Document ID: SEC-2019-0578-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2019-04-30T04:00Z

[Federal Register Volume 84, Number 83 (Tuesday, April 30, 2019)]
[Notices]
[Pages 18329-18332]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-08652]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-85713; File No. SR-FINRA-2019-014]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of a Proposed Rule Change To Amend 
FINRA Rule 6730 (Transaction Reporting) April 24, 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 April 16, 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 amend FINRA Rule 6730 (Transaction Reporting) 
to provide members additional time to report to the Transaction 
Reporting and Compliance Engine (``TRACE'') transactions in U.S. 
Treasury Securities executed to hedge a primary market transaction, and 
to adopt a new modifier to identify such transactions.
    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
    Rule 6730(a)(4) (Reporting Requirements--U.S. Treasury Securities) 
provides that members must report transactions in U.S. Treasury 
Securities \3\ executed on a business day through 5:00 p.m. ET on the 
same day during TRACE System Hours.\4\ For transactions executed on a 
business day after 5:00 p.m. ET, members must report the trade no later 
than the next business day (T+1) during TRACE System Hours, and, if 
reported on T+1, members must designate the trade ``as/of'' and include 
the date of execution. Transactions in U.S. Treasury Securities are 
reported for regulatory purposes only and are not disseminated. FINRA 
is proposing to amend Rule 6730 to provide until the end of TRACE 
System Hours on T+1 for members to report transactions in U.S. Treasury 
Securities executed to hedge certain primary market transactions in 
TRACE-Eligible Securities, even where the U.S. Treasury hedge trade 
occurs before 5:00 p.m. ET, as discussed below.
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    \3\ Rule 6710(p) defines a ``U.S. Treasury Security'' as ``a 
security, other than a savings bond, issued by the U.S. Department 
of the Treasury to fund the operations of the federal government or 
to retire such outstanding securities.'' The term ``U.S. Treasury 
Security'' also includes separate principal and interest components 
of a U.S. Treasury Security that has been separated pursuant to the 
Separate Trading of Registered Interest and Principal of Securities 
(``STRIPS'') program operated by the U.S. Department of Treasury.
    \4\ Rule 6710(t) provides that ``TRACE System Hours'' means the 
hours the TRACE system is open, which are 8:00:00 a.m. ET through 
6:29:59 p.m. ET on a business day, unless otherwise announced by 
FINRA.
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    FINRA understands that, at the request of customers, members often 
execute U.S. Treasury hedge transactions in connection with primary 
market transactions that meet the definition of ``List or Fixed 
Offering Price Transaction'' or ``Takedown Transaction'' (i.e., a 
``P1'' transaction).\5\ In such cases, the U.S. Treasury hedge and the 
P1 transactions are executed in

[[Page 18330]]

