Document ID: SEC-2012-0437-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2012-03-16T04:00Z

[Federal Register Volume 77, Number 52 (Friday, March 16, 2012)]
[Notices]
[Pages 15827-15833]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-6444]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-66577; File No. SR-FINRA-2012-020]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Proposed Rule Change Relating to 
Post-Trade Transparency for Agency Pass-Through Mortgage-Backed 
Securities Traded TBA

March 12, 2012.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that, on March 1, 2012, 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 and II 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 the FINRA Rule 6700 Series and Trade 
Reporting and Compliance Engine (``TRACE'') dissemination protocols 
regarding the reporting and dissemination of transactions in TRACE-
Eligible Securities that are Agency Pass-Through Mortgage-Backed 
Securities that are traded to be announced (``TBA'') (``TBA 
transactions''); to amend FINRA Rule 7730 regarding TRACE fees to 
provide for data fees for TBA transaction data; and to amend the FINRA 
Rule 6700 Series and FINRA Rule 7730 to delete references to a pilot 
program that expired on November 18, 2011, and to incorporate other 
minor administrative, technical or clarifying changes.\3\
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    \3\ The terms TRACE-Eligible Security, Agency Pass-Through 
Mortgage-Backed Security and TBA are defined in, respectively, Rule 
6710(a), Rule 6710(v) and Rule 6710(u).
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    The text of the proposed rule change is available on FINRA's Web 
site at http://www.finra.org, at the principal office of FINRA and at 
the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, FINRA included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. FINRA has prepared summaries, set forth in sections A, 
B, and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    1. Purpose
    FINRA proposes amendments to the TRACE rules and dissemination 
protocols to provide greater transparency in TBA transactions. First, 
FINRA proposes to amend Rule 6730, to establish distinct requirements 
for reporting TBA transactions for which good delivery may be made 
(``TBA transactions GD'') and for reporting TBA transactions in 
products that are not traded for good delivery (``TBA transactions 
NGD''), and, in two stages, to reduce the time frames to report each 
type of TBA transaction and to make a related amendment to Rule 
6710(u), the definition of ``TBA,'' to incorporate the concepts ``for 
good delivery'' and ``not for good delivery.'' Second, FINRA proposes 
to amend Rule 6750 to provide for the dissemination of TBA transactions 
and to establish, as part of TRACE dissemination protocols, a $25 
million dissemination cap for TBA transactions GD and a $10 million 
dissemination cap for TBA transactions NGD. Third, FINRA proposes to 
amend Rule 7730 to establish fees for current market data for TBA 
transactions and aged TBA transaction data.\4\ Finally, FINRA proposes 
to amend Rule 6730 to delete references to a pilot program that expired 
on November 18, 2011, and Rule 6730 and Rule 7730 to incorporate other 
minor administrative, technical or clarifying changes as described in 
greater detail below.
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    \4\ The term Historic TRACE Data is defined in Rule 7730(f)(4) 
and refers to aged TRACE transaction data, which will include TBA 
transaction data.
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TBA Transactions
    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).\5\
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    \5\ As defined in Rule 6710(v), an 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.
    The terms Agency and Government-Sponsored Enterprise (``GSE'') 
are defined in, respectively, Rule 6710(k) and Rule 6710(n).

    In a TBA transaction, the parties agree on a price for delivering a 
given volume of Agency Pass-Through Mortgage-Backed Securities at a 
specified future date. The distinguishing feature of a TBA transaction 
is that the actual identity of the securities to be delivered at 
settlement is not specified on the date of execution (``Trade Date''). 
Instead, the parties to the trade agree on only five general parameters 
of the securities to be delivered: issuer, mortgage type, maturity, 
coupon, and month of settlement.
    TBA transactions are ``for good delivery'' (``GD'') or ``not for 
good delivery'' (``NGD''). The GD and NGD distinctions and 
classifications are based on market standards and conventions that 
identify which mortgage pools (or combinations of mortgage pools) 
satisfy ``good delivery'' requirements, which were developed to 
facilitate the securitization of common

[[Page 15828]]

