Document ID: SEC-2017-1102-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2017-06-29T04:00Z

[Federal Register Volume 82, Number 124 (Thursday, June 29, 2017)]
[Notices]
[Pages 29602-29604]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-13582]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-81007; File No. SR-FINRA-2017-021]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of a Proposed Rule Change To Amend 
FINRA Rule 7730 To Make Available a New TRACE Security Activity Report

June 23, 2017.
    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 June 19, 2017, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission (``SEC'' 
or ``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 7730 to make available a new 
TRACE Security Activity Report.
    The text of the proposed rule change is available on FINRA's Web 
site at http://www.finra.org, at the principal office of FINRA and at 
the Commission's Public Reference Room.

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
    Rule 7730 (Trade Reporting and Compliance Engine (TRACE)), among 
other things, sets forth the TRACE data products offered by FINRA in 
connection with TRACE-Eligible Securities.\3\ FINRA is proposing to 
amend Rule 7730 to make available a new TRACE Security Activity Report, 
which would provide aggregated statistics by security for TRACE-
Eligible Securities that are corporate or agency bonds (collectively 
``CA Bonds'').\4\
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    \3\ Rule 6710 (Definitions) provides that a ``TRACE-Eligible 
Security'' is a debt security that is United States (``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 is a debt 
security that is U.S. dollar-denominated and issued or guaranteed by 
an Agency as defined in paragraph (k) or a Government-Sponsored 
Enterprise as defined in paragraph (n); or a U.S. Treasury Security 
as defined in paragraph (p). ``TRACE-Eligible Security'' does not 
include a debt security that is issued by a foreign sovereign or a 
Money Market Instrument as defined in paragraph (o).
    \4\ FINRA intends to establish a fee for the TRACE Security 
Activity Report prior to the effective date of the instant proposed 
rule change. The fee will be established pursuant to a separate rule 
filing.
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    The proposed TRACE Security Activity Report would contain basic 
descriptive security elements for each CA Bond (such as the issuer's 
name and the security's coupon and maturity date). In addition, the 
proposed report would provide subscribers with transaction totals, a 
measure of market concentration to indicate the extent to which 
activity in the security is concentrated within a few market 
participant identifiers (MPIDs),\5\ and more detailed aggregate par 
value volume information in a particular CA Bond than would be 
available in Real-Time TRACE transaction data. Today, the actual par 
value traded is available in the short-term only for transactions with 
sizes up to the applicable dissemination cap.\6\ Transactions with 
sizes over the capped amount become available only after 18 months as 
part of the Historic TRACE Data product.
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    \5\ One member may use multiple MPIDs.
    \6\ Due to transaction confidentiality concerns, FINRA has 
applied ``dissemination caps'' for purposes of dissemination. 
Specifically, for transactions in investment grade corporate bonds 
and in agency bonds over a 5 million dollar par value, TRACE 
disseminates the size as ``5MM+.'' For transactions in non-
investment grade corporate bonds over a 1 million dollar par value, 
TRACE disseminates the size as ``1MM+.''
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    The proposed TRACE Security Activity Report would provide insight 
into the level of activity in CA Bonds during a given month. 
Specifically, in addition to overall aggregate par value volume, the 
proposed TRACE Security Activity Report would provide information on 
the par value volume of customer buys, the par value volume of customer 
sells and the par value volume of inter-dealer transactions. The 
proposed TRACE Security Activity Report would reflect par value volume 
information using either capped amounts or actual par value volume, as 
follows. For uncapped transactions, the proposed TRACE Security 
Activity Report would reflect the actual trade size of each transaction 
(i.e., the transaction size disseminated in Real-Time TRACE transaction 
data). If there are six or more capped transactions disseminated during 
the calendar month, the aggregate par value volume would reflect the 
actual trade size of each transaction, as well as the par value traded 
that falls within specified size categories (e.g., the aggregate par 
value traded for transactions with a size greater than the 
dissemination cap up to $10 million and the aggregate par value traded 
for transactions with a size greater than $10 million).\7\
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    \7\ If the SEC approves this proposal, the size categories will 
be announced in the Regulatory Notice announcing the effective date 
of the new TRACE Security Activity Report. The size category 
thresholds will be based on a multiple of the dissemination cap, 
e.g., up to or over $10 million, which would be two times the 
investment grade dissemination cap. The number of size categories 
also may be adjusted (e.g., up to $10 million; over $10 million up 
to $20 million; over $20 million) based on FINRA's experience with 
the data product.
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    However, if there are fewer than six disseminated capped 
transactions during the calendar month, the TRACE Security Activity 
Report would reflect the capped volumes disseminated in Real-Time TRACE 
transaction data. Accordingly, the report would only reflect the actual 
par value traded (i.e., the amount reported by the member to TRACE) 
where there have been at least

