Document ID: SEC-2019-0419-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2019-04-08T04:00Z

[Federal Register Volume 84, Number 67 (Monday, April 8, 2019)]
[Notices]
[Pages 13977-13983]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-06786]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-85488; File No. SR-FINRA-2019-008]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of a Proposed Rule Change To 
Establish a Corporate Bond New Issue Reference Data Service

April 2, 2019.
    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 March 27, 2019, 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 enhance the collection and dissemination of 
new issue reference data for corporate bonds and charge associated 
fees.
    The text of the proposed rule change is available on FINRA's 
website 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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    FINRA is submitting this proposed rule change to establish a new 
issue reference data service for corporate bonds, consistent with a 
recommendation from the SEC's Fixed Income Market Structure Advisory 
Committee (``FIMSAC'').
Background
    On October 29, 2018, the FIMSAC unanimously approved a 
recommendation from its Technology and Electronic Trading Subcommittee 
to establish a new issue reference data service for corporate bonds 
(``FIMSAC Recommendation'').\3\ Specifically, the FIMSAC Recommendation 
urged FINRA to establish a consolidated, comprehensive, and accurate 
data set for corporate bond new issues. Today, market participants rely 
on corporate bond reference data providers for this information. 
However, each reference data provider collects and disseminates new 
issue reference data from different sources and at different speeds 
that vary

[[Page 13978]]

