[Federal Register Volume 83, Number 164 (Thursday, August 23, 2018)]
[Notices]
[Pages 42732-42735]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-18167]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-83882; File No. SR-FINRA-2018-032]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of a Proposed Rule Change To Amend 
FINRA Rule 6710 To Modify the Dissemination Protocols for Agency Debt 
Securities

August 17, 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 August 16, 2018, the Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III 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 
dissemination protocols with respect to Agency Debt Securities.
    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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    FINRA requires members to report to the Trade Reporting and 
Compliance Engine (``TRACE'') transactions in TRACE-Eligible 
Securities,\3\ including securities that meet the definition of 
``Agency Debt Security.'' \4\ FINRA disseminates transaction 
information on Agency Debt Securities and displays either the actual 
size (volume) of the transaction or a capped amount, depending on 
whether the security is rated as Investment Grade,\5\ Non-Investment 
Grade,\6\ or is unrated. For transactions in Agency Debt Securities 
that are either Investment Grade or unrated, FINRA disseminates the 
actual size of the trade for transactions less than or equal to $5 
million in par value traded, thus providing actual transaction size up 
to $5 million, and disseminates ``$5MM+'' for trades exceeding $5 
million in par value traded.\7\ For transactions in Agency Debt 
Securities that are Non-Investment Grade, FINRA disseminates the actual 
size of the trade for transactions less than or equal to $1 million in 
par value, and disseminates ``1MM+'' for trades exceeding $1 million in 
par value traded.\8\
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    \3\ Rule 6710 generally defines a ``TRACE-Eligible Security'' 
as: A debt security that is United States (``U.S.'') dollar-
denominated and is: (1) Issued by a U.S. or foreign private issuer, 
and, if a ``restricted security'' as defined in Securities Act Rule 
144(a)(3), sold pursuant to Securities Act Rule 144A; (2) issued or 
guaranteed by an Agency as defined in Rule 6710(k) or a Government-
Sponsored Enterprise as defined in Rule 6710(n); or (3) a U.S. 
Treasury Security as defined in Rule 6710(p). ``TRACE-Eligible 
Security'' does not include a debt security that is issued by a 
foreign sovereign or a Money Market Instrument as defined in Rule 
6710(o).
    \4\ ``Agency Debt Security'' generally includes a debt security 
(i) issued or guaranteed by an Agency as defined in Rule 6710(k); 
(ii) issued or guaranteed by a Government-Sponsored Enterprise 
(``GSE'') as defined in Rule 6710(n); or (iii) issued by a trust or 
other entity that was established or sponsored by a GSE for the 
purpose of issuing debt securities, where such enterprise provides 
collateral to the trust or other entity or retains a material net 
economic interest in the reference tranches associated with the 
securities issued by the trust or other entity. Rule 6710(n) 
provides that ``Government-Sponsored Enterprise'' has the same 
meaning as defined in 2 U.S.C. 622(8).
    \5\ Rule 6710 provides that ``Investment Grade'' means ``a 
TRACE-Eligible Security that, if rated by only one nationally 
recognized statistical rating organization (``NRSRO''), is rated in 
one of the four highest generic rating categories; or if rated by 
more than one NRSRO, is rated in one of the four highest generic 
rating categories by all or a majority of such NRSROs; provided that 
if the NRSROs assign ratings that are evenly divided between (i) the 
four highest generic ratings and (ii) ratings lower than the four 
highest generic ratings, FINRA will classify the TRACE-Eligible 
Security as Non-Investment Grade for purposes of TRACE. If a TRACE-
Eligible Security is unrated, for purposes of TRACE, FINRA may 
classify the TRACE-Eligible Security as an Investment Grade 
security. FINRA will classify an unrated Agency Debt Security as 
defined in [Rule 6710(l)] as an Investment Grade security for 
purposes of the dissemination of transaction volume.'' See FINRA 
Rule 6710(h).
    \6\ Rule 6710 provides that ``Non-Investment Grade'' means ``a 
TRACE-Eligible Security that, if rated by only one NRSRO, is rated 
lower than one of the four highest generic rating categories; or if 
rated by more than one NRSRO, is rated lower than one of the four 
highest generic rating categories by all or a majority of such 
NRSROs. Except as provided in paragraph (h), if a TRACE-Eligible 
Security is unrated, FINRA may classify the TRACE-Eligible Security 
as a Non-Investment Grade security.'' See FINRA Rule 6710(i).
    \7\ See Securities Exchange Act Release No. 59733 (April 8, 
2009), 74 FR 17709 (April 16, 2009) (Notice of Filing of File No. 
SR-FINRA-2009-010).
    \8\ See supra note 7.
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    FINRA is proposing to apply a $5 million dissemination cap to all 
Agency Debt Securities, regardless of the rating assigned to the 
security. When adopting the original dissemination caps for Agency Debt 
Securities, FINRA believed that unrated Agency Debt Securities should 
default to the $5 million dissemination cap due to factors such as that 
they trade more consistently with Investment Grade securities that are 
subject to the $5 million dissemination cap. While Non-Investment Grade 
Agency Debt Securities have been disseminated with the $1 million 
dissemination cap, FINRA is not aware of the existence of any Non-
Investment Grade Agency Debt Securities other than credit risk transfer 
securities (``CRTs''), a type of Agency Debt Security issued by Fannie 
Mae (``Fannie'') and Freddie Mac (``Freddie''). Based on experience 
gained with CRTs and in consultation with Fannie and Freddie, FINRA

