[Federal Register Volume 77, Number 80 (Wednesday, April 25, 2012)]
[Notices]
[Pages 24748-24750]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-9840]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-66829; File No. SR-FINRA-2012-020]


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 TBA

April 18, 2012.

I. Introduction

    On March 1, 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 ``to be 
announced'' or ``TBA.'' The proposed rule change was published for 
comment in the Federal Register on March 16, 2012.\3\ 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\ See Securities Exchange Act Release No. 66577 (March 12, 
2012), 77 FR 15827 (March 16, 2012) (``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.\4\ FINRA also utilizes TRACE to collect information on 
transactions in Asset-Backed Securities, but FINRA currently does not 
disseminate such information publicly.\5\ Agency Pass-Through Mortgage-
Backed Securities traded TBA (``MBS TBA'') are a specific type of 
Asset-Backed Security.\6\ FINRA has proposed to amend its rules to 
reduce the reporting timeframe for and to provide for public 
dissemination of MBS TBA transactions, and to make certain other 
changes.
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    \4\ See Securities Exchange Act Release No. 60726 (September 28, 
2009), 74 FR 50991 (October 2, 2009) (approving SR-FINRA-2009-010).
    \5\ See Securities Exchange Act Release No. 61566 (February 22, 
2010), 75 FR 9262 (March 1, 2010) (approving SR-FINRA-2009-065). The 
term ``Asset Backed Security'' is defined in FINRA Rule 6710(m).
    \6\ See FINRA Rules 6710(m), (u), and (v).
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Good Delivery and Not Good Delivery MBS TBA Transactions

    FINRA has proposed to amend the definition of TBA set forth in Rule 
6710(u) to identify two subsets of MBS TBA transactions: MBS TBA 
transactions ``for good delivery'' (``MBS TBA Good Delivery'') and MBS 
TBA transactions ``not for good delivery'' (``MBS TBA Not Good 
Delivery''). MBS TBA Good Delivery meet certain market standards and 
conventions, known generally as ``good delivery guidelines;'' MBS TBA 
Not Good Delivery do not meet those guidelines.\7\ Most newly issued 
MBS TBA are MBS TBA Good Delivery, and are composed primarily of 
standard loans such as 15- and 30-year fixed-rate single-family 
loans.\8\ Newly issued MBS TBA Not Good Delivery, on the other hand, 
include primarily non-standard loans, such as interest-only mortgages, 
project/construction loans, and certain non-conforming mortgages on 
single family residences.\9\ According to FINRA, MBS TBA Good Delivery 
are the most liquid and account for the vast majority of MBS TBA 
transactions.\10\
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    \7\ See Notice, 77 FR at 15827-28.
    \8\ See Notice, 77 FR at 15828.
    \9\ See Notice, 77 FR at 15828 n.7.
    \10\ See Notice, 77 FR at 15828, 15830.
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Reduction of Reporting Period

