Document ID: SEC-2018-1590-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2018-10-12T04:00Z

[Federal Register Volume 83, Number 198 (Friday, October 12, 2018)]
[Notices]
[Pages 51722-51724]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-22203]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-84374; File No. SR-FINRA-2018-032]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Approving Proposed Rule Change to FINRA Rule 
6710 To Modify the Dissemination Protocols for Agency Debt Securities

October 5, 2018.

I. Introduction

    On August 16, 2018, the Financial Industry Regulatory Authority, 
Inc. (``FINRA'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to modify the dissemination protocols for Agency 
Debt Securities. The proposed rule change was published for comment in 
the Federal Register on August 23, 2018.\3\ The Commission received no 
comment letters on the proposed rule

[[Page 51723]]

change. This order approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 83882 (August 17, 
2018), 83 FR 42732 (``Notice'').
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II. Description of the Proposal

    Under FINRA's rules, each member firm is required to report to the 
Trade Reporting and Compliance Engine (``TRACE'') transactions in 
TRACE-Eligible Securities,\4\ including securities that meet the 
definition of ``Agency Debt Security.'' \5\ Currently, for disseminated 
reports of transactions in Agency Debt Securities, FINRA displays 
either the entire notional size (volume) of the transaction or a capped 
amount, depending on whether the security is Investment Grade,\6\ Non-
Investment Grade,\7\ or unrated.\8\ For Agency Debt Securities that are 
Investment Grade or unrated, FINRA disseminates the entire notional 
size for transactions of $5 million or less in par value traded, but a 
capped size--``$5MM+''--for transactions exceeding $5 million in par 
value traded; for transactions in Agency Debt Securities that are Non-
Investment Grade, FINRA disseminates the entire notional size for 
transactions of $1 million or less in par value traded but a capped 
size-- ``1MM+''--for transactions exceeding $1 million in par value 
traded.\9\
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    \4\ See FINRA Rule 6710(a) (defining ``TRACE-Eligible 
Security'').
    \5\ FINRA Rule 6710(l) generally defines ``Agency Debt 
Security'' to mean a debt security (i) issued or guaranteed by an 
Agency as defined in paragraph (k); (ii) issued or guaranteed by a 
Government-Sponsored Enterprise as defined in paragraph (n); or 
(iii) issued by a trust or other entity that was established or 
sponsored by a Government-Sponsored Enterprise for the purpose of 
issuing debt securities, where such enterprise provides collateral 
to the trust or other entity or retains a material net economic 
interest in the reference tranches associated with the securities 
issued by the trust or other entity.
    \6\ FINRA Rule 6710(h) defines ``Investment Grade'' to mean ``a 
TRACE-Eligible Security that, if rated by only one nationally 
recognized statistical rating organization (``NRSRO''), is rated in 
one of the four highest generic rating categories; or if rated by 
more than one NRSRO, is rated in one of the four highest generic 
rating categories by all or a majority of such NRSROs; provided that 
if the NRSROs assign ratings that are evenly divided between (i) the 
four highest generic ratings and (ii) ratings lower than the four 
highest generic ratings, FINRA will classify the TRACE-Eligible 
Security as Non-Investment Grade for purposes of TRACE. If a TRACE-
Eligible Security is unrated, for purposes of TRACE, FINRA may 
classify the TRACE-Eligible Security as an Investment Grade 
security. FINRA will classify an unrated Agency Debt Security as 
defined in [Rule 6710(l)] as an Investment Grade security for 
purposes of the dissemination of transaction volume.''
    \7\ FINRA Rule 6710(i) defines ``Non-Investment Grade'' to mean 
``a TRACE-Eligible Security that, if rated by only one NRSRO, is 
rated lower than one of the four highest generic rating categories; 
or if rated by more than one NRSRO, is rated lower than one of the 
four highest generic rating categories by all or a majority of such 
NRSROs. Except as provided in [Rule 6710(h)], if a TRACE-Eligible 
Security is unrated, FINRA may classify the TRACE-Eligible Security 
as a Non-Investment Grade security.''
    \8\ See Notice, 83 FR at 42732.
    \9\ See Securities Exchange Act Release No. 59733 (April 8, 
2009), 74 FR 17709, 17712 (April 16, 2009) (SR-FINRA-2009-010) 
(Notice of Filing of Proposed Rule Change and Amendment No. 1 
Thereto To Expand TRACE To Include Agency Debt Securities and 
Primary Market Transactions).
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    FINRA has proposed to apply the $5 million dissemination cap to 
transactions in all Agency Debt Securities, regardless of whether the 
security is Investment Grade, Non-Investment Grade, or unrated. FINRA 
has stated that, when adopting the original dissemination caps for 
Agency Debt Securities, it believed that unrated Agency Debt Securities 
should default to the $5 million dissemination cap due to factors such 
as that they trade more consistently with Investment Grade securities 
that are subject to the $5 million dissemination cap.\10\ FINRA has 
further stated that it is not aware of the existence of any Non-
Investment Grade Agency Debt Securities other than credit risk transfer 
securities (``CRTs''), a type of Agency Debt Security issued by Fannie 
Mae (``Fannie'') and Freddie Mac (``Freddie'').\11\ Based on FINRA's 
experience with CRTs and in consultation with Fannie and Freddie, FINRA 
believes that it is appropriate to disseminate Non-Investment Grade 
CRTs with the $5 million dissemination cap. Because CRTs are the only 
type of Agency Debt Security rated less than Investment Grade, FINRA is 
proposing to simplify the dissemination structure by applying the $5 
million cap to all Agency Debt Securities irrespective of rating.\12\
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    \10\ See Notice, 83 FR at 42732.
    \11\ See id.
    \12\ See id. at 42733. In support of the proposal, FINRA 
provided statistics about the trade count and notional volume traded 
for Investment Grade, Non-Investment Grade, and unrated Agency Debt 
Securities indicating that, for both metrics, transactions in Non-
Investment Grade Agency Debt Securities currently account for only a 
small percentage of transactions in Agency Debt Securities. See id.
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    FINRA has stated that it will announce the effective date of the 
rule change in a Regulatory Notice to be published no later than 60 
days following a Commission approval, and the effective date will be no 
later than 120 days following publication of that Regulatory 
Notice.\13\
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    \13\ See id.
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III. Discussion and Commission Findings

