Document ID: SEC-2014-0347-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2014-02-28T05:00Z

[Federal Register Volume 79, Number 40 (Friday, February 28, 2014)]
[Notices]
[Pages 11481-11486]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-04390]

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-71607; File No. SR-FINRA-2013-046]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Amendment No. 1 and Order Granting 
Accelerated Approval of Proposed Rule Change, as Modified by Amendment 
No. 1, Relating to TRACE Reporting and Dissemination of Transactions in 
Asset-Backed Securities

February 24, 2014.

I. Introduction

    On November 13, 2013, 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 relating to TRACE reporting and dissemination of 
transactions in Asset-Backed Securities.\3\ The proposed rule change 
was published for comment in the Federal Register on November 26, 
2013.\4\ The Commission received one comment on the proposal.\5\ On 
January 10, 2014, the Commission extended to February 24, 2014, the 
time period in which to approve the proposed rule change, disapprove 
the proposed rule change, or institute proceedings to determine whether 
the proposed rule change should be disapproved.\6\ On February 14, 
2014, FINRA responded to the comment \7\ and filed Amendment No. 1 to 
the proposed rule change.\8\ On February 21, 2014, FINRA submitted a 
supplemental response to the comment.\9\ The Commission is publishing 
this notice to solicit comments on Amendment No. 1 from interested 
persons, and is approving the proposed rule change, as modified by 
Amendment No. 1, on an accelerated basis.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ The term ``Asset-Backed Security'' was previously defined in 
FINRA Rule 6710(m). As a result of this proposed rule change, the 
definition has been revised and relocated to FINRA Rule 6710(cc).
    \4\ See Securities Exchange Act Release No. 70906 (November 20, 
2013), 78 FR 70602 (``Notice'').
    \5\ See letter to Elizabeth M. Murphy, Secretary, Commission, 
from Chris Killian, Managing Director, Securitization, SIFMA, dated 
December 17, 2013 (``SIFMA Letter'').
    \6\ See Securities Exchange Act Release No. 71287 (January 10, 
2014), 79 FR 2924 (January 16, 2014).
    \7\ See letter to Elizabeth M. Murphy, Secretary, Commission, 
from Kathryn M. Moore, Associate General Counsel, FINRA, dated 
February 14, 2014 (``FINRA Letter I'').
    \8\ In Amendment No. 1, FINRA revised the types of products that 
would be included in the definition of ``Asset-Backed Security'' and 
that, under the proposal, would be disseminated through TRACE and 
subject to reduced reporting times. FINRA initially proposed to 
include in the definition of ``Asset-Backed Securities,'' among 
other things, collateralized debt obligations, collateralized loan 
obligations, collateralized bond obligations, and non-agency backed 
commercial mortgage-backed securities. Amendment No. 1 removes these 
securities from the defined ``Asset-Backed Securities'' that would 
be subject to reduced reporting times and disseminated under the 
proposal. Amendment No. 1 also makes other minor, technical 
revisions to the proposal.
    \9\ See email to Michael Gaw, Assistant Director, Division of 
Trading and Markets, Commission, from Kathryn M. Moore, Associate 
General Counsel, FINRA, dated February 21, 2014 (``FINRA Letter 
II'').
---------------------------------------------------------------------------

II. Description of the Amended Proposal

    Historically, FINRA has utilized the Trade Reporting and Compliance 
Engine (``TRACE'') to collect from its members and publicly disseminate 
information on secondary over-the-counter transactions in corporate 
debt securities, Agency Debt Securities,\10\ and certain primary market 
transactions. For certain other asset types, FINRA utilized TRACE to 
collect transaction information, but until recently, did not report 
such information publicly. Recently, however, FINRA began to phase-in 
dissemination of the transaction information for these previously non-
disseminated asset types. In the first two phases, FINRA implemented 
dissemination of Agency Pass-Through Mortgage-Backed Securities and 
SBA-Backed ABS.\11\

[[Page 11482]]

Next, FINRA sought, and the Commission approved, public dissemination 
of transactions in TRACE-Eligible Securities effected as Rule 144A 
transactions (provided that such transactions were in securities of the 
same type as are subject to dissemination if effected in non-Rule 144A 
transactions).\12\ FINRA now has proposed to provide for public 
dissemination of a group of newly defined Asset-Backed Securities and 
to make certain related changes to its rules, as described below.
---------------------------------------------------------------------------