[[Page 29603]]

six capped transactions during the calendar month. As a measure to 
further address possible confidentiality concerns, FINRA proposes that 
the TRACE Security Activity Report be provided on a 90-day delay.
    The proposed TRACE Security Activity Report also would provide the 
total number of transactions disseminated for each CA Bond as well as 
the number of customer buy transactions, the number of customer sell 
transactions and the number of inter-dealer transactions. In addition, 
the proposed TRACE Security Activity Report would provide incremental 
ranges (e.g., fewer than or equal to 5, between 6 and 10, etc.) for the 
number of transactions with a par value volume within specified size 
categories (e.g., the number of trades with a size greater than the 
dissemination cap up to $10 million, and the number of trades with a 
size of $10 million or greater).
    The proposed TRACE Security Activity Report also would provide 
information regarding the number of unique reporting MPIDs and 
statistics for the aggregate activity of the five most active MPIDs in 
each CA Bond. Specifically, the proposed TRACE Security Activity Report 
would provide the number of unique reporting MPIDs for disseminated 
uncapped and capped transactions. The number of unique reporting MPIDs 
would be provided by displaying the actual number of unique MPIDs where 
there are six or more unique MPIDs, or ``1 to 5,'' as applicable, where 
there are five or fewer reporting MPIDs. For capped transactions, the 
number of unique reporting MPIDs would be provided by displaying the 
actual number of unique MPIDs where there are six or more unique MPIDs, 
or ``0'' or ``1 to 5,'' as applicable, where there are five or fewer 
reporting MPIDs.
    The market participants that engaged in the transactions will not 
be identified in the proposed TRACE Security Activity Report. The TRACE 
Security Activity Report also would provide the percentage of the total 
number of transactions traded by the top five MPIDs for each CUSIP and 
the percentage of total par value traded by the top five MPIDs for each 
CUSIP. The percentage of the total number of transactions and total par 
value traded for the top 5 MPIDs will be provided irrespective of the 
number of capped transactions (e.g., where there is only one MPID, the 
number of unique MPIDs will be displayed as ``1 to 5'' and both the 
number of transactions and par value percentages will be displayed as 
100%).
    FINRA believes that the proposed TRACE Security Activity Report may 
be useful to interested parties for business as well as regulatory 
purposes. For example, members may use the information provided in the 
TRACE Security Activity Report to better ascertain their relative level 
of trading activity in particular CA Bonds. Interested parties also may 
use the information in the proposed report in connection with 
regulatory obligations--e.g., in assessing, classifying and reviewing 
the liquidity risk of individual securities pursuant to Rule 22e-4 
under the Investment Company Act.\8\
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    \8\ See SEC Press Release 2016-215 (October 13, 2016) (SEC 
Adopts Rules to Modernize Information Reported by Funds, Require 
Liquidity Risk Management Programs, and Permit Swing Pricing). See 
also 17 CFR 270.22e-4.
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    If the Commission approves the proposed rule change, FINRA will 
announce the effective date of the proposed rule change in a Regulatory 
Notice. The effective date will be no later than 365 days following SEC 
approval.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\9\ 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.
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    \9\ 15 U.S.C. 78o-3(b)(6).
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    Pursuant to the proposal, FINRA would make available to subscribers 
an optional data product to provide aggregated statistics by security 
for CA Bonds. FINRA believes that the TRACE Security Activity Report 
could benefit market participants and others interested in corporate 
and agency bond transaction data, including information on actual 
transaction volume that currently would not be ascertainable for 18 
months after the date of the transaction (as part of the Historic TRACE 
Data product). FINRA believes that the measures proposed to mitigate 
any potential confidentiality concerns--e.g., aggregate volume would 
reflect actual volume only where there were six or more total 
disseminated capped transactions during the calendar month--strikes an 
appropriate balance in providing additional transparency on the overall 
trading activity in a particular CA Bond, while remaining sensitive to 
confidentiality concerns. Thus, FINRA believes that the proposed rule 
change is in the public interest and consistent with the Act.