by a few hours to several days, resulting in data that may not be 
consistent, timely and accurate across reference data providers.
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    \3\ See Recommendation to Establish a New Issue Reference Data 
Service for Corporate Bonds, (October 29, 2018), https://www.sec.gov/spotlight/fixed-income-advisory-committee/fimsac-corporate-bond-new-issue-reference-data-recommendation.pdf.
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    The FIMSAC Recommendation states that reliable, consistent and 
timely reference data is necessary to support the efficient trading and 
settlement of bonds. A centralized reference data source is 
increasingly important as market participants rely more on electronic 
trading platforms, so that all platform participants price and trade 
bonds based on consistent and accurate information.
    In considering the need for improved corporate new issue reference 
data, the FIMSAC looked to the municipal bond market, where there is a 
centralized reference data service. The Municipal Securities Rulemaking 
Board (``MSRB'') requires the underwriter of a new issue of municipal 
securities to communicate information to ensure that market 
participants have timely access to information necessary to report, 
compare, confirm, settle and clear transactions in the new issue. 
Specifically, under MSRB Rule G-34, underwriters must submit new issue 
information to the New Issue Information Dissemination Service 
(``NIIDS''), operated by the Depository Trust and Clearing Corporation 
(``DTCC''). NIIDS then makes this information immediately available to 
reference data providers.
    To achieve its purpose, the FIMSAC stated that FINRA should expand 
its existing rules so that it can similarly collect and disseminate 
comprehensive reference data for corporate bond new issues. Currently, 
under Rule 6760 (Obligation to Provide Notice), members that are 
underwriters of an initial offering of a TRACE-Eligible Security are 
required to submit certain specified information to FINRA prior to the 
execution of the first transaction of the offering to facilitate trade 
reporting and dissemination of transactions.\4\ The information 
required by the rule generally is limited to the fields needed to set 
up a bond on TRACE for trade reporting purposes (e.g., the CUSIP 
number, the issuer name, the coupon rate, the maturity, whether Rule 
144A applies, and a brief description of the bond). FINRA disseminates 
some of this new issue information as part of the Corporate Security 
Daily List; however, electronic trading platforms generally require 
more information to make new issues available to trade.\5\
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    \4\ In cases where a new issue is priced and begins trading on 
the same day, Rule 6760 requires certain data elements--those 
sufficient to identify the security accurately--to be reported 
before the execution of the first transaction, and all remaining 
data elements to be reported within 15 minutes of the Time of 
Execution of the first transaction.
    \5\ The information distributed on the Corporate Security Daily 
List may only be used to support trade reporting and may not be 
redistributed. The Daily List includes some mandatory new issue 
information currently collected from underwriters pursuant to Rule 
6760, which is then made available at no charge through an 
application program interface (``API''). The Daily List would not be 
impacted by this proposal.
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    The FIMSAC Recommendation asked that FINRA build on the existing 
Rule 6760 requirements to establish a new issue data service with more 
comprehensive information. The FIMSAC stated that FINRA was best 
situated to carry out the Recommendation because it would be an 
incremental addition to current practices, both for FINRA and the 
underwriters that must report new issue information.
Proposal
    In line with the FIMSAC Recommendation, FINRA is proposing to amend 
Rule 6760 to specify a number of data elements, in addition to those 
already specified by the rule, which must be submitted for new issues 
in corporate debt securities.\6\ Under the proposed rule change, 
underwriters subject to Rule 6760 \7\ would be required to report the 
following additional data elements: (A) The International Securities 
Identification Number (``ISIN''); (B) the currency; (C) the issue date; 
(D) the first settle date; (E) the interest accrual date; (F) the day 
count description; (G) the coupon frequency; (H) the first coupon 
payment date; (I) a Regulation S indicator; (J) the security type; (K) 
the bond type; (L) the first coupon period type; (M) a convertible 
indicator; (N) a call indicator; (O) the first call date; (P) a put 
indicator; (Q) the first put date; (R) the minimum increment; (S) the 