    \10\ The term ``Agency Debt Security'' is defined in FINRA Rule 
6710(l).
    \11\ On November 12, 2012, FINRA began disseminating 
transactions in Agency Pass-Though Mortgage-Backed Securities traded 
TBA. See Securities Exchange Act Release No. 66829 (April 18, 2012), 
77 FR 24748 (April 25, 2012) (Order Approving SR-FINRA-2012-020); 
FINRA's Regulatory Notice 12-26 (May 2012) and Regulatory Notice 12-
48 (November 2012). On July 22, 2013, FINRA began disseminating 
Agency Pass-Through Mortgage-Backed Securities traded in Specified 
Pool Transactions and SBA-Backed ABS traded TBA or in Specified Pool 
Transactions. See Securities Exchange Act Release No. 68084 (October 
23, 2012), 77 FR 65436 (October 26, 2012) (Order Approving SR-FINRA-
2012-042); FINRA's Regulatory Notice 12-56 (December 2012). The 
terms ``TBA,'' ``Agency Pass-Through Mortgage-Backed Security,'' 
``Specified Pool Transaction,'' and ``SBA-Backed ABS'' are defined 
in FINRA Rule 6710(u), (v), (x), and (bb), respectively.
    \12\ See Securities Exchange Act Release No. 70345 (September 6, 
2013), 78 FR 56251 (September 12, 2013) (Order Approving SR-FINRA-
2013-029); Securities Exchange Act Release No. 70691 (October 16, 
2013), 78 FR 62788 (October 22, 2013) (SR-FINRA-2013-043) (together, 
``Rule 144A Dissemination Amendments''); FINRA's Regulatory Notice 
13-35 (announcing June 30, 2014 as the effective date for SR-FINRA-
2013-029 and SR-FINRA-2013-043). Given the Rule 144A Dissemination 
Amendments, the instant proposal would result in the dissemination 
of Asset-Backed Security transactions effected pursuant to Rule 144A 
(in addition to Asset-Backed Security transactions not effected 
pursuant to Rule 144A).
---------------------------------------------------------------------------

Dissemination and Definitional Amendments

    FINRA has proposed to revise FINRA Rule 6750 to include Asset-
Backed Securities among the TRACE-Eligible Securities that FINRA will 
disseminate publicly.\13\ In connection with this change, FINRA has 
proposed to revise certain existing definitions in its rules and add 
other, new definitions in order to delineate the specific Asset-Backed 
Securities that would be subject to dissemination pursuant to FINRA 
Rule 6750. Specifically, FINRA has proposed to re-name as ``Securitized 
Products'' the broad group of securities currently defined as ``Asset-
Backed Securities'' in FINRA Rule 6710(m) \14\ and, in a proposed new 
definition in FINRA Rule 6710(cc), to re-define the term ``Asset-Backed 
Security'' more narrowly to mean:
---------------------------------------------------------------------------

    \13\ See proposed Rule 6750 and Amendment No. 1.
    \14\ See proposed FINRA Rule 6710(m). Proposed FINRA Rule 
6710(m) also would replace the current rule's reference to Section 
3(a)(77)(A) of the Act with a reference to Section 3(a)(79)(A) of 
the Act. This is a technical change to coincide with renumbering to 
Section 3(a)(77) of the Act implemented by Section 101(b)(1) of the 
Jumpstart Our Business Startups act (``JOBS Act''). See Notice, 78 
FR at 70604; see also Public Law 112-106, 126 Stat. 306 (2012).

a type of Securitized Product where the Asset-Backed Security is 
collateralized by any type of financial asset, such as a consumer or 
student loan, a lease, or a secured or unsecured receivable, and 
excludes: (i) a Securitized Product that is backed by residential or 
commercial mortgage loans, mortgage-backed securities, or other 
financial assets derivative of mortgage-backed securities; (ii) an 
SBA-Backed ABS as defined in paragraph (bb) traded To Be Announced 
(``TBA'') as defined in paragraph (u) or in a Specified Pool 
Transaction as defined in paragraph (x); and (iii) collateralized 
debt, loan and bond obligations.\15\
---------------------------------------------------------------------------

    \15\ Proposed FINRA Rule 6710(cc); see also Amendment No. 1. 
FINRA believes that this proposed narrower definition is consistent 
with industry usage. See Notice, 78 FR at 70603.