close time proximity because the desired hedge position in the U.S. 
Treasury Security cannot be determined until the underwriters complete 
pricing of the new issue underlying the P1 trade and make allocations 
to customers. Once pricing is complete for the new issue, numerous 
transactions must be entered and reported to TRACE (i.e., for the U.S. 
Treasury hedge as well as the related P1 transactions).
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    \5\ ``List or Fixed Offering Price Transactions'' and ``Takedown 
Transactions,'' which are identified with the ``P1'' modifier, 
generally are 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). See Rule 6710(q) and (r).
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    Under the current rule, trade reports for U.S. Treasury hedge 
transactions executed by 5:00 p.m. ET are due on trade date (by the 
close of TRACE System Hours), whereas all P1 trade reports are due to 
TRACE on T+1 (by the close of TRACE System Hours).\6\ FINRA understands 
that this difference in reporting timeframes can present operational 
challenges for members, particularly where pricing of the debt new 
issue occurs prior to, but near, 5:00 p.m. ET. Therefore, FINRA is 
proposing the instant rule change to align the trade reporting 
timeframe for all transactions in U.S. Treasury Securities executed to 
hedge a P1 trade with the deadline for reporting the related P1 
transaction.
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    \6\ In light of the operational concerns raised by members at 
the time the P1 transaction reporting requirements were adopted, 
FINRA allowed members until 6:29:59 p.m. ET on T+1 to report P1 
transactions to TRACE. FINRA believed that the additional time was 
appropriate to address operational concerns and did not negatively 
impact regulatory surveillance or market transparency because P1 
transactions are not subject to dissemination. See Securities 
Exchange Act Release No. 60726 (September 28, 2009), 74 FR 50991 
(October 2, 2009) (Notice of Filing of Amendment No. 2 and Order 
Approving File No. SR-FINRA-2009-010); Letter from Sharon Zackula, 
Associate Vice President and Associate General Counsel, FINRA, to 
Elizabeth M. Murphy, Secretary, SEC, dated August 26, 2009.
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    Based on a review of P1 transaction data for corporate bond new 
issuances in 2017, FINRA found that approximately 70% of all P1 trades 
were executed after 3:00 p.m. ET on the date of issuance. Given that 
the majority of P1 transactions occur near the end of the day, FINRA 
believes it is reasonable to provide a consistent reporting timeframe 
for hedge transactions in U.S. Treasury Securities and related P1 
trades (i.e., hedge transactions in U.S. Treasury Securities may be 
reported until 6:29:59 p.m. ET on T+1). FINRA believes that this 
additional time may improve member compliance, ease operational 
concerns and would not impact transparency (because transactions in 
U.S. Treasury Securities currently are not disseminated).\7\ Thus, 
FINRA is proposing to amend Rule 6730 to provide members until the 
close of TRACE System Hours on the next business day (i.e., until 
6:29:59 p.m. ET on T+1) to report transactions in U.S. Treasury 
Securities executed to hedge a P1 transaction. FINRA notes that the 
proposal would not affect transparency (because transactions in U.S. 
Treasury Securities currently are not disseminated). FINRA also 
proposes that members must append a new trade modifier when reporting 
to TRACE transactions in U.S. Treasury Securities that are executed to 
hedge a P1 transaction. FINRA believes the modifier would improve 
FINRA's surveillance by helping FINRA identify the reason a transaction 
in a U.S. Treasury Security is being reported on T+1 rather than T, 
would provide useful information to FINRA's audit trail about the 
purpose of the trade, and provide further insight into the U.S. 
Treasury Security cash market.
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    \7\ See Rule 6750(c)(5).
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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 to be published no later than 90 days following Commission 
approval. The effective date will be no later than 270 days following 
publication of the Regulatory Notice announcing Commission approval.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\8\ 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 and Section 15A(b)(9) of the Act,\9\ which requires 
that FINRA rules not impose any burden on competition that is not 
necessary or appropriate.
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    \8\ 15 U.S.C. 78o-3(b)(6).
    \9\ 15 U.S.C. 78o-3(b)(9).
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    FINRA believes that the proposed rule change to provide members 
with additional time to trade report hedge transactions in U.S. 
Treasury Securities may improve member compliance, ease operational 
concerns, and would not impact transparency (because transactions in 
U.S. Treasury Securities currently are not disseminated). FINRA 
believes the proposed new modifier that would identify transactions in 
U.S. Treasury Securities executed to hedge P1 transactions would 
improve FINRA's surveillance capabilities by helping FINRA identify the 
reason a transaction in a U.S. Treasury Security is being reported on 
T+1 rather than T, would provide useful information to FINRA's audit 
trail about the purpose of the trade, and provide further insight into 
the U.S. Treasury Security cash market.

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 Impacts
    FINRA has undertaken an economic impact assessment, as set forth 
below, to analyze the need for the proposed rulemaking, the regulatory 
objective of the proposal, the economic baseline of analysis, the 
anticipated economic impacts, and the alternatives considered.
(a) Regulatory Objective
    Institutional investors often hedge P1 transactions with U.S. 
Treasury Securities. Underwriting syndicate members allocate the P1 
transaction among investors, and this may occur prior to, but near, the 
close of trading on the issue date. Members engaged in the underwriting 
also acquire the hedging positions in U.S. Treasury Securities on the 
issue date, but do not know the specific allocation of those securities 
among clients until the execution of the related P1 transactions. Thus, 
once pricing is complete for the new issue, possibly hundreds of trades 
in U.S. Treasury Securities must be entered and reported to TRACE. 
Members have indicated that this timing difference in the trade 
reporting requirements can present operational challenges. In response, 
FINRA proposes to:

--Permit these U.S. Treasury Security hedges to be reported on a T+1 
basis; and
--Create a modifier in TRACE for the identification of transactions in 
U.S. Treasury Securities to hedge a ``List or Fixed Offering Price 
Transaction'' or ``Takedown Transaction.''
(b) Economic Baseline
    When a new issue of a TRACE-Eligible Security comes to market, the 
underwriting syndicate may provide institutional clients with U.S. 
Treasury Security hedging services related to the amount of securities 
allocated to the client. The syndicate desk will allocate the U.S. 
Treasury Security hedge based on the P1 transactions, which may not be 
known until late in the trading day. Members have until the close of 
the TRACE system on the next business day, T+1, to report P1 
transactions, but the secondary market U.S. Treasury trades may be 
reportable by 6:29:59 p.m. ET on the same day, T. This

