[Federal Register Volume 85, Number 243 (Thursday, December 17, 2020)]
[Notices]
[Pages 82002-82005]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-27727]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-90646; File No. SR-FINRA-2020-034]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Approving Proposed Rule Change To Modify TRACE 
Dissemination Protocols for Agency Pass-Through MBS or SBA-Backed ABS 
Traded in Specified Pool Transactions

December 11, 2020.

I. Introduction

    On October 15, 2020, 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

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(``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to 
modify the Trade Reporting and Compliance Engine (``TRACE'') 
dissemination protocols for Agency Pass-Through Mortgage-Backed 
Securities or Small Business Administration (``SBA'')-Backed Asset-
Backed Securities traded in Specified Pool Transactions. The proposed 
rule change was published for comment in the Federal Register on 
October 29, 2020.\3\ The Commission received one comment letter in 
support of the proposed rule change.\4\ 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. 90264 (October 23, 
2020), 85 FR 68607 (October 29, 2020) (``Notice'').
    \4\ See Letter from Wendell J. Chambliss, Vice President and 
Deputy General Counsel, Mission, Legislative and Regulatory Affairs, 
Legal Division, Freddie Mac, to J. Matthew DeLesDernier, Assistant 
Security, Commission, dated November 18, 2020 (``Freddie Mac 
Letter'').
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II. Description of the Proposal