    In addition, FINRA has proposed to provide further guidance 
regarding the scope of this narrower definition of ``Asset-Backed 
Security'' in proposed Supplementary Material .01 to FINRA Rule 6710, 
which would state that the term ``Asset-Backed Security'' includes, but 
---------------------------------------------------------------------------
is not limited to:

securities collateralized by the following types of assets and 
securities: credit card receivables; automobile loans and leases; 
student loans; home equity loans and home equity lines of credit; 
aircraft leases; automobile floorplan and wholesale loans; 
motorcycle loans and leases; recreational vehicle loans; 
manufactured housing loans; commercial loans; tranches of other 
Asset-Backed Securities; reinsurance; timeshare obligations; and 
loans or other financial instruments generating a stream of payments 
and guaranteed as to principal or interest (or both) by the Small 
Business Administration (traded other than to be announced (``TBA'') 
as defined in paragraph (u) or in a Specified Pool Transaction as 
defined in paragraph (x)).\16\
---------------------------------------------------------------------------

    \16\ Proposed Supplementary Material .01 to FINRA Rule 6710; see 
also Notice, 78 FR at 70603-04 and Amendment No. 1.

    Transactions included in the re-defined group of Asset-Backed 
Securities, set forth in proposed Rule 6710(cc) (including Rule 144A 
transactions in such securities) and Supplementary Material .01 
thereto, will be publicly disseminated through TRACE as a result of the 
proposed rule change.\17\ Securities excluded from the new definition 
of Asset-Backed Security by subparts (i) through (iii) of proposed Rule 
6710(cc) would not be disseminated under the proposal. FINRA has 
represented that it will observe trading in the newly-disseminated 
Asset-Backed Securities to monitor the impact of price transparency on 
the market for these securities.\18\
---------------------------------------------------------------------------

    \17\ See Notice, 78 FR at 70603-04.
    \18\ See Notice, 78 FR at 70605.
---------------------------------------------------------------------------

    FINRA also has proposed to define ``Collateralized Mortgage 
Obligation'' in proposed new FINRA Rule 6710(dd).\19\ As defined, 
Collateralized Mortgage Obligations would be excluded from the 
definition of ``Asset-Backed Security'' by subpart (i) of proposed Rule 
6710(cc), and thus transactions in Collateralized Mortgage Obligations 
would not be publicly disseminated by TRACE pursuant to this proposed 
rule change.\20\
---------------------------------------------------------------------------

    \19\ See proposed Rule 6710(dd) and Amendment No. 1.
    \20\ See Amendment No. 1.
---------------------------------------------------------------------------

Reduction of Reporting Period

    In connection with its proposal to publicly disseminate 
transactions in certain Asset-Backed Securities,\21\ FINRA has proposed 
to amend FINRA Rule 6730 to reduce the period for reporting Asset-
Backed Security transactions to TRACE. The reduction would occur in two 
stages. First, FINRA would reduce the reporting period from no later 
than the close of the TRACE system on the date of execution to no later 
than 45 minutes from the time of execution.\22\ Second, after 
approximately 180 days, the reporting period would be further reduced 
from no later than 45 minutes from the time of execution to no later 
than 15 minutes from the time of execution.\23\
---------------------------------------------------------------------------

    \21\ Hereinafter, except where the context requires otherwise, 
references to ``Asset-Backed Security'' and ``Securitized Product'' 
are to the new definitions of those terms.
    \22\ See proposed Rule 6730(a)(3)(B)(i)(b). Exceptions for 
transactions that are executed within 45 minutes of the close of the 
TRACE system and for transactions executed when it is closed are set 
forth in subparts a., c., and d. of proposed Rule 6730(a)(3)(B)(i).
    \23\ See proposed Rule 6730(a)(3)(B)(ii), which incorporates by 
reference Rule 6730(a)(1). Rule 6730(a)(1) requires that 
transactions in TRACE-Eligible Securities be reported within 15 
minutes of the time of execution, and also provides exceptions for 
transactions in TRACE-Eligible Securities that are executed shortly 
before the TRACE system closes and when it is closed.
---------------------------------------------------------------------------