    FINRA also has proposed to amend Rule 6730 to reduce the period for 
reporting MBS TBA transactions to TRACE. The reduction would occur in 
two stages for both MBS TBA Good Delivery and MBS TBA Not Good Delivery 
transactions, but the reduced reporting period for each type of MBS TBA 
transaction would be different.
    With respect to MBS TBA Good Delivery transactions, first, for a 
pilot program of approximately 180 days duration, FINRA has proposed to 
reduce the reporting period from no later than the close of the TRACE 
system on the date of execution to no later than 45 minutes from the 
Time of Execution.\11\ Second, after approximately 180 days, the pilot 
program would expire and the reporting period would be reduced from no 
later than 45 minutes from the Time of Execution to no later than 15 
minutes from the Time of Execution.\12\
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    \11\ See proposed Rule 6730(a)(3)(D)(i)b. Exceptions for 
transactions that are executed within 45 minutes of the close of the 
TRACE system and for transactions executed when it is closed are set 
forth in subparts a., c., and d. of proposed Rule 6730(a)(3)(D)(i). 
The term ``Time of Execution'' is defined in Rule 6710(d).
    \12\ See proposed Rule 6730(a)(3)(D)(ii), which incorporates by 
reference Rule 6730(a)(1). Rule 6730(a)(1) requires that 
transactions in TRACE-Eligible Securities be reported within 15 
minutes of the Time of Execution, and also provides exceptions for 
transactions in TRACE-Eligible Securities that are executed shortly 
before the TRACE system closes and when it is closed.
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    With respect to MBS TBA Not Good Delivery transactions, first, for 
a pilot program of approximately 180 days duration, FINRA has proposed 
to 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.\13\ Second, after approximately 180 days, the 
pilot program would expire and the reporting period would be reduced 
from no later than two hours from the Time of Execution to no later 
than one hour from the Time of Execution.\14\
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    \13\ See proposed Rule 6730(a)(3)(E)(i)b. Exceptions for 
transactions that are executed within two hours of the close of the 
TRACE system and for transactions executed when it is closed are set 
forth in subparts a., c., and d. of proposed Rule 6730(a)(3)(E)(i).
    \14\ See proposed Rule 6730(a)(3)(E)(ii)b. Exceptions for 
transactions that are executed within one hour of the close of the 
TRACE system and for transactions executed when it is closed are set 
forth in subparts a., c., and d. of proposed Rule 6730(a)(3)(E)(ii).
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Dissemination of MBS TBA Transaction Information

    FINRA Rule 6750(b)(4) currently provides that transactions in 
Asset-Backed Securities are not subject to dissemination. The proposal 
would amend Rule 6750(b)(4) to provide for dissemination of information 
on MBS TBA 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 an MBS TBA transaction. As a result of 
this proposed change and the reduced reporting periods that FINRA has 
proposed for MBS TBA transactions, information on MBS TBA Good Delivery 
and MBS TBA Not Good Delivery transactions would be disseminated within 
45 minutes and two hours, respectively, of the Time of Execution during 
the pilot period. After the pilot period expires, information on MBS 
TBA Good Delivery and MBS TBA Not Good Delivery transactions would be 
disseminated within 15 minutes and

[[Page 24749]]

one hour, respectively, of the Time of Execution.

Dissemination Caps

    FINRA has proposed dissemination caps for MBS TBA Good Delivery and 
MBS TBA Not Good Delivery transactions, which would prevent the display 
of the actual size (volume) of a transaction over a certain par value 
in the disseminated TRACE data.\15\ With respect to MBS TBA Good 
Delivery transactions, FINRA would set a dissemination cap of $25 
million. Accordingly, MBS TBA Good Delivery transactions exceeding $25 
million would be displayed in TRACE as ``$25MM+.'' With respect to MBS 
TBA Not Good Delivery transactions, FINRA would set a dissemination cap 
of $10 million. Accordingly, MBS TBA Not Good Delivery transactions 
exceeding $10 million would be displayed in TRACE as ``$10MM+.''
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    \15\ See Notice, 77 FR at 15830. There are currently two 
dissemination caps already in place. For TRACE-Eligible Securities 
that are rated Investment Grade, there is a $5 million dissemination 
cap, and the size of transactions in excess of $5 million is 
displayed as ``$5MM+.'' See id. For TRACE-Eligible Securities that 
are rated Non-Investment Grade, there is a $1 million dissemination 
cap, and the size of a transaction in excess of $1 million is 
displayed as ``$1MM+.'' See id. The terms Investment Grade and Non-
Investment Grade are defined in Rule 6710(h) and Rule 6710(i), 
respectively.
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Data and Fees

    FINRA would amend Rule 7730 to make available the disseminated 
TRACE data for transactions in MBS TBA, and to establish fees for such 
data. Specifically, FINRA has proposed to amend Rule 7730(c) to 
establish a real-time market data set for disseminated Asset-Backed 
Security transaction information (``ABS Data Set'') and to amend Rule 
7730(d) to establish a historic data set for such information 
(``Historic ABS Data Set'').\16\ The provisions of Rule 7730 that 
currently apply to the two existing real-time market and historic data 
sets (for corporate bonds and Agency Debt Securities), including the 
fees for receipt of such data, would be amended to include the ABS Data 
Set and Historic ABS Data Set.
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    \16\ The Historic ABS Data Set would include all MBS TBA 
transactions effected as of or after May 16, 2011, and, among other 
things, would include uncapped volume information. See Notice, 77 FR 
at 15831. However, like the other historic TRACE data, data for MBS 
TBA transactions to be included in the Historic ABS Data Set would 
be released subject to a delay of approximately 18 months from the 
date of the transaction. See id.
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Other Rule Changes

    FINRA has proposed to delete provisions regarding an expired pilot 
program, and to make other minor administrative, technical, or 
clarifying changes in Rules 6730 and 7730.

