[Federal Register Volume 78, Number 48 (Tuesday, March 12, 2013)]
[Notices]
[Pages 15790-15791]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-05570]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-69037; File No. SR-FINRA-2012-052]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Order Granting Approval of Proposed Rule Change To
Require Members To Report to TRACE the ``Factor'' in Limited Instances
Involving Asset-Backed Security Transactions
March 5, 2013.
I. Introduction
On November 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 to require FINRA members to report to the Trade
Reporting and Compliance Engine (``TRACE'') the Factor used to
determine the size (volume) of each transaction in an Asset-Backed
Security ``(ABS'') (except ABS traded To Be Announced (``TBA'')), in
the limited instances when members effect such transactions as agent
and charge a commission.\3\ The proposed rule change was published for
comment in the Federal Register on December 18, 2012.\4\ The Commission
received one comment on the proposal and a response to the comment from
FINRA.\5\ On January 30, 2013, the Commission extended to March 18,
2013 the time period in which to approve the proposed rule change,
disapprove the proposed rule change, or institute proceedings to
determine whether the proposed rule change should be disapproved.\6\
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,'' ``To Be Announced,''
and ``Factor'' are defined in FINRA Rules 6710(m), (u), and (w),
respectively.
\4\ See Securities Exchange Act Release No. 68414 (December 12,
2012), 77 FR 74896 (``Notice'').
\5\ See comment from Mark Sokolow, dated December 18, 2012
(``Sokolow Comment''); see also response letter from Kathryn Moore,
Assistant General Counsel, FINRA, to Elizabeth M. Murphy, Secretary,
Commission, dated January 11, 2013 (``FINRA Letter'').
\6\ See Securities Exchange Act Release No. 68768 (January 30,
2013), 78 FR 8216 (February 5, 2013).
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II. Description of the Proposal
FINRA utilizes TRACE to collect from its members and publicly
disseminate information on secondary over-the-counter transactions in
corporate debt securities and Agency Debt Securities \7\ and certain
primary market transactions. FINRA also utilizes TRACE to collect
information on ABS transactions but, until recently, FINRA's rules did
not provide for the dissemination of such information publicly.\8\ Last
year, however, FINRA amended its rules to provide for public
dissemination of information regarding, among other things, certain ABS
traded in Specified Pool Transactions.\9\ FINRA has
[[Page 15791]]
proposed the instant rule change to prepare for such dissemination,
which has not yet become effective, as well as to prepare for any
future dissemination of additional ABS market segments.\10\
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\7\ The term ``Agency Debt Security'' is defined in FINRA Rule
6710(l).
\8\ See Securities Exchange Act Release No. 61566 (February 22,
2010), 75 FR 9262 (March 1, 2010) (approving SR-FINRA-2009-065).
\9\ See Securities Exchange Act Release No. 68084 (October 23,
2012), 77 FR 65436 (October 26, 2012) (approving SR-FINRA-2012-042).
The term ``Specified Pool Transaction'' is defined in FINRA Rule
6710(x).
\10\ See Notice, 77 FR at 74896.
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Specifically, FINRA has proposed to amend FINRA Rule 6730(d)(2) to
require a member to report to TRACE the Factor in the limited instances
when the member effects a transaction in an ABS (except a TBA
transaction) as agent and charges a commission.\11\ Under FINRA's
current transaction reporting rules, for a transaction in an ABS that
is backed by mortgages or other assets that amortize over the life of
the security, instead of reporting the size of the transaction by
reporting the total par or principal value, a member must report two
items from which the size is calculable: (1) The original face value of
the ABS, which is the size at issuance; and (2) the Factor, but only if
the Factor used to execute the transaction is not the most current
Factor that is publicly available at the Time of Execution \12\ (a
``non-conforming Factor'').\13\ As a result of the proposed rule
change, when an ABS transaction (except for a TBA transaction) is
executed in an agency capacity with a commission charged, the FINRA
member would be required to report the Factor regardless of whether it
is the most current Factor publicly available at the Time of Execution
or is a non-conforming Factor.\14\ In addition, FINRA has proposed
supplementary material to make clear that the requirement to report the
Factor will apply to every ABS transaction (except for a TBA
transaction) executed in an agency capacity with a commission charged,
including the small number of transactions in non-amortizing ABS.\15\
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\11\ See proposed Rule 6730(d)(2)(B)(iv); see also Notice, 77 FR
at 74896. FINRA stated that only a small number of ABS transactions
are executed on an agency basis with a commission charged; ABS are
traded mostly on a principal basis. See id.