List or Fixed Offering Price and Takedown Transactions

    According to FINRA, many Asset-Backed Securities are underwritten 
using a syndicated process that is similar to the offering process for 
corporate bonds.\24\ In syndicated offerings, there may be a number of 
transactions that occur at the list or fixed offering price (or the 
takedown price).\25\ Transactions in TRACE-Eligible Securities (except 
for transactions in Securitized Products) that are effected in 
accordance with the requirements of a List or Fixed Offering Price 
Transaction \26\ or a Takedown

[[Page 11483]]

Transaction \27\ may be reported as late as T+1 during TRACE system 
hours, as provided in FINRA Rule 6730(a)(2); such transactions are not 
disseminated, as provided in FINRA Rule 6750(b)(3); and members are not 
charged a reporting fee for such transactions, as provided in FINRA 
Rule 7730(b)(1)(C).\28\
---------------------------------------------------------------------------

    \24\ See Notice, 78 FR at 70605.
    \25\ See id. The terms ``List or Fixed Offering Price 
Transaction'' and ``Takedown Transaction'' are defined in FINRA 
Rules 6710(q) and 6710(r), respectively.
    \26\ The term ``List or Fixed Offering Price Transaction'' is 
defined in FINRA Rule 6710(q).
    \27\ The term ``Takedown Transaction'' is defined in FINRA Rule 
6710(r).
    \28\ See Notice, 78 FR at 70605.
---------------------------------------------------------------------------

    In light of the similarity of the offering process for corporate 
bonds and many Asset-Backed Securities, FINRA has proposed to amend 
FINRA Rules 6710(q) and 6710(r) so that primary market Asset-Backed 
Securities transactions that meet all of the requirements of a List or 
Fixed Offering Price Transaction or a Takedown Transaction may be 
treated in accordance with FINRA Rules 6730(a)(2), 6750(b)(3), and 
7730(b)(1)(C).\29\
---------------------------------------------------------------------------

    \29\ See proposed FINRA Rules 6710(q) and 6710(r); see also 
Notice, 78 FR at 70605. All primary market transactions in other 
classes of Securitized Products will continue to be specifically 
excluded from the definitions of List or Fixed Offering Price 
Transaction and Takedown Transaction, because, in general, such 
Securitized Products are structured, offered, and sold quite 
differently than corporate bonds (i.e., a large number of 
Securitized Products sales are for forward delivery, and most such 
securities are not underwritten using a syndicated process 
generating a large number of transactions occurring at the same 
price). See Notice, 78 FR at 70605 n.28.
---------------------------------------------------------------------------

Dissemination Caps

    Currently, there are dissemination caps in place for disseminated 
TRACE data, such that the actual size (volume) of a transaction over a 
certain par value is not displayed.\30\ FINRA has proposed a $10 
million dissemination cap for Asset-Backed Security transactions, which 
would prevent the display in disseminated TRACE data of the actual size 
(volume) of Asset-Backed Security transactions with an original par or 
value over $10 million; rather, such transactions will be displayed as 
``10MM+.'' \31\
---------------------------------------------------------------------------

    \30\ See Notice, 78 FR at 70605-06 and n.29. There are $5 
million and $1 million caps for TRACE-Eligible Securities that are 
rated Investment Grade and Non-Investment Grade, respectively; a $25 
million cap for Agency Pass-Through Mortgage Backed Securities 
traded TBA for good delivery; and a $10 million cap for Agency Pass-
Through Mortgage Backed Securities traded TBA not for good delivery, 
Agency Pass-Through Mortgage-Backed Securities traded in Specified 
Pool Transactions, and SBS-Backed ABS traded TBA and in Specified 
Pool Transactions.
    \31\ See Notice, 78 FR at 70606. In the Notice, FINRA stated 
that--based on a sample period of transactions reported from May 16, 
2011 through December 2012--approximately 17.6% of trades and 
approximately 75.6% of original par or principal value traded in 
Asset-Backed Securities transactions (other than Rule 144A 
transactions) would have been subject to the $10MM+ dissemination 
cap had these transactions been subject to public dissemination. For 
Rule 144A transactions in Asset-Backed Securities over that same 
time period, approximately 28.5% of trades and approximately 88.1% 
of original par or principal value traded would have been 
disseminated subject to the $10MM+ dissemination cap. See id. at n. 
30. The Commission notes that these figures are based on the 
definition of ``Asset-Backed Securities'' in the original proposal, 
not the definition in Amendment No. 1.
---------------------------------------------------------------------------