mortgage products, and to enhance and maintain the liquidity in the TBA 
market for such mortgage-backed securities. The conventions and 
standards for TBA transactions GD are set forth in the ``Uniform 
Practices for the Clearance and Settlement of Mortgage-Related 
Securities and Other Related Securities'', and particularly in Chapter 
8 (``Standard Requirements for Delivery on Settlements of Fannie Mae, 
Freddie Mac and Ginnie Mae Securities'') (``Good Delivery 
Guidelines'')).\6\ For a TBA transaction to be GD, it must conform to 
certain GSE or Ginnie Mae program requirements regarding the mortgage 
loans and also meet certain other requirements, such as those regarding 
variance in the actual principal amount delivered compared to the 
principal amount of the trade, the number of pools that may be 
delivered at settlement, minimum original face amount of a pool, and 
final maturity guidelines regarding the maturity of the mortgage loans 
underlying the security, among others.\7\ Products traded TBA but that 
are not eligible according to the Good Delivery Guidelines are 
considered ``not for good delivery.''
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    \6\ ``Uniform Practices for the Clearance and Settlement of 
Mortgage-Backed Securities and Other Related Securities'' (``Uniform 
Practices Guidelines'') is published by the Securities Industry and 
Financial Markets Association (``SIFMA'').
    \7\ Pooled mortgage loans that are traded GD include, but are 
not limited to, those conforming to the Fannie Mae and Freddie Mac 
``Single Family'' programs (i.e., single family mortgages identified 
by coupon ranges and maturities), and certain other products 
conforming to Fannie Mae, Freddie Mac or GNMA programs (e.g., the 
Gold Single Family, Balloon, Gold Balloon and Jumbo programs). Most 
newly issued Agency Pass-Through Mortgage-Backed Securities are 
eligible to be sold as TBA transactions GD. Examples of mortgage 
products not eligible for good delivery to settle a TBA transaction 
include, but are not limited to, interest only mortgages, project/
construction loans, and certain non-conforming mortgages on single 
family residences.
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    The vast majority of loans eligible for inclusion in TBA-delivered 
pools traded GD are known as standard loans. They are 15- and 30-year 
fixed-rate single-family loans with certain general characteristics set 
forth in the Good Delivery Guidelines.\8\ Other loans that are eligible 
for good delivery upon meeting specific criteria set forth in the Good 
Delivery Guidelines include Fannie Mae 11th District Cost of Funds 
Index (``COFI'') adjusted rate mortgages (``ARMs'') and Ginnie Mae 
ARMs. Also, TBA identification numbers assigned by the CUSIP Service 
Bureau distinguish the issuers and the various pool types, among other 
things, providing another means of identifying a transaction as a TBA 
transaction GD or a TBA transaction NGD.\9\
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    \8\ See Good Delivery Guidelines, Section 11 (``General 
Characteristics of Standard Loans for 15 and 30yr Fixed-Rate Single-
Family TBA-eligible Pools,'' listing 14 general characteristics of 
standard 15-year or 30-year loans (e.g., fixed rate, first lien, and 
level payment).)
    \9\ CUSIP means Committee on Uniform Security Identification 
Procedures. A CUSIP consists of nine characters. Positions 1 and 2 
denote the product type (for example, 01 refers to single family 
loans, 06 refers to balloon loans, and 16 refers to ARMs), and 
Position 3 identifies the Agency or GSE (F denotes Fannie Mae, R 
denotes Freddie Mac, N denotes GNMA I and H denotes GNMA II). 
Positions 4 through 8 are used to identify coupon, maturity in years 
and settlement month, and Position 9 is a check digit (i.e., a 
mathematical formula that checks the accuracy of the previous 8 
digits).
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    Together, the securitization process and the TBA market transform 
what is a fundamentally heterogeneous universe of individual mortgages 
and mortgage pools (with myriad credit and prepayment characteristics) 
into groups of fungible--and therefore liquid--fixed-income 
instruments.\10\
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    \10\ James Vichery and Joshua Wright, TBA Trading and Liquidity 
in the Agency MBS Market, Federal Reserve Bank of New York Staff 
Reports, no. 468 (August 2010), available at http://www.newyorkfed.org/research/staff_reports/sr468.pdf.
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Reduction of TBA Transaction Reporting Period
     Currently, Asset-Backed Securities transactions (except certain 
pre-issuance transactions in collateralized mortgage obligations 
(``CMOs'') and real estate mortgage investment conduits (``REMICs'')) 
that are executed on a business day through 5:00 p.m. Eastern Time must 
be reported to TRACE on the Trade Date during TRACE System Hours, as 
provided in Rule 6730(a)(3)(A)(ii).\11\ In contrast, secondary market 
transactions in all other TRACE-Eligible Securities must be reported 
within 15 minutes of the Time of Execution.\12\ With certain 
exceptions, transaction information on such TRACE-Eligible Securities 
is disseminated as soon as the transaction is reported, and the 15-
minute reporting requirement results in meaningful price transparency 
for market participants trading such securities.\13\
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    \11\ In general, Asset-Backed Securities must be reported to 
TRACE under Rules 6730(a)(3)(A) and (B). Rule 6730(a)(3)(B)(i) 
addresses reporting requirements for Asset-Backed Securities 
transactions executed after 5:00 p.m. Eastern Time on a business 
day, and Rule 6730(a)(3)(B)(ii) addresses reporting requirements for 
Asset-Backed Securities transactions executed after TRACE System 
Hours, or on a weekend or a holiday, or other day on which the TRACE 
system is not open at any time during that day. However, for certain 
pre-issuance transactions in CMOs and REMICs, the applicable 
reporting provisions are set forth in Rule 6730(a)(3)(C), and Rules 
6730(a)(3)(A) and (B) do not apply. The terms Asset-Backed Security 
and TRACE System Hours are defined in, respectively, Rule 6710(m) 
and Rule 6710(t).
    \12\ The term Time of Execution is defined in Rule 6710(d).
    \13\ Currently, transaction information on all types of 
securities that are TRACE-Eligible Securities, except Asset-Backed 
Securities, is disseminated as provided in Rule 6750(a). However, 
FINRA does not disseminate information on a transaction in a TRACE-
Eligible Security that is (1) effected pursuant to Securities Act 
Rule 144A (17 CFR 239.144A) under Rule 6750(b)(1); (2) a transfer of 
proprietary securities positions where the transfer (A) is effected 
in connection with a merger or direct or indirect acquisition and 
(B) is not in furtherance of a trading or investment strategy under 
Rule 6750(b)(2); or (3) a List or Fixed Offering Price Transaction 
or a Takedown Transaction under Rule 6750(b)(3). The terms List or 
Fixed Offering Price Transaction and Takedown Transaction are 
defined in, respectively, Rule 6710(q) and Rule 6710(r).
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    In connection with proposing that TBA transactions be disseminated, 
FINRA proposes to reduce the reporting time frames for TBA transactions 
GD to provide market participants meaningful and timely price 
information about the more liquid and active TBA market segment. The 
proposed rule change also will reduce the reporting period for the less 
liquid and active TBA transactions NGD, but to a lesser extent, as 
discussed in greater detail below. In addition, FINRA proposes to 
reduce the reporting time frames proposed for TBA transactions GD and 
TBA transactions NGD in two stages to permit industry participants to 
adjust policies and procedures and to make required technological 
changes.
    TBA Transactions For Good Delivery. Proposed Rule 6730(a)(3)(D) 
sets forth the requirements to report TBA transactions GD. First, for a 
pilot program of approximately 180 days duration, the reporting period 
for TBA transactions GD would be reduced from no later than the close 
of the TRACE system on Trade Date to no later than 45 minutes from the 
Time of Execution (``TBA GD Pilot Program''), as set forth in proposed 
Rule 6730(a)(3)(D)(i).\14\ Minor exceptions to the general requirements 
are set forth in proposed Rule 6730(a)(3)(D)(i)a., c. and d.\15\