Regulatory Notice

    FINRA has indicated 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 carefully reviewing the proposal, 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.\17\ In particular, the Commission finds that 
the proposed rule change is consistent with Section 15A(b)(6) of the 
Act,\18\ 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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    \17\ 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).
    \18\ 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.\19\ To further the goal of 
increasing price transparency in the debt markets in general and the 
MBS TBA market 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 TBA in the manner set forth 
in the proposal.
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    \19\ 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 uses TRACE to collect information on 
transactions in Asset-Backed Securities, including MBS TBA 
transactions, but to date, FINRA has not disseminated such information 
publicly.\20\ FINRA's proposal, however, would make MBS TBA transaction 
information publicly available for the first time, both in near-real 
time (subject to certain reporting delays, as detailed above) and on a 
historic basis. By increasing public availability of information about 
MBS TBA transactions, the proposal may encourage greater participation 
in the market, which could 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 TBA market.
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    \20\ See supra note 5.
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    Moreover, the Commission believes that the proposed reduction in 
reporting times for MBS TBA 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) market data for MBS TBA 
transactions than FINRA's current reporting regime for MBS TBA 
transactions.\21\ 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 TBA asset class.
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    \21\ The Commission notes further that the 15-minute reporting 
requirement applicable to MBS TBA Good Delivery after the pilot 
period is the same reporting requirement applicable to corporate 
bonds and Agency Debt Securities, i.e., other TRACE-Eligible 
Securities for which market data are already publicly disseminated. 
See Rule 6730(a)(1).
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    Firms covered by these new reporting requirements for MBS TBA 
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 market. The Commission 
notes that FINRA has proposed to shorten the reporting period for MBS 
TBA 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 market data for MBS TBA transactions.
    The Commission recognizes that the dissemination caps FINRA has 
proposed would, to a certain extent, limit the transparency provided by 
FINRA's proposal.\22\ However, the Commission notes that dissemination 
caps are already in place for transactions in other

[[Page 24750]]

TRACE-Eligible Securities.\23\ Moreover, public dissemination of MBS 
TBA transaction information has heretofore not existed in the MBS TBA 
market. The dissemination caps allow FINRA to implement post-trade 
price transparency in that market incrementally. FINRA has represented 
that it will continue to review the volume of and liquidity in the MBS 
TBA market and, if warranted in the future, may recommend that the 
dissemination caps be set at higher levels in order to provide 
additional transparency.
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    \22\ The Commission notes that, as calculated by FINRA, the 
dissemination caps would have limited the display of actual size for 
approximately 84% of total volume traded in MBS TBA Good Delivery 
and 85% of total volume traded in MBS TBA Not Good Delivery during 
the period May 16, 2011 through January 4, 2012. See Notice, 77 FR 
at 15830 and n.26.
    \23\ See supra note 15.
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    Lastly, the Commission finds that FINRA's proposed fees for MBS TBA 
market and historic transaction data are consistent with Section 
15A(b)(5) of the Act, which requires, among other things, that FINRA 
rules provide for the equitable allocation of reasonable dues, fees, 
and other charges among members and issuers and other persons using any 
facility or system which the association operates or controls. These 
fees are similar to those that currently apply to corporate debt 
securities and Agency Debt Securities.\24\
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    \24\ See FINRA Rule 7730.
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\25\ that the proposed rule change (SR-FINRA-2012-020) be, and it 
hereby is, approved.
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    \25\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\26\
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    \26\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-9840 Filed 4-24-12; 8:45 am]
BILLING CODE 8011-01-P