[Federal Register Volume 80, Number 152 (Friday, August 7, 2015)]
[Notices]
[Pages 47546-47550]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-19381]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-75588; File No. SR-FINRA-2015-026]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing of a Proposed Rule Change to Require
an Indicator When a TRACE Report Does Not Reflect a Commission or Mark-
Up/Mark-Down
August 3, 2015.
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 July 20, 2015, 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 6730 (Transaction Reporting)
to require an indicator when the TRACE report does not reflect a
commission or mark-up/mark-down.
Below is the text of the proposed rule change. Proposed new
language is in italics.\3\
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\3\ The text of the proposed rule change reflects rule text
approved by the SEC in SR-FINRA-2014-050, but which does not become
effective until November 2, 2015. See Securities Exchange Act
Release No. 74482 (March 11, 2015); 80 FR 13940 (March 17, 2015)
(Order Approving File No. SR-FINRA-2014-050).
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* * * * *
6000. Quotation and Transaction Reporting Facilities
* * * * *
6700. Trade Reporting and Compliance Engine (Trace)
* * * * *
6730. Transaction Reporting
(a) through (b) No Change.
(c) Transaction Information To Be Reported.
[[Page 47547]]
Each TRACE trade report shall contain the following information:
(1) through (10) No Change.
(11) The commission (total dollar amount), if applicable;
(12) through (13) No Change.
(d) Procedures for Reporting Price, Capacity, Volume.
(1) Price.
For principal transactions, report the price, which must include
the mark-up or mark-down. (However, if a price field is not available,
report the contract amount and, if applicable, the accrued interest.)
For agency transactions, report the price, which must exclude the
commission. (However, if a price field is not available, report the
contract amount and, if applicable, the accrued interest.) Report the
total dollar amount of the commission if one is assessed on the
transaction. Notwithstanding the foregoing, a member is not required to
include a commission, mark-up or mark-down where one is not assessed on
a trade-by-trade basis at the time of the transaction or where the
amount is not known at the time the trade report is due. In all cases,
a member must use the No Remuneration indicator as provided in
paragraph (d)(4)(F) where a trade report does not reflect either a
commission, mark-up or mark-down.
(2) through (3) No Change.
(4) Modifiers; Indicators.
Members shall append the applicable trade report modifiers or
indicators as specified by FINRA to all transaction reports.
(A) through (E) No Change.
(F) No Remuneration Indicator.
Where a trade report does not reflect either a commission, mark-up
or mark-down, select the No Remuneration indicator.
(e) through (f) No Change.
Supplementary Material:
.01 through .02 No Change.
* * * * *
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
Statutory Basis for, the Proposed Rule Change
1. Purpose
FINRA Rule 6730 (Transaction Reporting) sets forth the requirements
applicable to members reporting transactions in TRACE-Eligible
Securities,\4\ and provides the specific items of information that must
be included in a TRACE trade report. Among other things, Rules 6730(c)
and (d) require that firms report the commission (total dollar amount)
separately on the TRACE trade report for agency transactions. FINRA
then combines the dollar amount that is reported as the commission with
the amount that is reported in the price field, and disseminates to the
market this aggregate amount as the transaction's price. For principal
transactions, Rule 6730(d)(1) provides that firms must report a price
that includes the mark-up/mark-down, and FINRA disseminates this price
to the market. The goal of these reporting requirements is to enable
FINRA to provide investors and market participants with pricing
information that better reflects comparable prices for principal and
agency trades in a TRACE-Eligible Security.
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\4\ Rule 6710 generally defines a ``TRACE-Eligible Security''
as: (1) A debt security that is U.S. dollar-denominated and 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); or (2) a debt security that
is U.S. dollar-denominated and issued or guaranteed by an ``Agency''
as defined in Rule 6710(k) or a ``Government-Sponsored Enterprise''
as defined in Rule 6710(n). Most transactions reported to TRACE are
publicly disseminated immediately upon receipt of a transaction
report.