[[Page 15829]]

 Second, after approximately 180 days, the TBA GD Pilot Program would 
expire and the reporting period would be reduced from no later than 45 
minutes from the Time of Execution to no later than 15 minutes from the 
Time of Execution, as set forth in proposed Rule 6730(a)(3)(D)(ii). 
Again, FINRA proposes to include certain limited exceptions to the 
reporting time frames for TBA transactions executed shortly before the 
TRACE system closes and when the TRACE system is closed.\16\
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    \14\ To accommodate member requests that rule changes requiring 
technology changes occur on a Friday, if possible, the proposed TBA 
GD Pilot Program and a similar pilot program for TBA transactions 
NGD will expire on a Friday (i.e., on the 180th day, if a Friday, 
or, if the 180th day is not a Friday, on the Friday next occurring 
that the TRACE system is open).
    \15\ Minor exceptions to the general requirement to report TBA 
transactions GD no later than 45 minutes from the Time of Execution 
are set forth in proposed Rule 6730(a)(3)(D)(i)a., c. and d. Under 
proposed Rule 6730(a)(3)(D)(i)a., transactions executed on a 
business day at or after 12:00 a.m. Eastern Time through 7:59:59 
a.m. Eastern Time must be reported the same day no later than 45 
minutes after the TRACE system opens. Under proposed Rule 
6730(a)(3)(D)(i)c., transactions executed on a business day less 
than 45 minutes before 6:30 p.m. Eastern Time (the time the TRACE 
system closes) must be reported no later than 45 minutes after the 
TRACE system opens the next business day (T + 1), and if reported on 
T + 1, designated ``as/of'' and include the date of execution. Under 
proposed Rule 6730(a)(3)(D)(i)d., transactions executed on a 
business day at or after 6:30 p.m. Eastern Time through 11:59:59 
p.m. Eastern Time or on a Saturday, a Sunday, a federal or religious 
holiday or other day on which the TRACE system is not open at any 
time during that day (determined using Eastern Time) must be 
reported the next business day (T + 1), no later than 45 minutes 
after the TRACE system opens, designated ``as/of'' and include the 
date of execution.
    \16\ After the TBA GD Pilot Program expires, proposed Rule 
6730(a)(3)(D)(ii), which incorporates by reference Rule 6730(a)(1), 
requires generally that TBA transactions be reported no later than 
15 minutes from the Time of Execution, with certain minor exceptions 
for transactions executed near the end of the TRACE System Hours, 
before and after TRACE System Hours, and on weekends and certain 
federal and religious holidays. See, e.g., Rule 6730(a)(1)(C) and 
Rule 6730(a)(1)(D). The exceptions are the same as those that apply 
to members reporting transactions in corporate bonds and Agency Debt 
Securities to TRACE.
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    TBA Transactions Not For Good Delivery. The proposed reporting 
requirements that would apply to TBA transactions NGD are set forth in 
proposed Rule 6730(a)(3)(E). FINRA has been informed that TBA 
transactions NGD are in certain cases less automated and more 
operationally challenging, wherefore FINRA proposes a longer reporting 
time frame than for TBA transactions GD. First, for a pilot program of 
approximately 180 days duration, the reporting period for TBA 
transactions NGD would be reduced from no later than the close of the 
TRACE system on Trade Date to no later than 120 minutes from the Time 
of Execution (``TBA NGD Pilot Program''), as set forth in proposed Rule 
6730(a)(3)(E)(i). Minor exceptions to the general requirements would be 
set forth in proposed Rule 6730(a)(3)(E)(i)a., c. and d.\17\ Second, 
after approximately 180 days, the TBA NGD Pilot Program would expire 
and the reporting period would be reduced from no later than 120 
minutes from the Time of Execution to no later than 60 minutes from the 
Time of Execution, as set forth in proposed Rule 6730(a)(3)(E)(ii). The 
provision also would include certain limited exceptions for TBA 
transactions executed shortly before the TRACE system closes and when 
the TRACE system is closed.\18\ After the 60-minute reporting 
requirement is implemented, FINRA will continue to review the reporting 
of TBA transactions NGD and may recommend further reductions in the 
reporting period.
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    \17\ Minor exceptions to the general requirement to report TBA 
transactions NGD no later than 120 minutes from the Time of 
Execution are set forth in proposed Rule 6730(a)(3)(E)(i)a., c. and 
d. Under proposed Rule 6730(a)(3)(E)(i)a., transactions executed on 
a business day at or after 12:00 a.m. Eastern Time through 7:59:59 
a.m. Eastern Time must be reported the same day no later than 120 
minutes after the TRACE system opens. Under proposed Rule 
6730(a)(3)(E)(i)c., transactions executed on a business day less 
than 120 minutes before 6:30 p.m. Eastern Time (the time the TRACE 
system closes) must be reported no later than 120 minutes after the 
TRACE system opens the next business day (T + 1), and if reported on 
T + 1, designated ``as/of'' and include the date of execution. Under 
proposed Rule 6730(a)(3)(E)(i)d., transactions executed on a 
business day at or after 6:30 p.m. Eastern Time through 11:59:59 
p.m. Eastern Time or on a Saturday, a Sunday, a federal or religious 
holiday or other day on which the TRACE system is not open at any 
time during that day (determined using Eastern Time) must be 
reported the next business day (T + 1), no later than 120 minutes 
after the TRACE system opens, designated ``as/of'' and include the 
date of execution.
    \18\ After the TBA NGD Pilot Program expires, there are minor 
exceptions to the 60-minute reporting time frame set forth in 
proposed Rule 6730(a)(3)(E)(ii) for TBA transactions NGD executed 
near the end of the TRACE System Hours, before and after TRACE 
System Hours, and on weekends and certain federal and religious 
holidays. See proposed Rule 6730(a)(3)(E)(ii)a., c. and d. The 
exceptions are structured similarly to the exceptions to 15-minute 
reporting that FINRA proposes to apply to TBA transactions GD.
    Guidance previously published regarding reporting transactions 
in Asset-Backed Securities as soon as practicable, rather than 
queuing such reports until the end of the reporting time period, 
applies to members' reporting obligations under the time frames 
proposed herein. See Trade Reporting Notice, dated May 10, 2011.
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    TBA Definition. In connection with establishing separate reporting 
requirements, and as discussed infra, separate dissemination caps for 
TBA transactions GD and TBA transactions NGD, FINRA proposes to amend 
the definition of ``TBA'' in Rule 6710(u) to incorporate the concepts 
that TBA transactions may be traded GD or NGD. FINRA also incorporates 
minor, technical changes to the defined term. As amended, Rule 6710(u) 
would provide as follows:

