Document ID: SEC-2011-1629-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2011-10-20T04:00Z

[Federal Register Volume 76, Number 203 (Thursday, October 20, 2011)]
[Notices]
[Pages 65313-65315]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-27132]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65551; File No. SR-FINRA-2011-056]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing and Immediate Effectiveness of 
Proposed Rule Change To Amend Rule 7730 Regarding TRACE Reporting Fees 
For Transactions in Agency Pass-Through Mortgage-Backed Securities 
Traded ``To Be Announced''

October 13, 2011.
    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 September 30, 2011, the 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. 
FINRA has designated the proposed rule change as ``establishing or 
changing a due, fee or other charge'' under Section 19(b)(3)(A)(ii) of 
the Act \3\ and Rule 19b-4(f)(2) thereunder,\4\ which renders the 
proposal effective upon receipt of this filing by the Commission. 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.
    \3\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \4\ 17 CFR 240.19b-4(f)(2).
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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 establish a 
transaction reporting fee of $1.50 per transaction for a TRACE-Eligible 
Security that is an Agency Pass-Through Mortgage-Backed Security traded 
``to be announced'' and to incorporate minor technical amendments.
    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, on the 
Commission's Web site at http://www.sec.gov, 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
    On May 16, 2011, amendments to the FINRA Rule 6700 Series (the 
TRACE rules) and Rule 7730 (TRACE fees) became effective.\5\ The 
amendments defined Asset-Backed Securities (``ABS'') as TRACE-Eligible 
Securities and extended TRACE reporting requirements to transactions in 
ABS in the TRACE rules.\6\ In addition, the TRACE reporting fees in 
effect for transactions in corporate bonds and Agency Debt Securities 
were extended to transactions in ABS in Rule 7730.\7\
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    \5\ See Securities Exchange Act Release No. 61566 (February 22, 
2010), 75 FR 9262 (March 1, 2010) (order approving File No. SR-
FINRA-2009-065) (``TRACE ABS filing''); Securities Exchange Act 
Release No. 64364 (April 28, 2011), 76 FR 25385 (May 4, 2011) (order 
approving File No. SR-FINRA-2011-012) (``supplemental TRACE ABS 
filing''); Regulatory Notice 10-55 (October 2010) (establishing May 
16, 2011 as the effective date for the TRACE ABS filing); and 
Regulatory Notice 11-20 (May 2011) (establishing May 16, 2011 as the 
effective date for the supplemental TRACE ABS filing).
    \6\ ``Asset-Backed Security'' and ``TRACE-Eligible Security'' 
are defined in, respectively, Rule 6710(m) and Rule 6710(a).
    \7\ ``Agency Debt Security'' is defined in Rule 6710(l).
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    As a result, currently the reporting fee for transactions in ABS, 
including Agency Pass-Through Mortgage-Backed Securities (``Agency 
Pass-Through MBS'') traded to-be-announced

[[Page 65314]]