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FINRA is proposing that firms identify those transactions for which
a commission or mark-up/mark-down is not reflected in a TRACE trade
report because the firm does not charge or does not know the amount of
the commission or mark-up/mark-down at the time of TRACE reporting. For
example, some firms may assess a charge that is not transaction-based,
such as in the case of a ``fee-based account'' where remuneration is
based upon assets under management (and individual commissions or mark-
ups/mark-downs are not charged).\5\ As a result, when the price of the
transaction is publicly disseminated, there currently is no indication
to the public that the price is not inclusive of a commission or mark-
up/mark-down.
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\5\ Another example of a fee structure that is not transaction-
based is where an ATS charges subscribers a fixed fee for unlimited
trading each month. The ATS could then execute trades either as
principal, by acting as an intermediary in all subscriber trades, or
on an agency basis, by providing the system through which
subscribers' trades are executed.
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By way of further example, some firms charge a commission or mark-
up/mark-down, but may not know the exact amount of that commission or
mark-up/mark-down at the time the TRACE transaction report is required
to be submitted because of their remuneration structure (e.g., a firm
may not calculate a mark-up for a transaction on a trade-by-trade
basis, but will, nonetheless, ultimately assess transaction
remuneration pursuant to a monthly volume-based schedule). As a result,
the firm will not know the commission or mark-up/mark-down at the time
of TRACE reporting.\6\
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\6\ As a practical matter, it is difficult for firms to comply
with the current TRACE rules for these types of volume-based mark-
up/mark-down arrangements, since firms are unable to report
accurately all the required information related to the transaction
on a timely basis and would need to submit a cancel and replace to
update the pricing information. In some cases, this information may
not be known until the end of the month. Under the proposal, members
would not be required to reflect a mark-up/mark-down or commission
in a TRACE trade report where the charge is not known at the time of
the transaction, but would be required to report the proposed
identifier.
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FINRA therefore proposes to require firms to identify such trades,
and FINRA will flag these disseminated transactions as not being
inclusive of remuneration.\7\ As is the case now, the disseminated
TRACE feed will not explicitly distinguish between agency and principal
transactions, and the no-remuneration flag will apply to both principal
and agency transactions. FINRA believes that pricing information
disseminated today may be incomplete and, in some cases, misleading
given that disseminated prices on transactions that do not include
remuneration are not distinguished from transactions that do include a
commission or mark-up/mark-down. FINRA believes that the proposal will
provide more meaningful pricing transparency through TRACE by
identifying those transactions where no commission or mark-up/mark-down
was charged or known at the time of TRACE reporting, while not
inhibiting possible firm remuneration arrangements, particularly if
these arrangements benefit customers.
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\7\ In addition, if a firm does not charge any remuneration
associated with the trade (in any form), they would be required to
identify the trade as one for which no remuneration was assessed to
the transaction. FINRA notes that the MSRB has similarly proposed to
require members to report an indicator that would be disseminated to
identify transactions that do not include a dealer compensation
component. See MSRB Regulatory Notice 2014-14 (August 13, 2014).
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FINRA also believes that this proposal will enhance its regulatory
audit trail
[[Page 47548]]
and surveillance patterns. With this additional level of detail,
surveillance patterns should yield fewer false positives regarding
mark-up and best execution surveillance, reduce regulatory inquiries,
and provide greater focus for FINRA's regulatory efforts. For example,
without this designation, FINRA's surveillance patterns for best
execution may generate an alert for transactions whose prices reflect a
commission or a mark-up as being outliers compared to transactions
whose prices do not reflect a charge.
FINRA discussed the proposal with advisory committees in developing
its approach. These parties were supportive of the proposal, believing
that it would improve the value of information for TRACE-Eligible
Securities that is submitted to FINRA, and, by extension, to investors
and market participants. With regards to effort involved in affecting
the change, committee members did not express any particular concerns
with respect to the operational impacts or costs of the proposal.
However, as to facilitate planning and scheduling, firms specifically
requested that sufficient lead-time be provided when determining the
effective date of the rule. Further discussions with firms that would
be directly impacted by the proposal also indicated that the proposal
would be beneficial to market participants, and that the necessary
technological changes would not be unduly burdensome given an adequate
implementation timeframe.
If the Commission approves the proposed rule change, the proposed
rule change shall be effective upon Commission approval. The
implementation date will be May 23, 2016.
2. Statutory Basis
FINRA believes that the proposed rule change is consistent with the
provisions of Section 15A(b)(6) of the Act,\8\ 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, and Section 15A(b)(9) of the Act,\9\ which requires
that FINRA rules not impose any burden on competition that is not
necessary or appropriate.
