[Federal Register Volume 77, Number 208 (Friday, October 26, 2012)]
[Notices]
[Pages 65436-65438]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-26399]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-68084; File No. SR-FINRA-2012-042]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Order Granting Approval of Proposed Rule Change
Relating to Post-Trade Transparency for Agency Pass-Through Mortgage-
Backed Securities Traded in Specified Pool Transactions and SBA-Backed
Asset-Backed Securities Transactions
October 23, 2012.
I. Introduction
On August 29, 2012, 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 relating to post-trade transparency for Agency
Pass-Through Mortgage-Backed Securities (``MBS'') traded in Specified
Pool Transactions (``SPT'' and, together with MBS, ``MBS SPT'') and
Asset-Backed Securities backed by loans guaranteed as to principal and
interest by the Small Business Administration (``SBA-Backed ABS'') and
traded either SPT (``SBA-Backed ABS SPT'') or To Be Announced (``TBA''
and, together with SBA-Backed ABS, ``SBA-Backed ABS TBA'').\3\ The
proposed rule change was published for comment in the Federal Register
on September 13, 2012.\4\ The Commission received no comments on the
proposal. 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\ The terms ``Asset-Backed Security,'' ``TBA,'' ``Agency Pass-
Through Mortgage-Backed Security'' and ``Specified Pool
Transaction'' are defined in FINRA Rules 6710(m), (u), (v) and (x),
respectively.
\4\ See Securities Exchange Act Release No. 67798 (September 7,
2012), 77 FR 56686 (``Notice'').
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II. Description of the Proposal
FINRA utilizes the Trade Reporting and Compliance Engine
(``TRACE'') to collect from its members and publicly disseminate
information on secondary over-the-counter transactions in corporate
debt securities and Agency Debt Securities and certain primary market
transactions. FINRA also utilizes TRACE to collect information on
transactions in Asset-Backed Securities but, until recently, FINRA did
not disseminate such information publicly.\5\ Earlier this year,
however, FINRA amended its rules to reduce the reporting timeframe for
and to provide for public dissemination of information regarding
transactions in Agency Pass-Through Mortgage-Backed Securities traded
TBA (``MBS TBA''), a type of Asset-Backed Security.\6\ FINRA has now
proposed to reduce the reporting timeframe for and to provide for
public dissemination of information regarding transactions in
additional types of Asset-Backed Securities, namely, MBS SPT and SBA-
Backed ABS transactions, and to make certain other changes.
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\5\ See Securities Exchange Act Release No. 61566 (February 22,
2010), 75 FR 9262 (March 1, 2010) (approving SR-FINRA-2009-065).
\6\ See Securities Exchange Act Release No. 66829 (April 18,
2012), 77 FR 24748 (April 25, 2012) (approving SR-FINRA-2012-020)
(``FINRA-2012-020 Approval'').
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Reduction of Reporting Period
FINRA has proposed to amend its Rule 6730 to reduce the period for
reporting MBS SPT and SBA-Backed ABS transactions to TRACE. The
reduction would occur in two stages. First, for a pilot program of
approximately 180 days, FINRA will reduce the reporting period from no
later than the close of the TRACE system on the date of execution to no
later than two hours from the Time of Execution.\7\ Second, after
approximately 180 days, the pilot program will expire and the reporting
period will be reduced from no later than two hours from the
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Time of Execution to no later than one hour from the Time of
Execution.\8\
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\7\ However, there are exceptions for transactions that are
executed within two hours of the close of the TRACE system and for
transactions executed when TRACE is closed.
\8\ See supra note 7.
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Dissemination of MBS SPT and SBA Backed ABS Transaction Information
Recently, FINRA Rule 6750(b)(4) was amended to provide for
dissemination of information on MBS TBA transactions immediately upon
receipt of the transaction report.\9\ FINRA's current proposal would
amend Rule 6750(b)(4) so that it also provides for dissemination of
information on MBS SPT and SBA Backed ABS transactions immediately upon
receipt of the transaction report. Specifically, FINRA has proposed to
amend Rule 6750(b)(4) to provide that FINRA will not disseminate
information on a transaction in an Asset-Backed Security, except in the
case of MBS transactions--which include MBS TBA as well as MBS SPT--or
SBA-Backed ABS transactions. As a result of this proposed change and
the reduced reporting periods that FINRA has proposed for MBS SPT and
SBA-Backed ABS transactions, information on such transactions will be
disseminated within two hours of the Time of Execution during the pilot
period and within one hour of the Time of Execution after the pilot
period expires.