minimum piece/denomination; (T) the issuance amount; (U) the first call 
price; (V) the first put price; (W) the coupon type; (X) rating; (Y) a 
perpetual maturity indicator; and (Z) a Payment-In-Kind (PIK) 
indicator.
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    \6\ In connection with the proposal, FINRA also would make two 
technical, non-substantive, clarifying edits to the definition of 
corporate debt security that is currently located in FINRA Rule 2232 
(Customer Confirmations). First, FINRA would clarify that the 
definition of corporate debt security is limited to TRACE-Eligible 
Securities. This clarification reflects the original intent of the 
definition and is consistent with current FINRA guidance. See FINRA 
Fixed Income Confirmation Disclosure FAQ 1.12, http://www.finra.org/industry/faq-fixed-income-confirmation-disclosure-frequently-asked-questions-faq.
    Second, FINRA would update the definition of corporate debt 
security to exclude the class of assets defined as Securitized 
Products in Rule 6710(m), rather than Asset-Backed Securities, 
defined in Rule 6710(cc). When the definition of corporate debt 
security was first drafted, FINRA did not yet have a defined term 
for Securitized Products, only Asset-Backed Securities. Since that 
time, FINRA added the term Securitized Products, which includes 
Asset-Backed Securities. Accordingly, this is a clarifying change 
that simply updates the terms referred to in the corporate debt 
security definition; this clarifying change also reflects the 
original intent of the definition and is consistent with current 
FINRA guidance. See FINRA Fixed Income Confirmation Disclosure FAQ 
1.11.
    FINRA also proposes to relocate the revised definition of 
corporate debt security into the TRACE Rule Series. FINRA believes 
it makes sense to include the definition in Rule 6710 where it would 
sit alongside a number of other TRACE definitions for fixed income 
asset types. FINRA would make corresponding technical edits to Rule 
2232 to refer to the relocated definition in Rule 6710.
    \7\ As part of the proposal, FINRA would amend Rule 6760(a)(1) 
to clarify that underwriters subject to the Rule must report 
required information for the purpose of providing market 
participants in the corporate debt security markets with reliable 
and timely new issue reference data to facilitate the trading and 
settling of these securities, in addition to the current purpose of 
facilitating trade reporting and dissemination in TRACE-Eligible 
Securities.
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    These data fields, together with certain data fields specified in 
the current Rule, reflect all but one of the fields that were described 
in the FIMSAC Recommendation, as well as additional fields identified 
during supplemental industry outreach conducted by FINRA.\8\ FINRA also 
notes that several fields specified in the proposed rule change are 
already required to be reported or are reported voluntarily on the 
FINRA TRACE New Issue Form.\9\ FINRA has attached as Exhibit 3 a 
detailed list of the corporate bond new issue reference data fields 
that specifies whether the fields are currently mandatory or voluntary 
and includes a description of each field.
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    \8\ The one field from the FIMSAC Recommendation that FINRA has 
not included in this proposal is ``Calculation Types (CALT).'' FINRA 
understands from industry outreach that this field, as it is 
included in the FIMSAC Recommendation, leverages calculation 
methodology that is specific to one data vendor's protocols and may 
not be readily available to all underwriters that would be required 
to report information to FINRA under Rule 6760, or to consumers of 
the data. The FIMSAC Recommendation noted that the preliminary list 
of data fields was developed based on discussions with market 
participants, but that it should be finalized based on further 
analysis by FINRA and the SEC. See FIMSAC Recommendation at pg. 3 
n.2.
    \9\ The FINRA TRACE New Issue Form is used by firms to set up 
securities pursuant to firms' existing obligations either under Rule 
6760 or 6730 (Transaction Reporting). It allows for the submission 
of data fields required by these rules as well as additional data 
fields that underwriters often report voluntarily. As part of this 
proposal, FINRA would codify in Rule 6760 the specific fields that 
have been deemed necessary under current Rule 6760(b) and therefore 
are mandatory for successful submission of the TRACE New Issue Form.
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    In addition, for the fields that FINRA added to the proposal based 
on additional industry outreach ((T) through (Z) above), Exhibit 3 
describes FINRA's rationale for their inclusion in