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\8\ 15 U.S.C. 78o-3(b)(6).
\9\ 15 U.S.C. 78o-3(b)(9).
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FINRA believes that this proposal is consistent with the Act
because the additional identifier will enhance its regulatory audit
trail and surveillance patterns. With this additional level of detail,
surveillance patterns should yield fewer false positives regarding
mark-up and best execution surveillance, reduce regulatory inquiries,
and provide greater focus for FINRA's regulatory efforts. For example,
without this designation, FINRA's surveillance patterns for best
execution may generate an alert for transactions whose prices reflect a
commission or a mark-up as being outliers compared to transactions
whose prices do not reflect a charge. FINRA also believes that the
proposal will improve the information value of TRACE reports as
investors and other market participants will receive additional
information regarding pricing information for TRACE-Eligible
Securities. Finally, FINRA believes that this proposal would permit
firms additional flexibility in structuring their fee arrangements with
investors, which may provide cost benefits to such investors.
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. FINRA notes that the proposed
rule change is designed to assist FINRA in meeting its regulatory
obligations by enhancing its audit trail and surveillance patterns.
While this proposal will require members to meet the proposed reporting
obligation, ensure that they can properly ascertain transactions that
require the new identifier, and update their compliance procedures and
reporting protocols accordingly, FINRA notes that this proposal will
apply uniformly to firms that report transactions in TRACE-Eligible
Securities. FINRA also believes that this proposal will allow firms
more flexibility in designing their fee structures.
As set forth above, FINRA has undertaken an economic impact
assessment to further analyze, among other things, the need for the
proposed rulemaking and the economic impacts of the proposed
rulemaking. As discussed above, FINRA does not believe that the
compliance costs associated with the proposal would be unduly
burdensome given an adequate implementation timeframe.
Economic Impact Assessment
FINRA has undertaken an economic impact assessment, as set forth
below, to further analyze the need for the proposed rulemaking, the
regulatory objective of the rulemaking, the economic baseline of
analysis, and the economic impacts.
(a) Need for the Rule
FINRA believes that pricing information disseminated today may be
incomplete and, in some cases, misleading given that disseminated
prices on transactions that do not include remuneration are not
distinguished from transactions that do include a commission or mark-
up/mark-down.
(b) Regulatory Objective
FINRA believes that the proposal will provide more meaningful
pricing transparency through TRACE by identifying those transactions
where no commission or mark-up/mark-down was charged or known at the
time of TRACE reporting, while not inhibiting possible firm fee
remuneration arrangements, particularly if these fee arrangements
benefit customers. FINRA also believes that the additional identifier
will enhance its regulatory audit trail and surveillance patterns,
because it will require the firm to affirmatively report this
information related to the commission or mark-up/mark-down and will
enable FINRA to more efficiently separate out no-remuneration trades
for purposes of surveillance, analysis, and dissemination.
(c) Economic Baseline
The staff analyzed corporate bond transactions reported to TRACE in
Q3 2013.\10\ Transactions where the broker-dealer acts in an agency
capacity are reported to TRACE with a separate field for commission.
FINRA can therefore accurately identify agency-capacity transactions
reported without a commission.\11\ In contrast, for transactions where
the broker-dealer acts in a principal capacity, the mark-up or mark-
down is included in the reported price. It was necessary for the staff
to pair a broker-dealer's buy and
[[Page 47549]]
sell principal-capacity transactions of equal sizes in a given security
on a given day to estimate the mark-ups or mark-downs on the customer
transactions.\12\
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\10\ For purposes of this analysis, FINRA used data reported to
TRACE (not the TRACE-disseminated data). Although the TRACE-
disseminated data includes a flag (Y or blank) that identifies
whether a commission is included in the disseminated price, the data
does not specify in what capacity the dealer acted in the
transaction. As such, an agency transaction without a commission,
e.g., the commission flag is blank, would look the same on the
TRACE-disseminated data as a principal transaction with or without a
mark-up/mark-down.
Corporate bond transactions represented approximately 73% of all
transactions reported to TRACE in 2013.