    ``To Be Announced'' (``TBA'') means a transaction in an Agency 
Pass-Through Mortgage-Backed Security as defined in paragraph (v) 
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), and includes TBA 
transactions ``for good delivery'' (``GD'') and TBA transactions 
``not for good delivery'' (``NGD'').

Dissemination of TBA Transaction Data

    Although members began reporting transactions in Asset-Backed 
Securities to TRACE on May 16, 2011, FINRA currently does not 
disseminate publicly any of the Asset-Backed Securities transaction 
data reported to TRACE. Specifically, Rule 6750(b)(4) provides that 
transaction information on TRACE-Eligible Securities that are Asset-
Backed Securities will not be disseminated.
    However, when FINRA proposed the dissemination restrictions in Rule 
6750(b)(4) regarding Asset-Backed Securities, FINRA represented that it 
would study the Asset-Backed Securities data after transaction 
reporting began. In the Commission's order approving the proposed rule 
change to define Asset-Backed Securities as TRACE-Eligible Securities 
and require reporting of Asset-Backed Securities transactions, the 
Commission noted FINRA's intent to study Asset-Backed Securities 
dissemination issues prior to making any proposal to disseminate some 
or all of such information, and the Commission's historical support of 
efforts to improve post-trade transparency in the fixed income markets:

    FINRA believes that information on Asset-Backed Securities 
transactions should be collected and analyzed before making any 
decision regarding the utility of such information for transparency 
purposes or the consequences of dissemination on this market. FINRA 
has stated that, after a period of study, it would file a proposed 
rule change if it determined that its study of the trading data 
provides a reasonable basis to seek dissemination of transaction 
information on Asset-Backed Securities. The Commission has 
historically been supportive of efforts to improve post-trade 
transparency in the fixed income markets and encourages FINRA to 
carry out that study.\19\
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    \19\ See Securities Exchange Act Release No. 61566 (February 22, 
2010), 75 FR 9262, 9265 (March 1, 2010) (Order Approving File No. 
SR-FINRA-2009-065).

    Since reporting began on May 16, 2011, FINRA has reviewed Asset-
Backed Securities transaction data. The reported Asset-Backed 
Securities transaction data, as well as input from market participants 
as FINRA prepared to expand TRACE to include Asset-Backed Securities, 
suggests that real-time disseminated TRACE transaction data should be 
expanded to include transaction information on TBA transactions.
    First, at the launch of Asset-Backed Securities reporting, certain 
market participants noted that TBA transactions