[[Page 13979]]

the proposal. These attributes were indicated by market participants as 
important in liquidity and risk assessment. Issue amount is an 
indication of potential liquidity of the issue in general and also in 
particular as it is in many cases among the criteria used for index 
consideration. Other proposed fields (coupon type, PIK, perpetual 
maturity indicator and the complementing put information) provide 
further context and are descriptive of the cash flow profile and 
considerations in risk assessment and pre-trade compliance efforts. 
Additionally, FINRA utilizes ratings to determine TRACE grade 
(Investment Grade or Non-Investment Grade) which in turn determines 
dissemination volume caps.
    The proposal also would require that all data elements be reported 
for new issues in corporate debt securities prior to the first 
transaction in the security. Currently, for information reported under 
Rule 6760 for trade reporting purposes, the Rule allows phased 
reporting in some cases. Specifically, for an offering of a security 
that is priced and begins trading on the same business day between 9:30 
a.m. and 4:00 p.m. Eastern Time, Rule 6760 requires certain information 
to be reported before the first trade in the security and remaining 
information within 15 minutes of the time of the first trade. 
Otherwise, the current Rule requires all information to be reported 
before the first trade in the security.
    As noted above, FINRA is proposing to amend Rule 6760 to require 
all data fields for new issues in corporate debt securities to be 
reported prior to the first trade. FINRA alternatively considered 
maintaining the Rule's phased reporting approach for offerings in 
corporate debt securities subject to the proposal, with certain core 
information required prior to the first trade and an extended 60-minute 
window for remaining information, given the additional data fields that 
would be required to be reported under the proposal. However, FINRA 
believes that the proposed approach to require uniform pre-first trade 
reporting better supports the stated goals in the FIMSAC Recommendation 
to increase the efficiency of the corporate bond market and promote 
fair competition among all market participants. Specifically, a uniform 
reporting approach would allow FINRA to collect and make all of the 
data available immediately to market participants, resulting in a more 
consistent, timely and complete data set that will support more 
efficient pricing, trading and settlement of bonds. FINRA also believes 
that the proposed uniform reporting approach better advances the 
element in the FIMSAC Recommendation stating that managing underwriters 
should be required to report the data elements to FINRA no later than 
reporting such data elements to any third party not involved in the 
offering, including reference data vendors. Uniform pre-first trade 
reporting furthers this element, while not unduly constraining the 
sharing of data that may be necessary as part of the underwriting 
process.\10\ On balance, FINRA believes the significant benefits of 
uniform pre-first trade reporting outweigh the additional burdens on 
underwriters, but invites interested parties to submit comments on this 
(or any) aspect of the proposal.
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    \10\ See FIMSAC Recommendation at pg. 3.
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    Further in line with the FIMSAC Recommendation, FINRA would 
disseminate corporate bond new issue reference data collected under 
Rule 6760 upon receipt and provide subscribers with access to the data 
for fees determined on a commercially reasonable basis.\11\ Under Rule 
7730 (Trade Reporting and Compliance Engine (TRACE)), FINRA would make 
the corporate bond new issue reference data available to any person or 
organization for a fee of $250 per month for internal purposes only, 
and for a fee of $6,000 per month where the data is retransmitted or 
repackaged for delivery and dissemination outside the organization.
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    \11\ Under proposed Rule 6760(d), there may be some information 
collected under the Rule for security classification or other 
purposes that would not be disseminated. This may include, for 
example, information about ratings that is restricted by agreement. 
In addition, CUSIP Global Services' (``CGS'') information would not 
be disseminated to subscribers that do not have a valid license 
regarding use of CGS data.
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    This data would be accessible by all member firms and other market 
participants and data users, with the fees assessed only on those that 
choose to subscribe. The $6,000 charge for redistribution would apply 
to any retransmission or redistribution of the data to any party other 
than the subscriber. For example, the redistribution charge would apply 
to a firm that displays the data on a website to its clients or 
customers, or to a clearing firm that displays or otherwise makes the 
data available to its correspondents. However, FINRA notes that because 
the charge includes unlimited redistribution rights, FINRA would assess 
it only once on the party that subscribes. Accordingly, FINRA would not 
assess any charge on firms that receive the data from data vendors or 
other market participants that have subscribed for redistribution 
rights, nor would FINRA increase the amount charged to the subscriber 
based on how often it redistributes the data. As discussed further 
below, FINRA anticipates that many market participants, including 
clearing firms and correspondent firms, will receive the data from data 
vendors consistent with what they do today.
    If the Commission approves the filing, FINRA will announce the 
effective date of the proposed rule change in a Regulatory Notice to be 
published no later than 90 days following publication of the Regulatory 
Notice. The effective date will be no later than 270 days following 
Commission approval. Based on implementation of this proposal, FINRA 
would evaluate a potential expansion of the new issue reference data 
service to include other debt products.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\12\ 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, to foster cooperation and coordination with 
persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in 
securities, to remove impediments to and perfect the mechanism of a 
free and open market, and, in general, to protect investors and the 
public interest. FINRA also believes that the proposed rule change is 
consistent with the provisions of Section 15A(b)(5) of the Act,\13\ 
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 that 
FINRA operates or controls.
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    \12\ 15 U.S.C. 78o-3(b)(6).
    \13\ 15 U.S.C. 78o-3(b)(5).
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    The proposed changes to Rule 6760 are designed to improve 
transparency and efficiency in the corporate bond markets, consistent 
with Section 15A(b)(6).\14\ The proposal would do so by providing 
market participants in the corporate bond markets with reliable and 
timely new issue reference data to facilitate secondary trading in and 
settlement of these instruments, particularly during the period when