    FINRA commenced public dissemination of Specified Pool Transactions 
in 2013 after the Commission approved FINRA's proposal to do so in 
2012.\5\ FINRA's rules define a ``Specified Pool Transaction'' as a 
transaction in an Agency Pass-Through Mortgage-Backed Security 
(``Agency Pass-Through MBS'') \6\ or an SBA-Backed Asset-Backed 
Security (``SBA-Backed ABS'') \7\ requiring the delivery at settlement 
of a pool or pools that is identified by a unique pool identification 
number at the Time of Execution.\8\ As described in the FINRA-2012-042 
Approval, when disseminating information of a Specified Pool 
Transaction, FINRA does not identify the specific bond transacted by 
disclosing its CUSIP code.\9\ Instead, FINRA disseminates more general 
information about the bond and the pool underlying the bond, including 
approximations of information widely used to project cash flows and 
prepayment rates of the underlying mortgages, such as loan-to-value 
(``LTV'') information.\10\
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    \5\ See Securities Exchange Act Release No. 68084 (October 23, 
2012), 77 FR 65436 (October 26, 2012) (``FINRA-2012-042 Approval''). 
This filing provided for, among other things, public dissemination 
of transactions in Agency Pass-Through Mortgage-Backed Securities 
traded in specified pools and transactions in SBA-Backed Asset-
Backed Securities traded in specified pools or to be announced, and 
reduced the reporting timeframe for such transactions.
    \6\ FINRA Rule 6710(v) defines an ``Agency Pass-Through MBS'' as 
``a type of Securitized Product issued in conformity with a program 
of an Agency as defined in [FINRA Rule 6710(k)] or a Government-
Sponsored Enterprise (`GSE') as defined in [FINRA Rule 6710(n)], for 
which the timely payment of principal and interest is guaranteed by 
the Agency or GSE, representing ownership interest in a pool (or 
pools) of mortgage loans structured to `pass through' the principal 
and interest payments to the holders of the security on a pro rata 
basis.''
    \7\ FINRA Rule 6710(bb) defines an ``SBA-Backed ABS'' as ``a 
Securitized Product issued in conformity with a program of the SBA, 
for which the timely payment of principal and interest is guaranteed 
by the SBA, representing ownership interest in a pool (or pools) of 
loans or debentures and structured to `pass through' the principal 
and interest payments made by the borrowers in such loans or 
debentures to the holders of the security on a pro rata basis.''
    \8\ See FINRA Rule 6710(x).
    \9\ See FINRA-2012-042 Approval, 77 FR at 65437.
    \10\ See id. FINRA stated that, in developing the approach to 
public dissemination described in the FINRA-2012-042 Approval, it 
considered industry feedback, including concerns that dissemination 
of the CUSIP code in a Specified Pool Transaction might result in 
information leakage regarding trading strategies, positions, and 
other sensitive information, which could negatively impact trading 
interest and liquidity in the market for these securities. See 
Notice, 85 FR at 68607.
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    Under its public dissemination protocol for Specified Pool 
Transactions, FINRA groups the pools underlying the transacted bonds 
into cohorts, using data elements that are integral to describing and 
valuing the bonds based on these pools, such as the LTV ratio. The 
cohort groupings are established using rounded or truncated figures for 
the underlying data elements, so that numeric values within each cohort 
can be understood within defined ranges. Each cohort is assigned a 
unique identification number--the Reference Data Identifier (``RDID''). 
After a member reports a Specified Pool Transaction to TRACE, FINRA 
disseminates the corresponding RDID in lieu of disseminating the 
transacted bond's CUSIP code. The underlying data elements that 
correspond to each RDID are made available to members through the TRACE 
system.\11\ FINRA rounds or truncates certain cohort groupings to 
reduce the risk that the specific bond traded and the market 
participant that engaged in the transaction might be identified.\12\
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    \11\ FINRA uses the following ten data elements to form the RDID 
cohorts that describe the security traded in a Specified Pool 
Transaction: (1) Issuer; (2) Product Type; (3) Amortization Type; 
(4) Coupon; (5) Original Maturity; (6) Weighted Average Coupon 
(``WAC''); (7) Weighted Average Maturity (``WAM''); (8) Weighted 
Average Loan Age (``WALA''); (9) Current Average Loan Size 
(``ALS''); and (10) Original LTV. For example, RDID #A1234 might 
represent: (1) Issuer = FNMA; (2) Product Type = Co-Op; (3) 
Amortization Type = ARM; (4) Coupon = 2.0; (5) Original Maturity = 
360; (6) WAC = 2.5; (7) WAM = 200; (8) WALA = 160; (9) ALS = 100; 
and (10) Original LTV = 50. See id., 85 FR at 68607-08.
    \12\ Currently, the rounding and truncation conventions that are 
used for Specified Pool Transactions are the following: (1) Coupon--
Rounded down to the nearest quarter percentage point--e.g., an 
interest rate of 5.12% is rounded to 5%; (2) Original Maturity--
Rounded up to the nearest 10--e.g., an original maturity of 358 
months is rounded to 360 months; (3) WAC--Truncated to a single 
decimal--e.g., a WAC of 7.13% is truncated to 7.1%; (4) WAM--Rounded 
down to the nearest 10--e.g., a WAM of 87 months is rounded to 80 
month; (5) WALA--Rounded up to the nearest 10--e.g., a WALA of 163 
months is rounded to 170 months; (6) ALS--Rounded down to the 
nearest 25--e.g., an ALS of 113 (i.e., $113,000 average loan size) 
is rounded to 100 (i.e., $100,000 average loan size); and (7) LTV--
Rounded down to the nearest 25--e.g., an original LTV of 72% is 
rounded to 50%. See id., 85 FR at 68608.
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    FINRA believes ``that the transaction information disseminated 
through TRACE should provide investors with sufficient information to 
assess the value and price of a security, which for Securitized 
Products, includes information necessary to make assumptions about cash 
flows and prepayment rates.'' \13\ The elements described above are 
intended to provide market participants with the information necessary 
to perform such an analysis.\14\
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    \13\ Id.
    \14\ See id.
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    FINRA stated that, since commencing public dissemination of 
Specified Pool Transactions, it has continued to evaluate the relevant 
market and the value of the information disseminated to market 
participants.\15\ As a result of these efforts, which included 
discussions with market participants, FINRA is now proposing changes to 
the LTV rounding convention used in the public dissemination of 
Specified Pool Transactions.\16\ Specifically, FINRA proposes to create 
more granular cohorts for LTV to increase the precision of the 
information regarding the LTV of the pool traded. In place of the 
current LTV rounding convention, which is rounded down to the nearest 
25%, FINRA will organize the cohorts such that each cohort represents 
the LTV as the upper limit of the applicable category, as follows:
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    \15\ See id.
    \16\ FINRA has not proposed changes to the rounding or 
truncation conventions utilized for the other data elements.
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    1. For an LTV up to 20%, the cohorts would represent the LTV as 20% 
(such that an original LTV of 12% would be shown as 20%);
    2. for an LTV between 21% and 40%, the cohorts would represent the 
LTV as 40% (such that an original LTV of 21% would be shown as 40%);
    3. for an LTV between 41% and 60%, the cohorts would represent the 
LTV as 60% (such that an original LTV of 60% would be shown as 60%);
    4. for an LTV between 61% and 80%, the cohorts would represent the 
LTV as 80% (such that an original LTV of 70% would be shown as 80%);
    5. for an LTV between 81% and 93%, the cohorts would represent the 
LTV as