[[Page 15830]]

trade in a very liquid market and suggested that FINRA consider 
transparency in such transactions. Second, as FINRA reviewed and 
continues to review the data reported for Asset-Backed Securities, 
including TBA transactions, and studies the total volume of TBA 
transactions, the concentration of trading in such securities, and the 
pricing disparity among various types of Agency Pass-Through Mortgage-
Backed Securities traded TBA to understand their liquidity and 
fungibility, the data supports FINRA's proposal to disseminate TBA 
transactions GD and TBA transactions NGD to increase transparency in 
this market.
    The market activity reported and reviewed reveals that the TBA 
market is generally active and liquid. In addition, the degree of 
fungibility is high, with substantial trading concentrated among a 
relatively small universe of securities as identified by a unique CUSIP 
number (hereinafter, ``CUSIP'' means the specific security identified 
by the unique CUSIP number). The TBA market has an average daily volume 
of $248 billion traded in close to 8,000 average daily trades,\20\ and 
the average daily volume of all TBA transactions is approximately ten 
times the average daily volume of the entire corporate bond market.\21\ 
The vast majority of TBA transactions occur in TBA GD, accounting for 
99.36 percent of all TBA transactions (correspondingly, TBA 
transactions NGD account for 0.64 percent of all TBA transactions). The 
correlation among the prices of various TBA CUSIPs is high, and the 
price of one TBA transaction may be derived using available prices for 
TBA transactions for a different issuer, a different coupon rate, 
maturity, or a combination thereof.\22\
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    \20\ The information is based upon FINRA's review of all TBA 
transactions reported to TRACE from May 16, 2011 through October 28, 
2011.
    \21\ The information is based upon FINRA's review of 
transactions in all TRACE-Eligible Securities, other than Agency 
Debt Securities, reported to TRACE from May 16, 2011 through October 
28, 2011.
    \22\ From a review of all TBA transactions reported to TRACE 
from May 16, 2011 through July 31, 2011, the data shows that TBA 
transactions (with different issuers, different coupon rates, and 
different maturities) were priced consistently, relative to each 
other.
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FINRA Rule 6750

    Rule 6750(b)(4) currently provides that transactions in Asset-
Backed Securities are not subject to dissemination. FINRA proposes to 
amend the rule to disseminate information on TBA transactions GD and 
TBA transactions NGD, which would occur immediately upon receipt of a 
transaction report.\23\ Thus, information would be disseminated on TBA 
transactions GD within 45 minutes, or, after the expiration of the TBA 
GD Pilot Program, within 15 minutes of the Time of Execution, and, on 
TBA transactions NGD, within 120 minutes, or, after the expiration of 
the TBA NGD Pilot Program, within 60 minutes of the Time of 
Execution.\24\
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    \23\ Rule 6750(b) would be amended to provide that FINRA will 
not disseminate information on a transaction in a TRACE-Eligible 
Security that is
    (4) An Asset-Backed Security, except an Agency Pass-Through 
Mortgage-Backed Security traded to be announced (``TBA'') (``TBA 
transaction'').
    \24\ FINRA continues to review Asset-Backed Security transaction 
information in other sectors of the Asset-Backed Securities market 
and, at a later date, may propose that transactions in other Asset-
Backed Securities be disseminated.
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Dissemination Caps

    Currently, there are two TRACE dissemination protocols in place, 
referred to as dissemination caps, under which the actual size of a 
transaction over a certain par value is not displayed in disseminated 
TRACE transaction data. For TRACE-Eligible Securities that are rated 
Investment Grade, the dissemination cap is $5 million (``$5MM''), and 
the size of transactions in excess of $5MM is displayed as ``$5MM+.'' 
For TRACE-Eligible Securities that are rated Non-Investment Grade, the 
dissemination cap is $1 million (``$1MM''), and the size of a 
transaction in excess of $1MM is displayed as ``$1MM+.'' \25\
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    \25\ The terms Investment Grade and Non-Investment Grade are 
defined in, respectively, Rule 6710(h) and Rule 6710(i).
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    FINRA has analyzed the distribution of TBA transactions GD and TBA 
transactions NGD to determine an appropriate cap for these 
transactions. FINRA proposes to set a dissemination cap for a TBA 
transaction GD initially at $25 million. Accordingly, the size of a TBA 
transaction GD greater than $25 million would be displayed in 
disseminated data as ``$ 25MM+.'' At this level, approximately 20 
percent of trades in TBA transactions NG [sic] representing 
approximately 84 percent of total volume traded would be disseminated 
subject to the cap.\26\ For a TBA transaction NGD, FINRA proposes to 
set a $10 million dissemination cap initially, with size displayed in 
disseminated data as ``$10MM+,'' if the size of the TBA transaction NGD 
exceeded $10 million. At this level, approximately 42 percent of TBA 
transactions NGD representing approximately 85 percent of total volume 
traded would be disseminated subject to the cap.
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    \26\ In contrast, the existing caps for corporate Investment 
Grade bonds limit the display of actual size for approximately 1.6 
percent of trades representing approximately 48 percent of total par 
value traded, and, for Agency Debt Securities, approximately six 
percent of trades representing approximately 74 percent of total par 
value traded. The information is based on a review of all TBA 
transactions, and transactions in Investment Grade corporate bonds 
and Agency Debt Securities reported to TRACE from May 16, 2011 
through January 4, 2012. The term Agency Debt Security is defined in 
Rule 6710(l).
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    The $25 million dissemination cap for TBA transactions GD and the 
$10 million dissemination cap for multiple types of less liquid and 
active TBA transactions are more conservative than the $50 million 
dissemination cap FINRA initially considered.\27\ FINRA believes that 
the more conservative caps will allow the marketplace time to adjust to 
the new levels of transparency. In setting these dissemination caps, 
FINRA took into account the liquidity and trading activity differences 
within each segments [sic] of TBA GD and TBA NGD. FINRA notes that most 
TBA transactions are for good delivery, and even with setting a 
dissemination cap at $25 million for such transactions, and a $10 
million cap for a smaller and generally somewhat less liquid segment of 
the TBA market, price transparency in the TBA market will improve 
significantly.
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    \27\ See Item II.C. for a discussion of SR-FINRA-2011-069.
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    As dissemination of TBA transactions GD and TBA transactions NGD is 
implemented, FINRA will continue to review the volume of and liquidity 
in TBA transactions GD and TBA transactions NGD, and may recommend that 
the dissemination caps be set at higher levels to provide additional 
transparency to market participants.