[[Page 13980]]

new issues first start trading in the secondary markets. As discussed 
throughout the filing, the proposal would advance the FIMSAC 
Recommendation, which was intended to address the lack of a reliable 
and timely centralized source for corporate bond new issue reference 
data. The FIMSAC Recommendation explained that reliable, consistent and 
timely reference data is necessary to support the efficient trading and 
settlement of bonds, and is increasingly important as market 
participants rely more on electronic trading platforms. FINRA believes 
that the proposed new issue data reporting and dissemination 
requirements in Rule 6760 are designed to and will support and further 
the efficient trading and settlement of bonds, provide uniform and 
timely access to important new issue corporate reference data, and 
otherwise promote the objectives of Section 15A(b)(6).
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    \14\ Related changes to the definition of corporate debt 
security in Rule 2232 are technical, non-substantive, and 
clarifying, and are intended to support the proposed changes to Rule 
6760, consistent with Section 15A(b)(6).
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    FINRA further believes that the proposed fees for the corporate 
bond new issue reference data service contemplated by Rule 7730 are 
fair, equitable, reasonable, and not unfairly discriminatory. As 
discussed in the next section with respect to anticipated economic 
impacts of the proposal, the proposed fees would price the corporate 
bond new issue reference data service as a utility, using cost plus 
margin pricing, which FINRA believes is a reasonable means to meet 
ongoing operating costs related to the initiative. The data service 
would be available on the same terms to any party that wished to 
subscribe with two flat prices, one for internal use only and one for 
redistribution. FINRA believes that the proposed fee structure will 
allow for broad distribution of the new issue reference data to market 
participants, and that the fees are reasonably designed to cover 
FINRA's ongoing operational costs. Specifically, the proposed fee 
structure reflects FINRA's estimates of the ongoing operational costs 
related to the new proposed data service, including direct staff 
allocated to the initiative, and related functions, including 
technology, legal, billing, and finance. Accordingly, FINRA believes 
the proposed fees are reasonably designed to recover the costs of the 
data service with equitable and not unfairly discriminatory charges 
based on subscribers' use of the data for their business purposes. 
FINRA notes that the proposed fee structure, with use-based tiers that 
are based on projected costs, is consistent with fees the SEC 
previously has approved. The SEC has stated its belief that a ``use-
based approach is consistent with equitable distribution of fees'' and 
approved use-based fees when reasonably related to costs.\15\
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    \15\ See Securities Exchange Act Release No. 72280 (May 29, 
2014), 79 FR 32351, 32353 (June 4, 2014) (Order Approving File No. 
SR-FINRA-2014-018) (approving fees for ATS data that varied 
according to use and discussing the Commission's prior approval of 
similar use-based TRACE fees).
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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.
Economic Impact Assessment
Regulatory Need
    Currently in the corporate bond market, new issue reference data is 
not collected consistently or with established data standards, nor is 
it uniformly distributed to market participants in a timely manner. 
Data providers collect new issue reference data from different sources, 
typically underwriters, which often results in incomplete and 
inconsistent data. This holds true for any individual data provider and 
for the aggregate data collected; that is, even if a market participant 
gained access to all commercial products available today, the data may 
not be complete, reliable or timely for all new issues. The speed that 
data providers collect and disseminate data also varies and can be as 
long as several days.
    There are significant frictions in the corporate bond market that 
have made finding a solution to this problem difficult. First, because 
data is provided voluntarily by underwriters today, data providers may 
not be able to assure the completeness, accuracy and timeliness of the 
information. Second, underwriters may have differing incentives with 
respect to the importance of providing the information to data 
providers.\16\ Finally, because data providers are paid, at least in 
part, for the data they collect, there is little incentive to share 
information among themselves.
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    \16\ For example, underwriters may provide the information to 
data providers who also provide services in the underwriting process 
like modeling and pricing of the bonds, or to data providers who 
also provide trading platforms.
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    The lack of accurate, complete and timely corporate bond new issue 
reference data imposes costs to various market participants. Incomplete 
new issue reference data prevents traders from identifying and 
evaluating newly issued bonds for trading.\17\ This may lead to loss of 
trading opportunities for traders, loss of business for trading 
platforms, and less demand for the initial subscription of the bond 
issuance, all of which can hurt issuers and underwriters, decreasing 
demand and liquidity for bonds. Variation of reference data 
completeness across data providers puts small traders who cannot afford 
multiple data providers at a disadvantage in accessing the new issue 
market. For trading platforms, clearing firms and electronic trading 
platforms, inaccurate reference data creates inconsistencies in trading 
and the settlement process and increases transaction costs. The lack of 
centralized data sources forces data providers and trading platforms to 
manually collect or correct data, which can be costly.
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    \17\ According to one trading platform, its reference data 
provider would only provide data relating to new issues the morning 
after issuance, which resulted in the firm's clients not being able 
to trade the bond when it began to trade (usually the previous 
afternoon).
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Baseline
    This section explains the current dissemination process of the new 
issue reference data in the corporate bond market, including summary 
statistics on the new issuance market and underwriters.
    In 2018, 22,385 TRACE-Eligible corporate debt securities were 
issued, including corporate bonds and equity linked notes. New issue 
reference data is generated by underwriters. It is usually aggregated 
by data providers and then sold to various market participants for 
consumption, including trading and clearing firms, electronic trading 
platforms, broker-dealers and bond investors. As noted above, FINRA 
conducted outreach to understand the dissemination process, direct and 
indirect costs imposed by the process, and ways it might be 
improved.\18\
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    \18\ FINRA talked to four data providers, three underwriters, 
two trading platforms, and two clearing firms.
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    To facilitate trade reporting, as discussed above, underwriters are 
required to report limited new issue information to FINRA under Rule 
6760. Underwriters also often provide additional new issue reference 
data to FINRA on a voluntary basis on the FINRA TRACE New Issue Form. 
Besides regulatory reporting to FINRA, underwriters follow different 
practices to report reference data on new corporate bond issues to 
other parties. To facilitate trading of corporate bonds, underwriters 
usually report some of the data to their clients, which are generally 
institutional investors. Some also report to certain aggregators and 
media vendors. No standard exists among underwriters on whom to report 
new