[[Page 42733]]

believes that it is appropriate to disseminate Non-Investment Grade 
CRTs with the $5 million dissemination cap. Because CRTs are the only 
type of Agency Debt Security rated less than Investment Grade, FINRA is 
proposing to simplify the dissemination structure by applying the $5 
million dissemination cap to all Agency Debt Securities irrespective of 
rating.
    FINRA notes that transactions in the vast majority of securities 
issued by Fannie and Freddie are disseminated with the actual size of 
the trade (uncapped), and, of those that are capped, the vast majority 
are disseminated with the $5 million cap: 94.4% of all transactions in 
direct obligations issued by Fannie and Freddie, including CRTs, 
currently are disseminated with the actual size of the trade. Of the 
remaining 5.6% that are capped (both at $1 million and $5 million), 95% 
currently are disseminated with the $5 million cap. Thus, FINRA 
believes that the proposed modification to apply the $5 million 
dissemination cap to all Agency Debt Securities uniformly will have a 
minimal impact, while simplifying the dissemination structure and 
providing additional transparency in Agency Debt Securities.
    If the Commission approves the proposed rule change, FINRA will 
announce the effective date of the proposed rule change in a Regulatory 
Notice to be published no later than 60 days following Commission 
approval. The effective date will be no later than 120 days following 
publication of the Regulatory Notice announcing Commission approval.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\9\ 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 benefit investors in 
that it would simplify the dissemination structure by creating a 
uniform dissemination protocol for all Agency Debt Securities, and 
would increase transparency for transactions in Non-Investment Grade 
Agency Debt Securities over $1 million. Additionally, the proposed rule 
change would have a minimal impact as the vast majority of capped 
transactions in Agency Debt Securities are already disseminated with 
the $5 million cap.
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    \9\ 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.
Economic Impact Assessment
    FINRA has undertaken an economic impact assessment, as set forth 
below, to analyze the potential economic impacts, including anticipated 
costs, benefits, and distributional and competitive effects, relative 
to the current baseline, and the alternatives FINRA considered in 
assessing how to best meet its regulatory objectives.
Economic Baseline
    As of December 31, 2017, there were 35 Investment Grade, 9 Non-
Investment Grade, and 172 unrated CRT classes (based on TRACE data). 
FINRA notes that certain CRTs are currently the only type of Agency 
Debt Security with a Non-Investment Grade rating. The outstanding 
amount of these issues are $770 million, $350 million and $2,877 
million for Investment Grade, Non-Investment Grade and unrated issues 
respectively. Table 1 presents the number of trades reported to TRACE 
and nominal trade value of CRT CUSIPs by rating for the calendar year 
beginning January 1, 2017.\10\
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    \10\ Each CRT deal utilizes a senior/subordinate structure in 
which credit protection is provided to the senior class by the 
subordinate classes in priority order. The senior class and 
subordinate tranches, while part of the same CRT issuance, are 
separate securities and each are assigned a unique CUSIP. In 
addition, each CRT class can be further tranched to provide 
additional optionality for investors' needs. As such, each CRT class 
is associated with multiple unique CUSIPs. We note that only the 
CUSIP associated with the senior tranche contributes to the amount 
of debt outstanding for a given CRT class.

                                                     Table 1
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                                                              Trades                        Trade value
                                                 ---------------------------------------------------------------
                      Grade                                                           Dollars
                                                      Number          Percent       (millions)        Percent
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Non-Investment..................................           1,950            13.6         8,800.9            13.6
Investment......................................           1,988            13.8         8,880.1            13.7
Unrated.........................................          10,423            72.6        47,077.7            72.7
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    Under the existing dissemination protocols, Agency Debt Securities 
that are unrated or rated Investment Grade are disseminated with a $5 
million dissemination cap, where trades over $5 million are displayed 
as ``5MM+.'' Non-Investment Grade Agency Debt Securities are 
disseminated with a $1 million dissemination cap, where trades over $1 
million are displayed as ``1MM+.'' Table 2 presents the number and 
percent of trades and nominal trade value disseminated with actual 
trade sizes or displayed with ``5MM+'' for Investment Grade or unrated 
CRT CUSIPs for calendar year 2017. These statistics include all trades 
reported to TRACE during the period, and thus would include two trade 
reports for interdealer trades and one trade report for dealer to 
customer trades (two-sided trade data).\11\
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    \11\ For calendar year 2017, there were 11,341 trades reported 
to TRACE, that include only one trade report for interdealer trades 
and one trade report for dealer to customer trades (one-sided trade 
data), in Investment Grade and unrated CRT CUSIPs, of which 20.8% 
were displayed as ``5MM+.''