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\9\ See FINRA 2012-020 Approval.
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Dissemination Protocols
The dissemination of information on MBS SPT and SBA Backed ABS
transactions will be subject to certain dissemination protocols, in
addition to the dissemination cap discussed below. SBA-Backed ABS TBA
transactions will be subject to the same protocols that apply to MBS
TBA transactions ``not for good delivery'' and standard data elements
will be displayed.\10\
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\10\ See FINRA 2012-020 Approval; see also Notice, 77 FR at
56688 and n.20.
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With respect to MBS SPT and SBA Backed ABS SPT transactions,
however, FINRA has proposed not to disseminate the specific CUSIP of
the security traded. Instead, FINRA has proposed to disseminate certain
publicly available data elements that correspond to the reported CUSIP
(without actually disseminating the CUSIP).\11\ Specifically, for each
MBS SPT transaction reported to TRACE, FINRA would disseminate in lieu
of a CUSIP, the product type, amortization type, issuing agency,
coupon, original maturity, weighted average coupon (``WAC''), weighted
average maturity (``WAM''), weighted average loan age (``WALA''),
average loan size (``ALS''), and original loan-to-value (``original
LTV''). For each SBA-Backed ABS SPT transaction reported to TRACE,
FINRA would disseminate in lieu of a CUSIP, the amortization type,
coupon, original maturity, WAC, WAM, and WALA, except that such values
would be based on SBA-backed pooled loans. Each numerical data element
(which would not include issuing agency, product type or amortization
type) will be expressed in ranges (i.e., the information will be
truncated and rounded up or down).
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\11\ See Notice, 77 FR at 56688-90.
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Dissemination Cap
FINRA has proposed a dissemination cap of $10 million for MBS SPT
and SBA Backed ABS transactions, which would prevent the display in
disseminated TRACE data of the actual size (volume) of MBS SPT and SBA
Backed ABS transactions with a par value over $10 million; rather, such
transactions will be displayed as ``10MM+.'' \12\
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\12\ See Notice, 77 FR at 56690. Certain dissemination caps are
already in place. There are $5 million and $1 million caps for
TRACE-Eligible Securities that are rated Investment Grade and Non-
Investment Grade, respectively, which pre-date the FINRA-2012-020
Approval. See id. There are also $25 million and $10 million
dissemination caps for transactions in MBS TBA, with the $25 million
cap applying to one subset of MBS TBA transactions and the $10
million cap applying to another subset. See FINRA-2012-020 Approval.
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Other Rule Changes
FINRA has proposed to amend FINRA Rule 6710 to add ``SBA-Backed
ABS'' as a defined term \13\ and to make conforming amendments to the
definitions of TBA, MBS, and SPT in Rules 6710(u), (v), and (x),
respectively, in order to incorporate SBA-Backed ABS.
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\13\ See proposed Rule 6710(bb).
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Regulatory Notice
FINRA has 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
be no later than 180 days following publication of that Regulatory
Notice.
III. Discussion and Commission Findings
After careful review, 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.
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\14\ In approving this proposed rule change, 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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In approving the original TRACE rules, the Commission stated that
price transparency plays a fundamental role in promoting fairness and
efficiency of U.S. capital markets.\16\ To further the goal of
increasing price transparency in the debt markets in general and the
MBS SPT and SBA-Backed ABS markets in particular, the Commission now
believes that it is reasonable and consistent with the Act for FINRA to
extend post-trade price transparency to transactions in MBS SPT and
SBA-Backed ABS in the manner set forth in the proposal.