[[Page 13981]]

issuances to, what fields to include and on what timeline, so the 
dissemination of new issue reference data is fragmented and 
inconsistent.
    Based on FINRA's conversations with data providers, no systematic 
ways exist for data providers to obtain complete, timely and reliable 
reference information on corporate bond new issues. Individual 
underwriters send new issue reference information to some data 
providers, often through email or term sheets. However, data providers 
rely on various sources for collecting the reference data for other new 
issues, including preliminary deal documents, issuers, vendor data, 
pricing wires and final prospectuses. Since information is collected 
through different sources, the coverage of new issues varies by data 
providers and, as a result, data can be inconsistent. The speed at 
which data providers collect reference data also varies. Any individual 
data provider might have reference data for only a subset of the newly 
issued bonds on the pricing day when bonds are sold in the primary 
market. The coverage may rise through the trading day and reach its 
steady level several days after the issuance.
    FINRA understands that individual firms typically gain access today 
to new issue reference data by purchasing the services of one or more 
third-party data vendors. Introducing firms may gain access to the 
information via their clearing firm, which provides the data as part of 
its services. Similarly, some firms may grant access to the new pricing 
information to their clients, either directly or through some research 
product.
    FINRA understands that trading platforms typically subscribe to 
data providers and augment their reference data from other sources, 
such as term sheets and websites to collect missing reference 
information. Clients of trading platforms rely on the platforms to 
provide new issue reference data.
    Electronic trading platforms capture a significant portion of the 
corporate bond trading volume. The U.S. Treasury Department estimates 
that electronic platforms have captured 20% of investment grade 
corporate bond trading.\19\ According to Greenwich Associates' 2017 
U.S. Fixed-Income Study, almost 85% of investors in investment grade 
instruments surveyed use electronic trading, and close to 73% of 
investors in high-yield instruments do.
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    \19\ See Jake Liebschutz and Brian Smith, Examining Corporate 
Bond Liquidity and Market Structure, (March 7, 2016), https://www.treasury.gov/connect/blog/Pages/Examining-Corporate-Bond-Liquidity-and-Market-Structure.aspx.
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Economic Impacts
Pricing of the Proposed Service
    New issue reference data is essential for the pricing and trading 
of bonds and the proper functioning of the corporate bond market. 
However, building such data requires extensive coordination among 
market participants and manual data collection, compilation and 
cleaning efforts for each data vendor. By using a regulatory 
requirement to centralize data reporting to FINRA, FINRA could reduce 
these duplicated efforts and thus costs, while improving the accuracy, 
completeness and timeliness of the information made available. FINRA is 
proposing to price the reference data as a utility, using cost plus 
margin pricing. This ensures that market participants get accurate and 
timely reference data, while limiting the price of new issue reference 
data as a barrier to entry to bond market participants.
    Besides improving the quality of new issue reference data available 
to the market, FINRA believes that the data service will promote fair 
and reasonable pricing for reference data by introducing an alternative 
source in addition to what is provided by the incumbent data providers. 
As discussed in more detail below, currently underwriters have 
relatively few incentives to report to data providers other than the 
prevalent incumbent data providers. The incumbent data providers face 
less competition because of the complexity of building the database as 
discussed previously, leading to a relatively high barrier to entry. By 
providing an alternative option for the data at cost plus margin, the 
service will exert disciplinary pressure on the current pricing for the 
data. The proposed service may not be the only collector of reference 
data. Data providers may continue to collect data from their existing 
sources and on a range of bond reference data beyond the limited fields 
provided in the proposed service. By lowering the barrier to entry and 
allowing data providers to compete on other dimensions and value-added 
services, the service would promote competitive pricing of the 
reference data.
Benefits
    The proposed service would be a central source for collecting and 
disseminating new issue reference data, and would provide market 
participants with more complete, accurate and timely data about new 
issues. FINRA expects that the new issue reference data service will 
increase the transparency of the corporate bond market, especially 
around the issuance period. Historically, TRACE implementation has 
demonstrated that transparency has facilitated trading and improved 
market quality.\20\ Thus, FINRA believes that the increased 
transparency as a result of the proposed reference data service will 
also benefit the market.
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    \20\ See FINRA's website for a list of TRACE Independent 
Academic Studies, available at http://www.finra.org/industry/trace/trace-independent-academic-studies.
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    Accurate and timely information about newly issued corporate bonds 
would allow potential buyers the opportunity to evaluate the bonds for 
investment, especially right after issuance. This likely increases 
their investment choices. Index operators would also have the 
opportunity to evaluate new bonds for timely inclusion. This helps 
ensure that the index accurately represents the concurrent bond market 
condition.
    Accurate and timely new issue data also would benefit trading 
platforms and clearing firms by reducing broken trades and errors in 
trading due to inconsistent information. It also would increase trading 
speed by removing delays due to manually correcting reference data 
errors. Accurate and timely new issue reference data may also increase 
trading volumes that might otherwise be lost when traders do not have 
reference data on newly issued bonds.
    A central source for new issue reference data would likely benefit 
most data providers by providing them with a complete, accurate and 
relatively low cost source of data. It would reduce the need for data 
providers to manually collect missing data or correct errors in the new 
issue reference data.
    Issuers and underwriters may benefit from the service as well. The 
new issue reference data service may reduce trading costs and increase 
trading volume as discussed above. To the extent that this results in 
increased liquidity, it will lower the cost of capital for issuers. 
Increased awareness of the new issuances may also help underwriters in 
marketing and underwriting. Underwriters may also benefit from the 
reference data that underwriters collectively submit by reducing the 
need to manually research other reference data sources for proper 
procurement of information.
Costs and Negative Impacts
    The proposed rule change may impose costs on underwriters to report