Data and Fees

    FINRA proposes to amend Rule 7730 to make available the real-time 
disseminated TBA transaction data and the Historic TRACE Data for TBA 
transactions, and to establish the fees for such TBA transaction data. 
First, FINRA proposes to amend Rule 7730(c) to establish the Asset-
Backed Security data set (``ABS Data Set'') as the third Real-Time 
TRACE market data set. The ABS Data Set will be limited to information 
disseminated immediately upon receipt of a transaction report for 
either a TBA transaction GD or a TBA transaction NGD. The market data 
fee rates currently in effect for similar Real-Time TRACE market data 
sets (i.e., for the Corporate Bond Data Set and the Agency Data Set) in 
Rule 7730(c) would be extended to the ABS Data Set.
    Second, FINRA proposes to amend Rule 7730(d) to establish a third 
historic

[[Page 15831]]

data product for TBA transactions (``Historic ABS Data Set'') similar 
to the data sets for corporate bonds (``Historic Corporate Bond Data 
Set'') and Agency Debt Securities (``Historic Agency Data Set'') 
referenced in the rule. FINRA also proposes to establish fees for the 
Historic ABS Data Set at the same rates currently in effect in Rule 
7730(d) for the Historic Corporate Bond Data Set and the Historic 
Agency Data Set. The Historic ABS Data Set would include all TBA 
transactions effected as of or after May 16, 2011, and, among other 
things, would include uncapped volume information. However, like all 
other Historic TRACE Data, TBA transaction data included in the 
Historic ABS Data Set would be released subject to a delay of 
approximately 18 months from the date of the transaction.\28\
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    \28\ Reporting of Asset-Backed Securities transactions began on 
May 16, 2011. Given the 18-month delayed release of Historic TRACE 
Data, Historic ABS Data would become available for the first time in 
early 2013.
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Other Rule Changes

    FINRA proposes to delete references to a pilot program that expired 
on November 18, 2011 in Rule 6730, and to incorporate other minor 
administrative, technical or clarifying changes in Rule 6730 and Rule 
7730, as discussed below.
    FINRA Rule 6730. FINRA proposes to add the sentence ``Transactions 
in Asset-Backed Securities must be reported as provided in this 
paragraph (a)(3).'' as the introductory sentence to Rule 6730(a)(3), 
and ``General Reporting Requirements'' as the caption for Rule 
6730(a)(3)(A). FINRA also proposes to add the phrase, ``Except as 
provided in paragraphs (a)(3)(C), (a)(3)(D) and (a)(3)(E),'' as 
introductory text to Rule 6730(a)(3)(A), to indicate that Asset-Backed 
Securities must be reported as provided in subparagraph (A) of Rule 
6730(a)(3), with the exceptions to the general requirements set forth 
in subparagraphs (C), (D) and (E) of Rule 6730(a)(3).
    FINRA proposes to consolidate and otherwise amend Rule 
6730(a)(3)(A) and (B) as follows: (a) To delete Rule 6730(a)(3)(A)(i), 
the pilot program for Asset-Backed Securities transaction reporting 
that expired on November 18, 2011 (``ABS Pilot Program''); (b) to 
delete a clause referencing the ABS Pilot Program and Rule 
6730(a)(3)(C), and to delete ``(ii)'' and renumber the retained text as 
Rule 6730(a)(3)(A)(i); and (c) to delete the text in Rule 
6730(a)(3)(B), except subparagraphs (i) and (ii) of Rule 6730(a)(3)(B), 
and renumber Rule 6730(a)(3)(B)(i) and (ii) as Rule 6730(a)(3)(A)(ii) 
and (iii).
    FINRA proposes to amend Rule 6730(a)(3)(C) as follows: (a) To add a 
caption, ``Collateralized Mortgage Obligation and Real Estate Mortgage 
Investment Conduit Transactions;'' (b) to delete the provisions 
relating to the ABS Pilot Program (i.e., Rule 6730(a)(3)(C)(i), 
including subparagraphs a. and b.); (c) to add an introductory clause 
providing: ``Transactions in Asset-Backed Securities that are 
collateralized mortgage obligations (``CMOs'') or real estate mortgage 
investment conduits (``REMICS'') that are executed before the issuance 
of the security must be reported the earlier of:''; (d) to retain in 
Rule 6730(a)(3)(C)(ii) subparagraphs a. and b. and the final sentence 
of Rule 6730(a)(3)(C)(ii), and renumber subparagraphs a. and b. as 
subparagraphs (i) and (ii) of Rule 6730(a)(3)(C); and (e) to delete, in 
Rule 6730(a)(3)(C)(ii), ``(ii)'' and the phrase ``After the expiration 
of the Pilot Program in paragraph (a)(3)(A)(i), such transactions must 
be reported the earlier of:.''
    FINRA Rule 7730. In Rule 7730, FINRA proposes to add, in paragraphs 
(d)(1)(A)(ii) and (d)(1)(B)(ii) regarding Historic TRACE Data, a 
sentence to clarify that the 2011 Historic Agency Data Set also will 
include the 2010 Historic Agency Data Set, and the 2013 Historic ABS 
Data Set also will include the 2012 Historic ABS Data Set.\29\ FINRA 
also proposes minor technical amendments to Rule 7730(c) and (d) to 
reflect that the number of Data Sets and Historic Data Sets will 
increase from two to three, and other minor technical amendments to 
Rule 7730(b)(1) and Rule 7730(c) and (d).
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    \29\ FINRA proposes not to add the clarification to the fee 
chart in Rule 7730. Also, FINRA proposes to delete a similar 
statement--``The 2003 Historic Corporate Bond Data Set also includes 
the 2002 Historic Corporate Bond Data Set.''--in two sections of the 
fee chart in Rule 7730 summarizing Historic TRACE Data fees. Also, 
FINRA proposes to delete ``BTDS'' in two sections of the fee chart 
in Rule 7730 summarizing market data fees.
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    FINRA will announce the effective date of the proposed rule change 
in a Regulatory Notice to be published no later than 60 days following 
Commission approval. The effective date will be no earlier than August 
1, 2012 and no later than 180 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,\30\ 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)(5) of the Act,\31\ 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 rule change to 
increase fixed income market transparency is designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, and, generally to protect investors and 
the public because transparency in TBA transactions will enhance the 
ability of investors and other market participants to identify and 
negotiate fair and competitive prices for Agency Pass-Through Mortgage-
Backed Securities, and because the dissemination of price and other TBA 
transaction information publicly will promote just and equitable 
principles of trade among participants in the more transparent market, 
and will aid in the prevention of fraudulent and manipulative acts and 
practices in the TBA market.
---------------------------------------------------------------------------