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93% (such that an original LTV of 90% would be shown as 93%);
    6. for an LTV between 94% and 100%, the cohorts would represent the 
LTV as 100% (such that an original LTV of 100% would be shown as 100%);
    7. for an LTV between 101% and 120%, the cohorts would represent 
the LTV as 120% (such that an original LTV of 105% would be shown as 
120%); and
    8. for an LTV of 121% or greater, the cohorts would represent the 
LTV as 121+ (such that an original LTV of 125% would be shown as 121+).
    Thus, as a result of the proposed rule change, FINRA will 
disseminate the LTV ratio cohorts at 20%, 40%, 60%, 80%, 93%, 100%, 
120%, and 120%+. FINRA stated that, in developing the new LTV approach, 
it sought to balance the goal of making more detailed information 
available to the market against the potential risk of identifying the 
particular security being traded and the market participant that 
engaged in the transaction.\17\ FINRA believes that the new LTV 
rounding convention is a ``measured change'' that will provide more 
granular and meaningful information on the LTV of the Specified Pool 
Transaction, which should increase the value of the disseminated 
information to market participants.\18\ FINRA also anticipates that the 
new cohorts will improve how disseminated TRACE data reflects the role 
of LTV ratios in MBS valuations.\19\
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    \17\ See Notice, 85 FR at 68608.
    \18\ See id., 85 FR at 68609.
    \19\ See id., 85 FR at 68608. FINRA stated, for example, that 
separating pools with LTV ratios at or below 80% from those with LTV 
ratios of 81% or higher delineates the pools with mortgages that 
might require mortgage insurance from those that might not require 
mortgage insurance. See id. Similarly, FINRA believes that the 
cohorts for LTV ratios of 81% or more are more consistent with the 
way mortgage originators view loan characteristics and the way that 
the market determines pricing. 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 270 days following publication of that Regulatory 
Notice.\20\
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    \20\ See id., 85 FR at 68609.
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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.\21\ In particular, the Commission finds that the proposed 
rule change is consistent with Section 15A(b)(6) of the Act,\22\ 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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    \21\ 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).
    \22\ 15 U.S.C. 78o-3(b)(6).
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    When it issued the FINRA-2012-042 Approval, the Commission found 
that the protocols for publicly disseminating Specified Pool 
Transactions proposed by FINRA--specifically, eschewing dissemination 
of CUSIP codes and instead providing more generic information about the 
bond transacted and the underlying pool--were consistent with the 
Act.\23\ The Commission stated that the dissemination protocols for the 
specified data elements ``strike an appropriate balance between 
providing meaningful post-trade transparency and, at the same time, 
reducing the potential for `reverse engineering' of transaction data 
that could permit identification of a market participant and/or its 
trading strategy.'' \24\ The Commission also noted that FINRA could in 
the future determine to propose dissemination of additional data 
elements that it believes would improve transparency for Specified Pool 
Transactions.\25\
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    \23\ See FINRA-2012-042 Approval, 77 FR at 65437-38.
    \24\ Id., 77 FR at 65437.
    \25\ See id., 77 FR at 65438.
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    FINRA is now proposing to revise the dissemination protocol for 
Specified Pool Transactions by increasing the precision of the LTV 
cohort groupings. In place of the current rounding convention used for 
LTV (i.e., rounded down to the nearest 25%), FINRA will utilize eight 
cohorts, with each cohort representing the LTV as the upper limit of 
the applicable grouping. FINRA believes that the tighter bands around 
LTVs will benefit market participants by increasing the value of price 
information as it relates to LTV.\26\
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    \26\ See Notice, 85 FR at 68610.
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    The Commission finds that the current proposal is consistent with 
the Act because it represents a measured adjustment to the overall 
public dissemination protocols for Specialized Pool Transactions that 
the Commission previously found consistent with the Act in the FINRA-
2012-042 Approval. Establishing additional cohorts utilizing the 
proposed LTV thresholds appears reasonably designed to provide market 
participants and other market observers with more useful information 
about the transacted bonds while minimizing the potential for adverse 
market impact. The Commission notes that it received no comments 
suggesting that the proposal would have adverse market impact; the one 
comment letter received on the proposal was supportive.\27\ Moreover, 
FINRA has represented that it will continue to evaluate the market for 
Specified Pool Transactions and evaluate the conventions that it uses 
for disseminating information on these transactions.\28\ The Commission 
also notes that, under this proposal, FINRA members will not incur any 
administrative burdens to report transactions differently; the creation 
and distribution of the new LTV cohorts will be performed by FINRA 
through the TRACE system.
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    \27\ See Freddie Mac Letter at 1 (stating that ``[a]dopting the 
proposed approach of segmenting LTV ratios into eight categories 
would align TRACE data with pooling practices and would enhance 
market transparency while maintaining sufficient anonymity'').
    \28\ See Notice, 85 FR at 68610.
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    Pursuant to Section 19(b)(5) of the Act,\29\ 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.\30\ Pursuant to 
Section 19(b)(6) of the Act,\31\ 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, 
the proposed rule change appears reasonably designed to improve the 
value to market participants and other market observers of the LTV 
information disseminated for Specified Pool Transactions.
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    \29\ 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'').
    \30\ Email from Treasury Department staff to Michael Gaw, 
Assistant Director, Division of Trading and Markets, Commission 
(November 30, 2020).
    \31\ 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,\32\ that the proposed rule change (SR-FINRA-2020-034) is approved.
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    \32\ 15 U.S.C. 78s(b)(2).


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    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\33\
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    \33\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-27727 Filed 12-16-20; 8:45 am]
BILLING CODE 8011-01-P