[[Page 13982]]

the additional reference data to FINRA. Currently, underwriters provide 
limited corporate bond reference data to FINRA, some required under 
Rule 6760 and some voluntarily, and they may provide information to one 
or more data vendors. The costs associated with providing the new 
proposed reference data fields to FINRA depends on underwriters' 
current reporting systems, the speed at which they currently are able 
to provide this information, and the timing with which they report the 
data today. Reporting additional fields to FINRA as outlined in the 
proposed rule may require upgrades to their current system for 
reporting to incorporate both the new fields as well as to meet the new 
timing required by the proposed rule change. Underwriters may also 
incur costs when they choose to use third-party vendors to report the 
reference data, although FINRA anticipates that underwriters will 
decide to report themselves or through a third party based on their 
cost and efficiencies. Based on conversations with underwriters, FINRA 
understands that underwriters do not anticipate incurring significant 
costs for reporting under this proposal.
    The underwriter market is highly skewed towards large underwriters, 
with 71.24% of dollar volume being led by the ten largest underwriters 
in the first three quarters of 2018, according to Bloomberg league 
tables. This may create a concern that underwriters that underwrite 
fewer deals may be burdened disproportionally if there are fixed costs 
associated with amending an underwriter's reporting system to meet the 
additional requirements for new issue reference data submission as set 
forth in the proposal. Additional burden may be alleviated because 
reporting to FINRA would reduce or eliminate the need for underwriters 
to report to other parties, or by the fact that underwriters can 
leverage investments already made in the existing reporting system 
necessary under Rule 6760.
    Subscribers to FINRA's new issue reference data service will incur 
a subscription fee and setup cost. Subscribers may pay the lower fee 
for internal usage of the data or pay the higher fee for redistributing 
the data. Firms redistributing the data may pass on the cost to their 
clients; however, FINRA will not charge redistributors anything beyond 
the flat $6,000 per month charge regardless of how often it 
redistributes the data. Thus those firms gaining access indirectly, for 
example through a clearing firm, may be charged by the clearing firm as 
part of their agreements. However, FINRA expects that any incremental 
additional cost charged by a redistributor to cover new issue reference 
data may be relatively low because FINRA would allow unlimited 
redistribution rights for the $6,000 monthly charge. FINRA also 
believes that the incremental additional costs charged by 
redistributors may be relatively low compared to the current cost that 
subscribers incur to obtain new issue reference data for corporate 
bonds. FINRA anticipates that many market participants will receive the 
data from redistributors, consistent with what they do today.
    A centralized source of new issue reference data is more efficient 
than the current process of sourcing reference data, and FINRA intends 
to price the service as a utility provider. Subscribers would be able 
to access the full data stream from a single source rather than have to 
engage in multiple contracts or limit their access to data. Direct 
subscription to the reference data service is completely voluntary, so 
any subscription indicates that the benefit outweighs the cost and 
thus, it will not impose a regulatory burden on subscribers. For those 
firms that gain access indirectly through another subscriber, costs may 
decrease if the costs to subscribers to obtain new issue reference data 
is lower and some or all of those savings are passed onto the firms.
    Finally, a centralized source of new issue reference data may 
create a single point of failure in the new issue reference data market 
if data providers stop collecting data on their own and solely rely on 
the data service. We expect this is unlikely to happen because data 
providers will likely continue to collect a range of bond reference 
data beyond the limited fields provided in the proposed service in 
order to provide value added services to their offerings.
Competition and Efficiency
    The proposed service will likely affect competition among market 
participants. FINRA believes the service will promote competition in 
general while ensuring the essential functioning of the bond market by 
providing accurate and timely data for pricing and trading of corporate 
bonds.
    The proposed service may increase competition among data providers. 
FINRA learned through discussions with market participants that the 
quality and timeliness of reference data varies greatly across data 