    \30\ 15 U.S.C. 78o-3(b)(6).
    \31\ 15 U.S.C. 78o-3(b)(5).
---------------------------------------------------------------------------

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

    On November 22, 2011, FINRA filed with the SEC SR-FINRA-2011-069 
(``November 2011 Filing''), a proposed rule change to amend the Rule 
6700 Series and TRACE dissemination protocols regarding the reporting 
and dissemination of TBA transactions. Specifically, FINRA proposed to 
disseminate TBA transactions immediately upon FINRA's receipt of a TBA 
transaction report, and to establish a $50 million dissemination cap 
such that when transactions over $50 million were disseminated, the 
size displayed for such transactions would be capped at $50 million and 
displayed as ``$50MM+.'' In connection with proposing to disseminate 
TBA transactions, FINRA proposed to reduce the period to report TBA 
transactions to 15 minutes, in two stages. First, for a

[[Page 15832]]

pilot period of approximately 180 days, FINRA proposed to require 
members to report TBA transactions no later than 45 minutes from the 
Time of Execution, and after the pilot period expired, to report no 
later than 15 minutes from the Time of Execution. FINRA proposed to 
announce the effective date of the proposed rule change in a Regulatory 
Notice to be published no later than 60 days following Commission 
approval, and that the effective date would be no later than 180 days 
following publication of the Regulatory Notice announcing Commission 
approval.\32\ A copy of the Form 19b-4 and original Exhibit 5 of the 
November 2011 Filing is attached as Exhibit 2a.
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    \32\ FINRA also proposed to amend Rule 7730 regarding TRACE fees 
to provide for data fees for TBA transaction data, Rule 6730 to 
delete references to a pilot program that expired on November 18, 
2011, and Rule 6730 and Rule 7730 to incorporate other minor 
administrative, technical or clarifying changes.
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    On December 8, 2011, the November 2011 Filing was published for 
comment in the Federal Register.\33\ A copy of the Federal Register 
release is attached as Exhibit 2b. The SEC received one comment letter 
in response,\34\ a copy of which is attached as Exhibit 2c. The 
commenter raised concerns regarding: (1) The proposed $50 million 
dissemination cap and its potential impact on various segments of the 
TBA market; (2) the proposed reporting time frames; and (3) the 
implementation time frame for the proposed rule change.
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    \33\ See Securities Exchange Act Release No. 65877 (December 2, 
2011), 76 FR 76777 (December 8, 2011) (Notice of Filing of File No. 
SR-FINRA-2011-069). The comment period closed on December 29, 2011.
    \34\ See Letter from Chris Killian, Managing Director, 
Securitization, Securities Industry and Financial Markets 
Association (``SIFMA''), to Elizabeth M. Murphy, Secretary, SEC, 
dated December 22, 2011.
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    FINRA withdrew the November 2011 Filing on March 1, 2012, prior to 
filing a response to comments. Accordingly, the comments to the 
November 2011 Filing and FINRA's responses are discussed below.