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\16\ See Securities Exchange Act Release No. 43873 (January 23,
2001), 66 FR 8131, 8136 (January 29, 2001).
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As discussed above, FINRA recently amended its rules to provide for
public dissemination (and timelier reporting to TRACE) of information
on transactions in MBS TBA.\17\ The current proposal will continue this
initiative by making information on MBS SPT and SBA-Backed ABS
transactions publicly available for the first time. In doing so, the
proposal could encourage greater participation in the market, and
thereby contribute to deeper liquidity and increased competition. In
addition, the proposal appears reasonably designed to reduce the
potential for manipulation and promote just and equitable principles of
trade by allowing market participants to make more accurate assessments
of, and enhancing their ability to negotiate fair and competitive
prices in, the MBS SPT and SBA-Backed ABS markets.
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\17\ See FINRA-2012-020 Approval.
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Further, the Commission believes that the proposed dissemination
protocols for MBS SPT and SBA-Backed ABS SPT transactions, pursuant to
which specified data elements would be disseminated in lieu of actual
CUSIPs, 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.
According to FINRA, part of the valuation analysis of any Asset-Backed
Security includes a projection of its cash flow which, in turn, relies
on
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assumptions about prepayment rates.\18\ FINRA believes that the
specified data elements that will be disseminated for MBS SPT and SBA-
Backed ABS SPT transactions provide information that will allow market
participants to perform such an analysis.\19\ Moreover, FINRA has
represented that, in the future, it could determine to propose
dissemination of additional data elements that it believes would
improve transparency for such transactions.\20\
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\18\ See Notice, 77 FR at 56689.
\19\ See id.
\20\ See id.
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Additionally, the proposed reduction in reporting times for MBS SPT
and SBA-Backed ABS transactions is an important corollary to the
expansion of post-trade transparency for such transactions. Timelier
reporting should be more conducive to the dissemination of meaningful
(and close-to-real time) MBS SPT and SBA-Backed ABS transaction
information. The Commission believes that reducing the reporting period
as set forth in the proposal would result in important trade
information reaching the market more quickly, thus contributing to
enhanced price transparency for the MBS SPT and SBA-Backed ABS asset
classes.
Firms covered by these new reporting requirements for MBS SPT and
SBA-Backed ABS transactions could incur certain compliance burdens.
However, the Commission believes that any such burdens are justified by
the overall benefits of increasing transparency in the MBS SPT and SBA-
Backed ABS markets. The Commission notes that FINRA has proposed to
shorten the reporting period for MBS SPT and SBA-Backed ABS
transactions in stages. The Commission believes that this approach is
reasonably designed to ease the compliance burdens on those affected by
the proposal without significantly compromising FINRA's ability to
disseminate more timely transaction information for MBS SPT and SBA-
Backed ABS transactions.
The Commission recognizes that the $10 million dissemination cap
FINRA has proposed would, to a certain extent, limit the transparency
provided by FINRA's proposal.\21\ However, the Commission notes that
dissemination caps are already in place for transactions in other
TRACE-Eligible Securities.\22\ Moreover, public dissemination of
information on MBS SPT and SBA-Backed ABS transactions has heretofore
not existed in the MBS SPT and SBA-Backed ABS markets. The
dissemination cap will allow FINRA to implement post-trade price
transparency in those markets incrementally. Furthermore, FINRA has
represented that it will continue to review the volume of and liquidity
in those markets and, if warranted in the future, may propose that the
dissemination cap be set at a higher level in order to provide
additional transparency.\23\
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\21\ The Commission notes that, as calculated by FINRA, the $10
million dissemination cap would have limited the display of actual
size for approximately 80% of total volume traded in MBS SPT and
SBA-Backed ABS during the period May 16, 2011 through January 4,
2012. See Notice, 77 FR at 56690 and n.28.
\22\ See supra note 13.
\23\ See Notice, 77 FR at 56690.
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IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\24\ that the proposed rule change (SR-FINRA-2012-042) be, and it
hereby is, approved.
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\24\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\25\
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\25\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-26399 Filed 10-25-12; 8:45 am]
BILLING CODE 8011-01-P