined in Rule 6710(k); or 
(ii) issued or guaranteed by a Government-Sponsored Enterprise as 
defined in Rule 6710(n). Rule 6710(n) provides that ``Government-
Sponsored Enterprise'' has the same meaning as defined in 2 U.S.C. 
622(8).
    \4\ Fannie and Freddie introduced their respective CRT programs 
in 2013. CRTs are linked to an underlying loan pool selected and 
acquired by the GSE and the credit and prepayment performance of the 
underlying loans determines the performance of the CRTs.
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    FINRA believes that the new issuance structure for CRTs will not 
materially change the characteristics of the CRTs to warrant altered 
treatment for purposes of TRACE categorization and dissemination. While 
a trust will be issuing the CRTs, FINRA understands that Fannie and 
Freddie will retain a material net economic interest \5\ in the 
reference tranches associated with the CRTs issued under the new 
structure and will enter into a credit protection agreement with the 
trust, including agreeing to pay any shortfall between the investment 
earnings on the collateral held by the trust and the one-month LIBOR. 
Thus, FINRA is proposing to amend Rule 6710(l) to expand the definition 
of ``Agency Debt Security'' to include debt issued by a trust or other 
entity established or sponsored by a GSE for the purpose of issuing 
debt securities, where the GSE provides the collateral to the entity or 
retains a material net economic interest in the securities issued by 
the entity. This proposed rule would allow CRTs to continue to fall 
within the definition of ``Agency Debt Security'' for TRACE purposes 
and would address any similar future modifications by Fannie and 
Freddie to other programs.\6\ FINRA believes that this would benefit 
investors by ensuring the continued application of the $5 million 
dissemination cap for unrated Agency Debt Securities, instead of the $1 
million dissemination cap for unrated corporate debt. Additionally, 
continuing to classify CRTs issued under the new issuance structure as 
Agency Debt Securities would avoid confusion by ensuring that 
subscribers of the Agency Debt data set continue to receive transaction 
information on CRTs. Finally, FINRA does not believe that the 
modification in issuance structure will materially change the 
characteristics of the CRTs for purposes of TRACE dissemination and, 
therefore, FINRA does not believe that classifying CRTs as corporate 
debt solely because of the new issuance structure is warranted.
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    \5\ See, e.g., Fannie Mae, Prospectus, Connecticut Avenue 
Securities, Series 2018-C03 Notes Due October 2030, http://www.fanniemae.com/resources/file/credit-risk/pdf/connave-2018-c03-prospectus.pdf; see also, e.g., Freddie Mac, Offering Circular, 
Seasoned Credit Risk Transfer Trust, Series 2017-3, http://www.freddiemac.com/seasonedloanofferings/docs/SCRT_2017-3_OC%20Final.pdf.
    \6\ FINRA has discussed the proposed rule change with Fannie and 
Freddie, both of which support the continued inclusion of CRTs 
within the definition of ``Agency Debt Security.''
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    FINRA has filed the proposed rule change for immediate 
effectiveness. FINRA has requested that the SEC waive the requirement 
that the proposed rule

[[Page 24144]]

change not become operative for 30 days after the date of the filing, 
so FINRA can implement the proposed rule change immediately.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\7\ which requires, among 
other things, that FINRA rules must be designed to prevent fraudulent 
and manipulative acts and practices, to promote just and equitable 
principles of trade, and, in general, to protect investors and the 
public interest. The proposed rule change would prevent investor 
confusion by providing that CRTs continue to fall within the definition 
of ``Agency Debt Security'' for TRACE purposes. In addition, 
subscribers of the Agency Debt data set would continue to receive 
transaction information on CRTs, and investors would continue to see 
CRTs disseminated pursuant to the protocols applicable to Agency Debt 
Securities that provide a comparatively higher level of transparency as 
to the actual size of the transaction. As noted above, FINRA does not 
believe that the new issuance structure will materially change the 
characteristics of CRTs sufficient to warrant different treatment for 
TRACE purposes, and believes that the proposal is in the best interest 
of investors in that it would reduce confusion regarding the 
appropriate categorization of CRTs.
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    \7\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    FINRA does not believe that the proposed rule change will result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act. FINRA does not anticipate that 
the proposed rule change will lead to any material costs or benefits to 
members, as it does not affect the TRACE reporting requirements that 
are applicable today. The proposed rule change would simply allow FINRA 
to continue classifying the CRTs as Agency Debt Securities for data 
categorization and dissemination purposes.

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

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A) of the Act \8\ and Rule 19b-
4(f)(6) thereunder.\9\
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    \8\ 15 U.S.C. 78s(b)(3)(A).
    \9\ 17 CFR 240.19b-4(f)(6).
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    FINRA has asked the Commission to waive the 30-day operative delay 
so that the proposal may become operative immediately upon filing. 
FINRA has stated that, based on conversations with Fannie and Freddie, 
it understands that the first CRTs will be issued under the new 
structure imminently. The Commission believes that waiver of the 30-day 
operative delay is consistent with the protection of investors and the 
public interest. Such action should help avoid confusion among 
consumers of TRACE data products; if the proposal were not immediately 
operative, debt securities issued by GSE-sponsored trusts that retain 
economic characteristics of Agency Debt Securities would instead be 
treated as corporate debt securities, contrary to established 
expectations. In addition, the Commission's action will preserve the 
same degree of post-trade transparency for debt securities issued by 
GSE-sponsored trusts, as such securities will continue utilizing the $5 
million dissemination cap and avoid the $1 million cap that would apply 
if securities newly issued by GSE-sponsored trusts were characterized 
as corporate debt securities. Accordingly, the Commission hereby waives 
the operative delay and designates the proposed rule change operative 
upon filing.\10\
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    \10\ For purposes only of waiving the 30-day operative delay, 
the Commission also has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission shall institute proceedings to 
determine whether the proposed rule should be approved or 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 email to [email protected]. Please include 
File Number SR-FINRA-2018-020 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR-FINRA-2018-020. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (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 provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549 on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of such filing also will be available for inspection 
and copying at the principal office of FINRA. All comments received 
will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-FINRA-2018-020, and should be submitted 
on or before June 14, 2018.
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    \11\ 17 CFR 200.30-3(a)(12).


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    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\11\
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2018-11093 Filed 5-23-18; 8:45 am]
 BILLING CODE 8011-01-P