Dissemination Cap

    The commenter states that the TBA market is a collection of 
distinct trading markets for distinct trading products, with material 
differences in liquidity. For example, the commenter stated that in 
products such as ARMs, mortgages with 40-year maturities, and project 
loans, the volume issued is very low in comparison to standard 30-year 
fixed rate mortgages that trade for good delivery, and consequently, 
liquidity in TBA transactions backed by such products is lower. In 
addition, the commenter states that a volume cap of $50 million is 
generally too high for even the most liquid segments of the TBA market, 
and recommends that FINRA adopt a $25 million dissemination cap (or a 
lesser cap) for the most liquid TBA products (pools to be comprised of 
standard, 30-year, fixed rate mortgages for good delivery), a $10 
million dissemination cap for pools of 15-year mortgages, and a $1 
million to $5 million cap for other products traded TBA (e.g., pools of 
high coupon fixed rate mortgages, ARMs, project loans, jumbo loans and 
reverse mortgages). The commenter notes that, in making its 
recommendations, it does not have access to the transaction data cited 
by FINRA regarding trading volume.
    After careful consideration of the commenter's concerns, FINRA 
proposes two lower dissemination caps herein. Based on FINRA's review 
of the TBA trading data, discussions with member firms, and the 
commenter's concern that liquidity may be adversely affected if the 
originally proposed dissemination cap is adopted, FINRA has proposed to 
lower the dissemination cap to $25 million for all TBA transactions GD 
and to $10 million for all TBA transactions NGD. Although the commenter 
recommends multiple dissemination caps based upon factors such as 
mortgage maturity and coupon, FINRA believes that the commenter's 
approach would result in investor confusion and operational 
complexities that are unnecessary to address the issues raised by the 
commenter. FINRA's proposal to adopt a two-pronged approach to the 
dissemination caps for products traded TBA is much less complex and, at 
the same time, allows FINRA to address most of the commenter's concerns 
regarding liquidity, providing a lower dissemination cap for those 
products that generally are the least liquid, without establishing 
multiple caps and standards. The reduction of the dissemination cap to 
$25 million for TBA transactions GD, and for multiple types of less 
liquid TBA transactions NGD to $10 million is a more conservative 
metric than initially proposed, which FINRA believes is appropriate at 
the onset. In setting these dissemination caps, FINRA took into account 
the liquidity and activity differences in coupons and maturities within 
each segments [sic] of TBA transactions GD and TBA transactions 
NGD.\35\ FINRA notes that even with the reduction of the dissemination 
cap for TBA transactions GD from $50 million to $25 million for such 
transactions, and a $10 million cap for a small and generally somewhat 
less liquid segment, price transparency in the TBA market will improve 
significantly.
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    \35\ For example, at the proposed cap of $25 million, 
approximately 21 percent of trades and approximately 85 percent of 
volume would be capped for transactions in TBA transactions GD 
backed by eligible 30-year mortgage loans, approximately 15 percent 
of trades and approximately 78 percent of volume would be capped for 
transactions in TBA transactions GD backed by eligible 15-year 
mortgage loans, and approximately 20 percent of trades and 
approximately 67 percent of volume would be capped for transactions 
in TBA transactions GD backed by other types of eligible loans 
having other maturities.
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Reporting Time Frames

    The commenter states that the proposed time frames for reporting 
certain less liquid products, such as ARMs, project loans and reverse 
mortgages, within the proposed accelerated time frames will not be 
possible absent a cumbersome and potentially risky manual trade 
reporting process. The commenter notes that manual processing raises 
compliance, audit and workflow related concerns, and may result in 
additional TRACE reporting errors. For these reasons, the commenter 
recommends that the reporting deadline for these products remain at the 
close of business on the date of execution.
    In response to the commenter's concerns regarding reporting 
transactions in instruments such as certain ARMS, project loans and 
reverse mortgages, FINRA proposes to modify the reporting requirements 
herein. Specifically, for TBA transactions NGD, FINRA proposes to 
extend the previously proposed time frames to report (i.e., 45 minutes 
from the Time of Execution, then after expiration of a pilot program, 
15 minutes from the Time of Execution). In this proposed rule change, 
FINRA proposes to require members to report such transactions initially 
no later than two hours from the Time of Execution, then, after 
expiration of the proposed TBA NGD Pilot Program, no later than one 
hour from the Time of Execution. FINRA retains the reporting time frame 
initially proposed for TBA transactions GD. FINRA believes that 
proposing the longer reporting time frames for TBA transactions NGD 
will facilitate timely trade reporting, and accommodate current 
differences in members' systems, trade processing and other work flows. 
However, given that more than half of TBA transactions NGD currently 
are reported within one hour from the time of execution, FINRA believes 
that in the long term members will be able to report all TBA 
transactions within 15 minutes from the Time of Execution.

[[Page 15833]]

Implementation

    The commenter requested that the effective date of the November 
2011 Filing be no earlier than August 1, 2012, to allow members to make 
necessary changes to internal systems, policies and procedures. FINRA 
intends to take into account the operational challenges associated with 
the proposal in establishing the effective date of this proposed rule 
change and will work with members to minimize the operational burdens 
of implementation. FINRA also has amended the stated implementation 
period to provide that FINRA will announce the effective date of the 
proposed rule change in a Regulatory Notice to be published no later 
than 60 days following Commission approval. The effective date will be 
no earlier than August 1, 2012 and no later than 180 days following 
publication of the Regulatory Notice announcing Commission approval.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

     Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-FINRA-2012-020 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-FINRA-2012-020. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. Copies of the filing also will be available for 
inspection and copying at the principal office of FINRA. All comments 
received will be posted without change; the Commission does not edit 
personal identifying information from submissions. You should submit 
only information that you wish to make available publicly. All 
submissions should refer to File Number SR-FINRA-2012-020 and should be 
submitted on or before April 6, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\36\
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    \36\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-6444 Filed 3-15-12; 8:45 am]
BILLING CODE 8011-01-P