Document ID: SEC-2019-0916-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2019-06-27T04:00Z

[Federal Register Volume 84, Number 124 (Thursday, June 27, 2019)]
[Notices]
[Pages 30783-30784]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-13657]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-86178; File No. SR-FINRA-2019-014]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Approving Proposed Rule Change To Allow 
Additional Time for Reporting to TRACE of Transactions in U.S. Treasury 
Securities Executed To Hedge a Primary Market Transaction

June 21, 2019.

I. Introduction

    On April 16, 2019, 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 amend FINRA Rule 6730 to provide additional 
time for reporting to TRACE of transactions in U.S. Treasury Securities 
executed to hedge a primary market transaction. The proposed rule 
change was published for comment in the Federal Register on April 30, 
2019.\3\ On June 13, 2019, pursuant to Section 19(b)(2) of the Act,\4\ 
the Commission designated a longer period within which to approve the 
proposed rule change, disapprove the proposed rule change, or institute 
proceedings to determine whether to approve or disapprove the proposed 
rule change.\5\ The Commission received one comment letter in support 
of the proposed rule change.\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\ See Securities Exchange Act Release No. 85713 (April 24, 
2019), 84 FR 18329 (April 30, 2019) (``Notice'').
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 86101 (June 13, 
2019), 84 FR 28601 (June 19, 2019) (designating July 29, 2019, as 
the date by which the Commission shall approve the proposed rule 
change, disapprove the proposed rule change, or institute 
proceedings to determine whether to approve or disapprove the 
proposed rule change).
    \6\ See Letter from Robert Toomey, Managing Director and 
Associate General Counsel, SIFMA, to Robert W. Errett, Deputy 
Security, Commission, dated May 21, 2019 (``SIFMA Letter'').
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II. Description of the Proposal

    Currently, a transaction in a U.S. Treasury Security executed on a 
business day up to 5:00 p.m. E.T. must be reported on the same day 
during TRACE System Hours.\7\ For a transaction in a U.S. Treasury 
Security executed on a business day after 5:00 p.m. E.T., a member must 
report the trade no later than the next business day (T+1) during TRACE 
System Hours, and, if reported on T+1, the member must designate the 
trade ``as/of'' and include the date of execution.\8\
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    \7\ See FINRA Rule 6730(a)(4)(A)(i). FINRA Rule 6710(t) defines 
``TRACE System Hours'' to mean ``the hours the TRACE system is open, 
which are 8:00:00 a.m. Eastern Time through 6:29:59 p.m. Eastern 
Time on a business day, unless otherwise announced by FINRA.''
    \8\ See FINRA Rule 6730(a)(4)(A)(ii).
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    According to FINRA, institutional investors often hedge a primary 
market transaction that meets the definition of ``List or Fixed 
Offering Price Transaction'' or ``Takedown Transaction'' (i.e., a 
``P1'' transaction) with a U.S. Treasury Security.\9\ In such cases, 
hedges in U.S. Treasury Securities and the P1 transactions are executed 
in close time proximity because the desired hedge position in the U.S. 
Treasury Security cannot be determined until the underwriters complete 
pricing of P1 issue and make allocations to customers.\10\ Once pricing 
is complete for the new issue, any associated hedging trades in U.S. 
Treasury Securities must be entered and reported to TRACE.\11\ Under 
current FINRA Rule 6730, a trade report for a transaction in a U.S. 
Treasury Security executed by 5:00 p.m. ET is due on trade date (by the 
close of TRACE System Hours), whereas a P1 trade report is due on T+1 
(by the close of TRACE System Hours).\12\
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    \9\ FINRA Rule 6710(q) and (r) define ``List or Fixed Offering 
Price Transactions'' and ``Takedown Transactions,'' which are 
identified with the ``P1'' modifier, generally as primary market 
sale transactions on the first day of trading of a security: (i) By 
a sole underwriter, syndicate manager, syndicate member or selling 
group member at the published or stated list or fixed offering price 
(or, for Takedown Transactions, at a discount from the published or 
stated list or fixed offering price) or (ii) in the case of primary 
market sale transactions effected pursuant to Securities Act Rule 
144A, by an initial purchaser, syndicate manager, syndicate member 
or selling group member at the published or stated fixed offering 
price (or, for Takedown Transactions, at a discount from the 
published or stated fixed offering price).
    \10\ See Notice, 84 FR at 18330.
    \11\ See id.
    \12\ See FINRA Rule 6730(a)(2) and (4).
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    FINRA understands that this difference in TRACE reporting 
timeframes for the hedging transactions in U.S. Treasury Securities and 
the related P1 transaction can present operational challenges for 
members, particularly where pricing of the debt new issue occurs prior 
to, but near, 5:00 p.m. E.T.\13\ In response to these concerns, FINRA 
has proposed to align the TRACE reporting timeframe for any hedging 
transactions in U.S. Treasury Securities associated with a P1 
transaction with the deadline for reporting the related P1 transaction. 
Specifically, FINRA has proposed to amend FINRA Rule 6730 to provide 
that a transaction in a U.S. Treasury Security executed to hedge a P1 
transaction must be reported no later than the next business day (T+1) 
during TRACE System Hours and, if reported on T+1, designated ``as/of'' 
and include the date of execution.\14\ FINRA also proposed that a 
member must append a new trade modifier when reporting to TRACE any 
transaction in a U.S. Treasury Security that is executed to hedge a P1 
transaction.\15\
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    \13\ See Notice, 84 FR at 18330.
    \14\ See proposed FINRA Rule 6730(a)(4)(B).
    \15\ See proposed FINRA Rule 6730(d)(4)(G)(iii).
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    FINRA has stated that it will announce the effective date of the 
rule change in a Regulatory Notice to be published no later than 90 
days following a Commission approval, and the effective date will be no 
later than 270 days following publication of that Regulatory 
Notice.\16\
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    \16\ See Notice, 84 FR at 18330.
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III. Discussion and Commission Findings