\11\ Although FINRA is currently able to accurately identify
agency-capacity transactions that are reported without a commission,
this process requires FINRA to match trades where the commission
field is blank with trades where the dealer acted as agent. With the
no-remuneration flag, the firm will be required to affirmatively
report this information related to the commission or mark-up/mark-
down, and FINRA will be able to more efficiently identify such
trades.
\12\ FINRA recognizes that any pairing methodology adopted
requires assumptions as part of that methodology. Further, there is
not a unique set of assumptions that reasonable parties might all
choose to adopt if they were to go through a similar exercise. As a
result, FINRA provides results of this methodology as part of the
baseline in order to inform the discussion of potential regulatory
impacts.
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During Q3 2013, the daily average number of agency-capacity
transactions in corporate bonds was 9,100.\13\ Approximately 55% of
agency-capacity transactions in corporate bonds were customer
transactions. Based on the data, the staff estimated that approximately
85% of Investment Grade corporate bond customer transactions where the
broker-dealer acted in an agency capacity were reported without a
commission. For Non-Investment Grade and unrated corporate bonds, the
proportions were 74% and 92%, respectively. Such transactions may have
been executed for fee-based accounts or other accounts where firm
remuneration was not determined on a per-transaction basis. For the
agency-capacity customer transactions reported with commissions, the
table below summarizes the average commission charged for agency-
capacity customer buy and customer sell transactions in Investment
Grade, Non-Investment Grade and Unrated securities over the quarter.
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\13\ This excludes List or Fixed Offering Price Transactions, as
defined in FINRA Rule 6710(q), and Takedown Transactions as defined
in FINRA Rule 6710(r).
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Average commission (in basis points)
--------------------------------------------------------
Non-Investment
Investment grade grade Unrated
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Customer Buy........................................... 18 21 21
Customer Sell.......................................... 21 20 32
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During Q3 2013, the daily average number of principal-capacity
transactions in corporate bonds was just under 48,000.\14\
Approximately 45% of principal-capacity transactions in corporate bonds
were customer transactions. Using the previously described pairing
methodology, the staff estimated that 19% of these customer
transactions were reported to have been executed without a mark-up or
mark-down. For the principal-capacity customer transactions estimated
to include mark-ups or mark-downs, the table below summarizes the
estimated average remuneration charged for principal-capacity customer
buy and customer sell transactions in Investment Grade, Non-Investment
Grade and Unrated securities in the quarter.
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\14\ This excludes List or Fixed Offering Price Transactions, as
defined in FINRA Rule 6710(q), and Takedown Transactions as defined
in FINRA Rule 6710(r).
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Average mark-up/mark-down (in basis points)
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Non-investment
Investment grade grade Unrated
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Customer Buy........................................... 75 66 73
Customer Sell.......................................... 50 78 60
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(d) Economic Impacts
FINRA believes that the proposal will enable market participants,
including investors relying on TRACE for valuation information, to
better understand the prevailing market prices by being able to
distinguish between transactions that include remuneration and those
that do not. As discussed above, FINRA further believes that the
additional identifier will enhance its regulatory audit trail and
surveillance patterns. With this additional level of detail,
surveillance patterns should yield fewer false positives regarding
mark-up and best execution surveillance, reduce regulatory inquiries,
and provide greater focus for FINRA's regulatory efforts. For example,
without this designation, FINRA's surveillance patterns for best
execution may generate an alert for transactions whose prices reflect a
commission or a mark-up as being outliers compared to transactions
whose prices do not reflect a charge.
The proposal will require member firms to meet the proposed
reporting obligation, ensure that they can properly ascertain
transactions that require the new identifier, and update their
compliance procedures and reporting protocols accordingly. Member firms
would also need to make technological changes to their systems to
include the identifier. Based on discussions with advisory committees
and member firms, FINRA does not believe that the compliance costs
associated with the proposal would be unduly burdensome given an
adequate implementation timeframe.
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.
[[Page 47550]]
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-2015-026 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-2015-026. 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 Web site (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 Web site 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 the filing also will be available
for inspection and copying at the principal office of FINRA. All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File Number SR-FINRA-2015-026 and should be
submitted on or before August 28, 2015.
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\15\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\15\
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015-19381 Filed 8-6-15; 8:45 am]
BILLING CODE 8011-01-P