[Federal Register Volume 83, Number 198 (Friday, October 12, 2018)]
[Notices]
[Pages 51722-51724]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-22203]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-84374; File No. SR-FINRA-2018-032]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Order Approving Proposed Rule Change to FINRA Rule
6710 To Modify the Dissemination Protocols for Agency Debt Securities
October 5, 2018.
I. Introduction
On August 16, 2018, the Financial Industry Regulatory Authority,
Inc. (``FINRA'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a
proposed rule change to modify the dissemination protocols for Agency
Debt Securities. The proposed rule change was published for comment in
the Federal Register on August 23, 2018.\3\ The Commission received no
comment letters on the proposed rule
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change. This order approves 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. 83882 (August 17,
2018), 83 FR 42732 (``Notice'').
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II. Description of the Proposal
Under FINRA's rules, each member firm is required to report to the
Trade Reporting and Compliance Engine (``TRACE'') transactions in
TRACE-Eligible Securities,\4\ including securities that meet the
definition of ``Agency Debt Security.'' \5\ Currently, for disseminated
reports of transactions in Agency Debt Securities, FINRA displays
either the entire notional size (volume) of the transaction or a capped
amount, depending on whether the security is Investment Grade,\6\ Non-
Investment Grade,\7\ or unrated.\8\ For Agency Debt Securities that are
Investment Grade or unrated, FINRA disseminates the entire notional
size for transactions of $5 million or less in par value traded, but a
capped size--``$5MM+''--for transactions exceeding $5 million in par
value traded; for transactions in Agency Debt Securities that are Non-
Investment Grade, FINRA disseminates the entire notional size for
transactions of $1 million or less in par value traded but a capped
size-- ``1MM+''--for transactions exceeding $1 million in par value
traded.\9\
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\4\ See FINRA Rule 6710(a) (defining ``TRACE-Eligible
Security'').
\5\ FINRA Rule 6710(l) generally defines ``Agency Debt
Security'' to mean a debt security (i) issued or guaranteed by an
Agency as defined in paragraph (k); (ii) issued or guaranteed by a
Government-Sponsored Enterprise as defined in paragraph (n); or
(iii) issued by a trust or other entity that was established or
sponsored by a Government-Sponsored Enterprise 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.
\6\ FINRA Rule 6710(h) defines ``Investment Grade'' to mean ``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.''
\7\ FINRA Rule 6710(i) defines ``Non-Investment Grade'' to mean
``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 [Rule 6710(h)], if a TRACE-Eligible
Security is unrated, FINRA may classify the TRACE-Eligible Security
as a Non-Investment Grade security.''
\8\ See Notice, 83 FR at 42732.
\9\ See Securities Exchange Act Release No. 59733 (April 8,
2009), 74 FR 17709, 17712 (April 16, 2009) (SR-FINRA-2009-010)
(Notice of Filing of Proposed Rule Change and Amendment No. 1
Thereto To Expand TRACE To Include Agency Debt Securities and
Primary Market Transactions).
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FINRA has proposed to apply the $5 million dissemination cap to
transactions in all Agency Debt Securities, regardless of whether the
security is Investment Grade, Non-Investment Grade, or unrated. FINRA
has stated that, when adopting the original dissemination caps for
Agency Debt Securities, it 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.\10\ FINRA has
further stated that it 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'').\11\ Based on FINRA's
experience with CRTs and in consultation with Fannie and Freddie, FINRA
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 cap to all Agency Debt Securities irrespective of rating.\12\
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\10\ See Notice, 83 FR at 42732.
\11\ See id.
\12\ See id. at 42733. In support of the proposal, FINRA
provided statistics about the trade count and notional volume traded
for Investment Grade, Non-Investment Grade, and unrated Agency Debt
Securities indicating that, for both metrics, transactions in Non-
Investment Grade Agency Debt Securities currently account for only a
small percentage of transactions in Agency Debt Securities. See id.
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FINRA has stated that it will announce the effective date of the
rule change in a Regulatory Notice to be published no later than 60
days following a Commission approval, and the effective date will be no
later than 120 days following publication of that Regulatory
Notice.\13\
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\13\ See id.
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III. Discussion and Commission Findings
After careful consideration, 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.\14\ In particular, the Commission finds that the proposed
rule change is consistent with Section 15A(b)(6) of the Act,\15\ 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. The Commission believes that the proposal is
reasonably designed to simplify the dissemination protocols for
transactions in Agency Debt Securities by instituting a uniform $5
million dissemination cap, regardless of whether the security is
Investment Grade, Non-Investment Grade, or unrated. The Commission
received no comments that objected to the proposed rule change and
notes that FINRA consulted with Fannie and Freddie before submitting
the proposal.
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\14\ 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).
\15\ 15 U.S.C. 78o-3(b)(6).
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Pursuant to Section 19(b)(5) of the Act,\16\ the Commission
consulted with and considered the views of the Treasury Department in
determining to approve the proposed rule change. The Treasury
Department indicated its support for the proposal.\17\ Pursuant to
Section 19(b)(6) of the Act,\18\ the Commission has considered the
sufficiency and appropriateness of existing laws and rules applicable
to government securities brokers, government securities dealers, and
their associated persons in approving the proposal. As discussed above,
by applying the $5 million dissemination cap to all Agency Debt
Securities regardless of rating, the rule change will simplify the
dissemination protocols for transactions in Agency Debt Securities.
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\16\ 15 U.S.C. 78s(b)(5) (providing that the Commission ``shall
consult with and consider the views of the Secretary of the Treasury
prior to approving a proposed rule filed by a registered securities
association that primarily concerns conduct related to transactions
in government securities, except where the Commission determines
that an emergency exists requiring expeditious or summary action and
publishes its reasons therefor'').
\17\ Telephone conversation with Treasury Department staff and
Brett Redfearn, Director, Division of Trading and Markets, et al.,
on October 2, 2018.
\18\ 15 U.S.C. 78s(b)(6).
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IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\19\ that the proposed rule change (SR-FINRA-2018-032) is approved.
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\19\ 15 U.S.C. 78s(b)(2).
\20\ 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.\20\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-22203 Filed 10-11-18; 8:45 am]
BILLING CODE 8011-01-P