providers. Underwriters provide the reference data and in return 
receive a benefit. Given the prevalence of the incumbent data 
provider's service, underwriters have less incentive to report to other 
data providers. This might create a high barrier to entry for other 
data providers.\21\ By providing an option of complete and timely new 
issue reference data to data providers, the proposed service would 
promote competition by lowering the barrier to entry. Data providers 
can compete on other dimensions, such as presentation, ease of access, 
integration with other data, supplementary fields and other value-added 
services.
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    \21\ For example, one trading platform/data provider told FINRA 
that a reference data contract with the incumbent provider of new 
issue data is prohibitively expensive, so it has to use other less 
expensive reference data sources and a higher degree of manual 
intervention.
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    The proposed service also would promote competition among firms by 
lowering the barrier to entry for broker-dealers trading newly issued 
corporate bonds. For example, accurate and timely information about 
newly issued corporate bonds at relatively low cost would especially 
benefit small broker-dealers that would otherwise have less access to 
such information.
    The proposed service would increase efficiency by providing data 
providers with the essential fields on the complete set of new 
issuances on which they can build their reference data. It reduces the 
need for data providers and trading platforms to manually correct 
errors and fill in missing data.\22\
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    \22\ For example, one trading platform told FINRA that in 
addition to the cost of their contract with the reference data 
provider, they hired an employee specifically to maintain the 
integrity of the new issue reference data and the estimated cost for 
the person-hours needed for this is about $150k/year.
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Alternatives Considered
    FINRA understands that for the municipal bonds new issue reference 
data service required by the MSRB and operated by DTCC, costs may be 
recovered from generally applicable connectivity fees to underwriters, 
service providers, and information vendors that use NIIDS. FINRA has 
determined that rather than imposing connectivity fees on underwriters, 
which could be ultimately passed on to other users, it is more 
appropriate to recover fees from parties that choose to receive and use 
the data for their business purposes.
    FINRA also considered whether there was an appropriate alternative 
approach that involved an expansion of the DTCC's NIIDS service to 
include corporate new issue reference data. However, based on 
operational and commercial reasons, including inefficiencies with 
integrating the existing FINRA reporting infrastructure with a separate 
DTCC infrastructure, FINRA concluded that expanding the

[[Page 13983]]

current existing FINRA reporting and dissemination framework was a more 
effective and efficient approach. In addition, the current proposal 
reflects the unanimous view of the FIMSAC, which stated that FINRA was 
best situated to carry out the Recommendation because it would be an 
incremental addition to current practices, both for FINRA and the 
underwriters that must report corporate new issue information.
    In addition, as discussed above, FINRA considered an alternative, 
phased reporting approach, with certain core information required prior 
to the first trade and an extended 60-minute window for remaining 
information. FINRA is not proposing this alternative approach for the 
reasons discussed above, but FINRA invites interested parties to submit 
comments on this or any other element of the proposal.

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. As noted 
above, the proposed rule change is based on the FIMSAC Recommendation, 
which was published on the SEC website but did not generate any written 
comments.

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 up to 90 days (i) as the 
Commission may designate 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 [email protected]. Please include 
File Number SR-FINRA-2019-008 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-2019-008. 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 website (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 website 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. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-FINRA-2019-008, and should be submitted 
on or before April 29, 2019.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\23\
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    \23\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-06786 Filed 4-5-19; 8:45 am]
 BILLING CODE 8011-01-P