    After careful consideration, the Commission finds that the proposed 
rule change is consistent with the requirements of the Act and the 
rules

[[Page 30784]]

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. The Commission believes that aligning the 
reporting deadline for U.S. Treasury Security hedge transactions with 
the deadline for the associated P1 transaction is reasonably designed 
to minimize compliance burdens on FINRA members who report to TRACE 
without adversely impacting regulatory surveillance. In addition, 
because P1 transactions and transactions in U.S. Treasury Securities 
are not subject to public dissemination, the rule change would not 
negatively impact market transparency. The new requirement to flag any 
transaction in a U.S. Treasury Security used to hedge a P1 transaction 
is reasonably designed to enhance the TRACE audit trail, consistent 
with the protection of investors and the public interest. The 
Commission notes that the one comment letter received on the proposal 
was supportive.\19\
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    \17\ In approving this proposal, 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).
    \19\ See SIFMA Letter, supra note 6 (opining that the proposal 
would ``ease the operational burden on member firms, provide a 
better characterization of the transaction for market surveillance 
purposes through the linkage that will be reported, and result in 
fewer late Treasury transaction filings to the TRACE system'').
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    Pursuant to Section 19(b)(5) of the Act,\20\ the Commission 
consulted with and considered the views of the Treasury Department in 
determining to approve the proposed rule change. The Treasury 
Department indicated its support for the proposal.\21\ Pursuant to 
Section 19(b)(6) of the Act,\22\ the Commission has considered the 
sufficiency and appropriateness of existing laws and rules applicable 
to government securities brokers, government securities dealers, and 
their associated persons in approving the proposal. As discussed above, 
by aligning the TRACE reporting timeframe for transactions in U.S. 
Treasury Securities executed to hedge a P1 transaction with the 
deadline for reporting the related P1 transaction, and adopting a new 
modifier to identify such transactions, the proposed rule change is 
reasonably designed to minimize burdens on FINRA members who must 
report to TRACE without adversely impacting regulatory surveillance or 
market transparency.
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    \20\ 15 U.S.C. 78s(b)(5) (providing that the Commission ``shall 
consult with and consider the views of the Secretary of the Treasury 
prior to approving a proposed rule filed by a registered securities 
association that primarily concerns conduct related to transactions 
in government securities, except where the Commission determines 
that an emergency exists requiring expeditious or summary action and 
publishes its reasons therefor'').
    \21\ Email from Treasury Department staff to Michael Gaw, 
Assistant Director, Division of Trading and Markets, Commission 
(June 17, 2019).
    \22\ 15 U.S.C. 78s(b)(6).
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\23\ that the proposed rule change (SR-FINRA-2019-014) is approved.
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    \23\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\24\
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    \24\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2019-13657 Filed 6-26-19; 8:45 am]
 BILLING CODE 8011-01-P