(``TBA''),\8\ is based upon a sliding scale and ranges from $0.475 to 
$2.375 per transaction depending upon the size (volume) of the reported 
transaction.\9\ Most ABS transactions, including Agency Pass-Through 
MBS traded TBA (``TBA transactions''), are in excess of $1,000,000 par 
value (or, in the case of certain ABS, in excess of $1,000,000 as 
measured by the original face value or Remaining Principal Balance of 
the security, as applicable).\10\ Thus, for most ABS transactions, the 
highest reporting fee, $2.375 per transaction, applies.
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    \8\ As provided in Rule 6710(v), ``Agency Pass-Through Mortgage-
Backed Security'' means
    ``a mortgage-backed security issued by an Agency or a 
Government-Sponsored Enterprise, for which the timely payment of 
principal and interest is guaranteed by an Agency or a Government-
Sponsored Enterprise, representing ownership interests in a pool or 
pools of residential mortgage loans with the security structured to 
``pass through'' the principal and interest payments made by the 
mortgagees to the owners of the pool(s) on a pro rata basis.''
    ``Agency'' and ``Government-Sponsored Enterprise'' (``GSE'') are 
defined in, respectively, Rule 6710(k) and Rule 6710(n).
    As provided in Rule 6710(u), ``TBA'' means
    `` `to be announced' and refers to a transaction in an Agency 
Pass-Through Mortgage-Backed Security * * * where the parties agree 
that the seller will deliver to the buyer an Agency Pass-Through 
Mortgage-Backed Security of a specified face amount and coupon from 
a specified Agency or Government-Sponsored Enterprise program 
representing a pool (or pools) of mortgages (that are not specified 
by unique pool number).''
    In a transaction traded TBA, the parties agree on a price for 
delivering a given volume of Agency Pass-Through MBS at a specified 
future date.
    \9\ As set forth in Rule 7730(b)(1)(A), for trades up to and 
including $200,000 par value, the reporting fee is $0.475 per trade; 
for trades over $200,000 and up to and including $999,999.99 par 
value, the reporting fee is $0.000002375 times par value (i.e., 
$0.002375 per $1000 par value) per trade; and for trades of 
$1,000,000 par value or more, the reporting fee is $2.375 per trade. 
(Trade reporting and other TRACE fees are also summarized in a fee 
chart in Rule 7730.)
    \10\ For some ABS transactions, including TBA transactions, par 
value is not the correct term to describe the size (volume) of a 
transaction. When calculating reporting fees for transactions in 
such securities, Rule 7730(b)(1)(B) provides that the size (volume) 
of a transaction is the lesser of the original face value or the 
Remaining Principal Balance. ``Remaining Principal Balance'' and 
``Time of Execution'' are defined in, respectively, Rule 6710(aa) 
and Rule 6710(d).
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    FINRA proposes to amend the transaction reporting fee in Rule 7730 
applicable to TBA transactions. Specifically, FINRA proposes to charge 
a member a flat fee of $1.50 per TBA transaction in lieu of the current 
reporting fee that is based upon a sliding scale depending on the size 
(volume) of the transaction.\11\
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    \11\ The proposed TBA transaction fee would be set forth in Rule 
7730(b)(1)(B). FINRA also proposes three minor technical amendments 
to Rule 7730(b)(1). The provision regarding the sliding scale, which 
determines a reporting fee based on the size (volume) of a 
transaction, would be incorporated in Rule 7730(b)(1)(B) and deleted 
in Rule 7730(b)(1)(A). The provision indicating that, for ABS where 
par value is not used to determine the size (volume) of a 
transaction, for purposes of trade reporting fees, the size (volume) 
of a transaction is the lesser of the original face value or the 
Remaining Principal Balance would be incorporated in Rule 
7730(b)(1)(A) and deleted in Rule 7730(b)(1)(B). In addition, the 
final sentence of current Rule 7730(b)(1)(B) would be deleted.
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    Agency Pass-Through MBS are the most liquid sector among all ABS, 
and transactions in Agency Pass-Through MBS are a significant share of 
the volume of all ABS transactions. Many Agency Pass-Through MBS are 
TBA transactions. The proposed amendment to Rule 7730 to modify the 
reporting fee from multiple rates based upon transaction size (volume) 
to a flat rate of $1.50 per transaction for TBA transactions regardless 
of transaction size (volume) would reduce the reporting fee for 
approximately 95 percent of all TBA transactions.\12\ In addition, the 
proposed fee reduction would substantially reduce reporting fees that 
members pay in connection with ABS transactions in general, as TBA 
transactions account for approximately 85 percent of the total volume 
(size) traded in ABS and approximately 51 percent of all ABS 
transactions.\13\
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    \12\ A review of ABS transaction data reported to TRACE between 
May 16, 2011 and July 31, 2011, indicates that more than 95 percent 
of all TBA transactions are larger than $1 million and, thus, are 
billed at the rate of $2.375 per transaction. Reducing the reporting 
fee to a flat fee of $1.50 per transaction will raise fees on 
approximately five percent of TBA transactions, and lower fees on 
approximately 95 percent of such transactions.
    \13\ A review of ABS transaction data reported to TRACE between 
May 16, 2011 and July 31, 2011, showed that TBAs trade in a liquid 
market. The average daily volume of TBA transactions is 
approximately $219 billion. The average daily number of trades is 
slightly more than 7,000. The average daily volume of TBA 
transactions is approximately ten times the average daily volume of 
all corporate bonds.
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    FINRA has filed the proposed rule change for immediate 
effectiveness. The implementation date will be November 1, 2011.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(5) of the Act,\14\ 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. FINRA believes that the proposed amendment, which will 
establish a flat fee per transaction for reporting TBA transactions 
regardless of the size (volume) of the TBA transaction, is a reasonable 
and fair adjustment to TRACE reporting fees in that, currently, for TBA 
transactions, members are subject to the highest TRACE reporting fee 
for almost all such transactions, and the proposed amendment will 
reduce the reporting fee for 95 percent of such transactions, and will 
result in a more equitable allocation among members for ABS reporting 
fees.
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    \14\ 15 U.S.C. 78o-3(b)(5).
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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.

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

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A) of the Act \15\ and paragraph (f)(2) of Rule 19b-4 
thereunder.\16\ At any time within 60 days of the filing of the 
proposed rule change, the Commission summarily may temporarily suspend 
such rule change if it appears to the Commission that such action is 
necessary or appropriate in the public interest, for the protection of 
investors, or otherwise in furtherance of the purposes of the Act. If 
the Commission takes such action, the Commission shall institute 
proceedings to determine whether the proposed rule should be approved 
or disapproved.
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    \15\ 15 U.S.C. 78s(b)(3)(A).
    \16\ 17 CFR 240.19b-4(f)(2).
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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 e-mail to rule-comments@sec.gov. Please include 
File Number SR-FINRA-2011-056 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary,

[[Page 65315]]

Securities and Exchange Commission, 100 F Street, NE., Washington DC 
20549-1090.

All submissions should refer to File Number SR-FINRA-2011-056. This 
file number should be included on the subject line if e-mail 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 the filing will also 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 No. SR-FINRA-2011-056 
and should be submitted on or before November 10, 2011.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-27132 Filed 10-19-11; 8:45 am]
BILLING CODE 8011-01-P