B. Self-Regulatory Organization's Statement on Burden on Competition

    FINRA does not believe that the proposed rule change would result 
in any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.
Economic Impact Analysis
    FINRA's existing Real-Time TRACE data product provides transaction 
data for the following Data Sets: Corporate Bond Data, Agency Data Set, 
SP Data Set, and Rule 144A Data Set. As detailed above, FINRA is 
proposing to create a TRACE Security Activity Report to provide 
additional aggregated statistics by security for CA Bonds, as an 
alternative or in addition to the transaction data contained in the 
Real-Time TRACE product. The TRACE Security Activity Report would be 
available on an optional basis to subscribers. The proposed rule change 
would expand the benefits of FINRA's TRACE initiatives by providing 
additional transparency on CA Bonds, as the product would provide 
subscribers with more detailed volume information on the overall 
trading activity in a particular CA Bond.
    The proposal to create a new TRACE Security Activity Report would 
not impose any additional reporting requirements or costs on firms, and 
the purchase of TRACE data products would continue to be optional for 
market participants and others and, as a result, would have no direct 
impact on firms. However, FINRA also considered the potential for 
indirect costs regarding possible information leakage due to the 
inclusion of the number of unique reporting MPIDs. FINRA believes that 
information contained in the TRACE Security Activity Report alone is 
not sufficient to discover the true identity of other MPIDs by market 
participants, where the only information used in the analysis is the 
information to be contained in this product. However, there may exist 
other publicly available datasets that can be used in conjunction with 
the proposed TRACE Security Activity Report.\10\ FINRA acknowledges

[[Page 29604]]

the potential for reverse engineering of the information contained in 
the TRACE Security Activity Report, in particular for bonds that are 
traded by a few market participants in a given month, to determine the 
true identities of other market participants, and FINRA has taken a 
number of measures, such as displaying information in buckets as 
discussed above, to reduce this risk and mitigate any potential 
impacts.
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    \10\ One such dataset is sold by the National Association of 
Insurance Commissioners (NAIC) and contains detailed information 
about insurance company bond transactions, including the CUSIP of 
the bond traded along with identities of insurance companies and the 
dealers with whom each trade is completed, the date of the 
transaction, the amount traded and the price of the transaction. See 
Maureen O'Hara, Yihui Wang, and Xing (Alex) Zhou, The Execution 
Quality of Corporate Bonds (June 1, 2016), http://papers.ssrn.com/sol3/Papers.cfm?abstract_id=2680480.
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    The proposed TRACE Security Activity Report would include a ``top 
5'' snapshot for each CA Bond showing the percentage of the total 
number of transactions that is represented by the activity of the top 
five MPIDs, and the percentage of the total par value traded by the top 
five MPIDs. To the extent that market participants extract non-reported 
information from this report about concentration and competition in a 
specific bond, they may alter their demand, supply and pricing 
accordingly. Customers may potentially find it easier or harder to 
trade some bonds, and may see a change in the costs of trading, 
including search costs. Such changes may eventually express themselves 
as an indirect impact on the liquidity of these bonds.

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. 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 rule-comments@sec.gov. Please include 
File Number SR-FINRA-2017-021 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-2017-021. 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 
a.m. and 3 p.m. Copies of such 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-2017-021 and should be 
submitted on or before July 20, 2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-13582 Filed 6-28-17; 8:45 am]
 BILLING CODE 8011-01-P