\12\ The term ``Time of Execution'' is defined in FINRA Rule
6710(d).
\13\ See FINRA Rules 6730(c)(2) and (d)(2); see also Notice, 77
FR at 74896. When a member uses the most current Factor that is
publicly available at the Time of Execution of the transaction, the
member currently is not required to report the Factor. Instead, the
TRACE system incorporates the most current Factor publicly available
at the Time of Execution. FINRA receives such information from
commercial data vendors. See Notice, 77 FR at 74896 n.7.
\14\ See proposed Rule 6730(d)(2)(B)(iv); see also Notice, 77 FR
at 74897.
\15\ See proposed supplementary material .01 to Rule 6730(d)(2);
see also Notice, 77 FR at 74897. For transactions in non-amortizing
ABS, a member would be required to report 1.0 as the Factor. See id.
at 74897 n.11.
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FINRA has also proposed technical amendments to reorganize the
current size reporting requirements in FINRA Rule 6730(d)(2) and to
make them consistent with proposed Rule 6730(d)(2)(B)(iv).\16\
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\16\ See proposed Rules 6730(d)(2)(A)-(2)(B)(iv).
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FINRA stated that it 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, and that the effective date
will be no later than 270 days following publication of the Regulatory
Notice.\17\
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\17\ See Notice, 77 FR at 74897.
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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.\18\ In particular, the Commission finds that the proposed
rule change is consistent with Section 15A(b)(6) of the Act,\19\ 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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\18\ 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).
\19\ 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.\20\ FINRA believes that the
proposed rule change would promote price transparency provided by TRACE
for ABS transactions executed in an agency capacity with a commission
charged.\21\ When an ABS transaction is executed in an agency capacity
with a commission charged, the TRACE system must take the Factor, as
well as other information, into account when calculating the
disseminated price of the transaction.\22\ Currently, all components of
the formula that would be used to calculate a disseminated price in an
agency ABS transaction, except the Factor, are reported by a member
effecting the transaction.\23\ FINRA represented that requiring that
the Factor also be reported would ensure the accuracy of the
disseminated price for an agency ABS transaction because the TRACE
system would rely exclusively upon information reported by the members
that are parties to such a transaction in calculating the transaction's
disseminated price.\24\ The Commission believes that the proposal is
reasonably designed to promote the accuracy of the disseminated price
data for agency ABS transactions and to further the goal of increasing
price transparency in the ABS market.
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\20\ See Securities Exchange Act Release No. 43873 (January 23,
2001), 66 FR 8131, 8136 (January 29, 2001).
\21\ See Notice, 77 FR at 74897.
\22\ See id. at 74896-97.
\23\ See id. at 74897.
\24\ See id.
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The commenter suggested that the proposed rule change would add an
administrative burden to the industry.\25\ FINRA responded that the
proposed rule change is necessary and appropriate, and noted that it
would be narrowly tailored to apply to the very limited number of ABS
transactions where a member trades in an agency capacity and charges a
commission.\26\ FINRA also noted that the accuracy of the price
transparency provided by TRACE assists all market participants in
determining the quality of their executions and firms in complying with
their regulatory obligations.\27\ The Commission believes that the
commenter has not raised any issue that would preclude approval of the
proposal.
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\25\ See Sokolow Comment.
\26\ See FINRA Letter at 2.
\27\ See id.
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IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\28\ that the proposed rule change (SR-FINRA-2012-052) be, and it
hereby is, approved.
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\28\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\29\
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\29\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-05570 Filed 3-11-13; 8:45 am]
BILLING CODE 8011-01-P