    After careful consideration, the Commission finds that the proposed 
rule change is consistent with the requirements of the Act and the 
rules and regulations thereunder applicable to a national securities 
association.\14\ In particular, the Commission finds that the proposed 
rule change is consistent with Section 15A(b)(6) of the Act,\15\ which 
requires, among other things, that FINRA rules be designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, and, in general, to protect investors 
and the public interest. The Commission believes that the proposal is 
reasonably designed to simplify the dissemination protocols for 
transactions in Agency Debt Securities by instituting a uniform $5 
million dissemination cap, regardless of whether the security is 
Investment Grade, Non-Investment Grade, or unrated. The Commission 
received no comments that objected to the proposed rule change and 
notes that FINRA consulted with Fannie and Freddie before submitting 
the proposal.
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    \14\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
    \15\ 15 U.S.C. 78o-3(b)(6).
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    Pursuant to Section 19(b)(5) of the Act,\16\ the Commission 
consulted with and considered the views of the Treasury Department in 
determining to approve the proposed rule change. The Treasury 
Department indicated its support for the proposal.\17\ Pursuant to 
Section 19(b)(6) of the Act,\18\ the Commission has considered the 
sufficiency and appropriateness of existing laws and rules applicable 
to government securities brokers, government securities dealers, and 
their associated persons in approving the proposal. As discussed above, 
by applying the $5 million dissemination cap to all Agency Debt 
Securities regardless of rating, the rule change will simplify the 
dissemination protocols for transactions in Agency Debt Securities.
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    \16\ 15 U.S.C. 78s(b)(5) (providing that the Commission ``shall 
consult with and consider the views of the Secretary of the Treasury 
prior to approving a proposed rule filed by a registered securities 
association that primarily concerns conduct related to transactions 
in government securities, except where the Commission determines 
that an emergency exists requiring expeditious or summary action and 
publishes its reasons therefor'').
    \17\ Telephone conversation with Treasury Department staff and 
Brett Redfearn, Director, Division of Trading and Markets, et al., 
on October 2, 2018.
    \18\ 15 U.S.C. 78s(b)(6).
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\19\ that the proposed rule change (SR-FINRA-2018-032) is approved.
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    \19\ 15 U.S.C. 78s(b)(2).
    \20\ 17 CFR 200.30-3(a)(12).

[[Page 51724]]

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    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-22203 Filed 10-11-18; 8:45 am]
 BILLING CODE 8011-01-P