[[Page 42734]]



                                                     Table 2
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                                                                              Trades
                                                 ---------------------------------------------------------------
                      Grade                                    <=$5M                           >$5M
                                                 ---------------------------------------------------------------
                                                      Number          Percent         Number          Percent
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Investment......................................           1,524            76.7             464            23.3
Unrated.........................................           8,435            80.9           1,988            19.1
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                                                                            Trade value
                                                 ---------------------------------------------------------------
                                                               <=$5M                           >$5M
                                                 ---------------------------------------------------------------
                                                      Dollars                         Dollars
                                                    (millions)        Percent       (millions)        Percent
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Investment......................................         2,591.5            29.2         6,288.6            28.2
Unrated.........................................        22,390.9            47.6        24,686.7            46.6
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    Table 3 presents the number and percent of trades and nominal trade 
value disseminated with actual trade sizes or displayed with ``1MM+'' 
for Non-Investment Grade CRT CUSIPs for calendar year 2017.\12\
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    \12\ For calendar year 2017, there were 1,712 trades reported to 
TRACE, that include only one trade report for interdealer trades and 
one trade report for dealer to customer trades (one-sided trade 
data), in Non-Investment Grade CUSIPs, of which 88.3% were displayed 
as ``1MM+.''

                                                     Table 3
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                                                                              Trades
                                                 ---------------------------------------------------------------
                      Grade                                    <=$1M                           >$1M
                                                 ---------------------------------------------------------------
                                                      Number          Percent         Number          Percent
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Non-Investment..................................             222            11.4           1,728            88.6
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                                                                            Trade value
                                                 ---------------------------------------------------------------
                                                               <=$1M                           >$1M
                                                 ---------------------------------------------------------------
                                                      Dollars                         Dollars
                                                    (millions)        Percent       (millions)        Percent
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Non-Investment..................................           139.7             1.6         8,661.2            98.4
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Economic Impact
    Based on transactions during calendar year 2017, this proposal 
would have led to dissemination of additional trade size information 
for 1,112 trades in 82 CRT CUSIPs than disseminated under the current 
protocols. This increased transparency could have impacts on investors, 
market makers and issuers. Markets participants, especially uninformed 
investors, generally anticipate that they benefit from greater price 
transparency because, in the presence of this information, they are 
more likely to gain more timely information about the current price of 
an asset. Knowing this, they may be more willing to commit capital.\13\
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    \13\ For instance, one study that examined corporate bond 
transactions in TRACE from January 2003 through January 2005 found 
that ``[c]osts are lower for bonds with transparent trade prices, 
and they drop when the TRACE system starts to publicly disseminate 
their prices. The results suggest that public traders benefit 
significantly from price transparency.'' For additional details, see 
Amy K. Edwards, Lawrence E. Harris, and Michael S. Piwowar, 
Corporate Bond Market Transaction Costs and Transparency, Journal of 
Finance 62, No. 3, 1421-1451 (2007).
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    At the same time, FINRA understands that some firms believe that 
transparency about the size of larger trades impedes their ability to 
commit capital and hence may have a negative impact on liquidity. 
Increasing transparency may increase the amount of information 
available to uninformed investors on transaction size and price. This 
may reduce the informed investors' relative advantage by decreasing the 
bid-ask spread earned by an informed investor or increasing the bid-ask 
spread paid by an informed investor. Furthermore, firms may be less 
willing to trade as principal and hold these securities in inventory, 
leading to wider spreads or less depth, if they fear that investors may 
identify the firms' inventory position.\14\ In addition, existing 
institutional investors that prefer trading in large sizes or at the 
current level of transparency in Non-Investment Grade CRTs may 
substitute trading in other asset classes, if the investors fear others 
may identify their holdings. The consensus of the academic literature 
studying the impact of transparency in a variety of settings in U.S. 
fixed income markets is that greater transparency is associated with 
lower costs to end customers and positive to neutral impacts on market 
liquidity.\15\ In addition, FINRA has discussed the proposed rule 
change with Fannie and Freddie, both of which support the application 
of the $5 million dissemination cap to all CRTs.
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    \14\ See supra note 13.
    \15\ See supra note 13.
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Alternatives
    No alternatives are under consideration.

[[Page 42735]]

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 45 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 or disapprove such proposed rule change, or
    (B) 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 email to [email protected]. Please include 
File Number SR-FINRA-2018-032 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-2018-032. 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-2018-032, and should be submitted 
on or before September 13, 2018.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-18167 Filed 8-22-18; 8:45 am]
 BILLING CODE 8011-01-P