[[Page 18331]]

incongruous reporting timeframe can create an operational burden for 
the syndicate as approximately 200-300 accounts may be involved in an 
issuance with respect to P1 transaction and secondary market U.S. 
Treasury hedge transactions. Based on transaction reports from July 
2017 through February 2018, late reporting exceptions represent 0.33% 
of total transaction reports to TRACE in U.S. Treasury Securities. 
While FINRA cannot currently determine what percentage of late 
reporting exceptions are attributed to U.S. Treasury Securities 
executed to hedge P1 transactions, firms selected for examination of 
late trade reports attributed nearly 100% of their late transaction 
reports (typically reported on T+1 rather than T) to U.S. Treasury 
hedges for new issue TRACE-Eligible Securities. The results from these 
examinations may not be generalizable to other members as the sample 
size examined is small.
(c) Economic Impact
Change Reporting Time for U.S. Treasury Hedges to T+1
    FINRA believes that permitting U.S. Treasury hedge transactions to 
be reported with the same deadline as P1 transactions on a T+1 basis 
will allow for sufficient time for syndicate firms to report hedge 
transactions without reducing the usefulness of the TRACE data for 
audit trail purposes. Syndicate firms may benefit, as uniform reporting 
deadlines would simplify internal operations. This in turn may reduce 
the syndicate firm's operational burdens relating to maintaining 
orderly books and records, which may reduce late TRACE reports.
    FINRA anticipates that members will experience no material costs 
from the change in reporting time to T+1 in U.S. Treasury Security 
hedge transactions. In addition, market participants will experience no 
change in transparency from the one-day extension to T+1, because 
transactions in U.S. Treasury Securities are not currently 
disseminated. FINRA may incur a cost from this change in reporting time 
as FINRA would be required to make changes to incorporate the new 
reporting timeframe into the system logic to ensure that firms are not 
identified as having reported late until after the end of the new 
reporting period.
    In aggregate, FINRA believes that the benefits of creating a 
modifier and extending reporting deadlines, as proposed, will outweigh 
costs of appending the modifier for syndicate firms by simplifying 
their operations and reducing late trade reports.
Creation of Modifier in TRACE To Identify Certain U.S. Treasury Hedge 
Transactions
    The proposed new modifier that would identify transactions in U.S. 
Treasury Securities executed to hedge P1 transactions would improve 
FINRA's surveillance capabilities by helping FINRA identify the reason 
a transaction in a U.S. Treasury Security is being reported on T+1 
rather than T, would provide useful information to FINRA's audit trail 
about the purpose of the trade, and provide further insight into the 
U.S. Treasury Security cash market.
    FINRA will be required to make system changes and members will need 
technical changes in order to accommodate the new modifier. This 
represents a fixed cost to FINRA and its members that report U.S. 
Treasury Security hedging transactions related to P1 transactions. The 
variable cost of reporting this new modifier should be minimal to all 
parties as costs are currently incurred for existing trade reports to 
TRACE.
(d) Alternatives
    No alternatives are under consideration.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    FINRA received an email from SIFMA relating to the need for the 
proposed rule change.\10\ While SIFMA expressed continued support for 
FINRA's efforts in requiring regulatory reporting of U.S. Treasury 
Securities to TRACE as a good first step, SIFMA noted that the 
divergence in the reporting timelines for U.S. Treasury hedge trades 
related to P1 transactions and the P1 transactions themselves created a 
significant operational burden for firms. SIFMA also believed that the 
different reporting timeframes reduced the regulatory value of the data 
by failing to link the reporting requirements. Therefore, SIFMA 
recommended that FINRA should (1) align the trade reporting timeframe 
for U.S. Treasury trades to hedge a P1 transaction with the reporting 
timeframe for the related P1 transaction, and (2) create an additional 
modifier to identify all U.S. Treasury hedge trades linked to P1 
transactions. The instant proposal addresses these concerns. As stated 
above, FINRA believes that the proposed rule change to provide members 
with additional time to trade report P1 hedge transactions in U.S. 
Treasury Securities may improve member compliance, ease operational 
concerns, and would not impact transparency because transactions in 
U.S. Treasury Securities currently are not disseminated.
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    \10\ Email from Robert Toomey, Managing Director and Associate 
General Counsel, Securities Industry and Financial Markets 
Association (SIFMA), to Chris Stone & Justin Tubiolo, FINRA, dated 
June 13, 2018, 1.24 p.m.
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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 [email protected]. Please include 
File Number SR-FINRA-2019-014 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-2019-014. 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

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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 
such 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-
014, and should be submitted on or before May 21, 2019.

    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,
Deputy Secretary.
[FR Doc. 2019-08652 Filed 4-29-19; 8:45 am]
 BILLING CODE 8011-01-P