Other Dissemination Protocols

    Currently, the standard data elements that are disseminated for 
TRACE-Eligible securities include, among other things, a dealer/
customer indicator (indicating the type of contra party) and a buy/sell 
indicator.\32\ FINRA has stated that the Asset-Backed Security market 
differs from the corporate bond market in that it has a smaller number 
of participants that are largely institutional. As a result, market 
participants have raised concerns with FINRA regarding protecting the 
confidentiality of dealer and customer trading strategies, identities, 
and positions in certain types of Asset-Backed Securities. To address 
these concerns, FINRA has proposed not to disseminate the dealer/
customer and buy/sell indicators for Asset-Backed Security 
transactions.\33\
---------------------------------------------------------------------------

    \32\ Additional standard data elements include the CUSIP, the 
time and date of the transaction, price, and the size (subject to 
dissemination caps). Specified Pool Transactions are disseminated 
subject to modified dissemination protocols. See Securities Exchange 
Act Release No. 68084 (October 23, 2012), 77 FR 65436 (October 26, 
2012) (Order Approving SR-FINRA-2012-042); FINRA Regulatory Notice 
12-56 (December 2012).
    \33\ See Notice, 78 FR at 70606.
---------------------------------------------------------------------------

Data Availability

    Currently, what is known as Asset-Backed Securities data--organized 
as the ABS Data Set for real-time data and as the Historic ABS Data Set 
for Historic TRACE Data \34\--includes all Securitized Products 
transactions that are disseminated (i.e., TBA transactions and 
Specified Pool Transactions). In light of the proposed definitional 
amendments discussed above, however, FINRA has proposed to amend Rule 
7730 to rename those data sets as the ``SP Data Set'' and ``Historic SP 
Data Set.'' FINRA also has proposed to include in these data sets the 
transaction data for the newly defined Asset-Backed Securities, which 
would be disseminated under this proposal.\35\ Asset-Backed Securities 
that are traded in Rule 144A transactions would be included in, 
respectively, the Rule 144A Data Set, when available, and the Historic 
Rule 144A Data Set, when available.\36\ FINRA does not propose to amend 
the fees currently in effect for the SP Data Set and the Historic SP 
Data Set. Similarly, when the Rule 144A Data Set and the Historic Rule 
144A Data Set become available, disseminated information regarding Rule 
144A transactions in Asset-Backed Securities would be included in such 
data sets without any change to the applicable fees.\37\
---------------------------------------------------------------------------

    \34\ A transaction in a disseminated TRACE-Eligible Security 
becomes available as part of Historic TRACE Data no earlier than 18 
months after the specific transaction is reported to TRACE. See 
Notice, 78 FR at 70606 n.35.
    \35\ See proposed FINRA Rule 7730; see also Notice, 78 FR at 
70606 and n. 35.
    \36\ See Notice, 78 FR at 70606.
    \37\ See id.; see also Rule 144A Dissemination Amendments, supra 
note 12.
---------------------------------------------------------------------------

Other Technical Changes

    FINRA has proposed to eliminate certain provisions that have 
expired and all cross-references thereto in FINRA Rule 6730(a) and to 
make conforming changes.\38\ FINRA also has proposed to make conforming 
and technical changes to the FINRA Rule 6700 Series and FINRA Rule 7730 
to incorporate the proposed definitional amendments and new data set 
names discussed above.\39\
---------------------------------------------------------------------------

    \38\ See proposed FINRA Rules 6730(a)(3)(D) through 
6730(a)(3)(G); see also Notice, 78 FR at 70606.
    \39\ See Notice, 78 FR at 70606.
---------------------------------------------------------------------------

Effective Date of Proposed Rule Change

    FINRA has stated that it would 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 270 days following publication of that 
Regulatory Notice.

III. Summary of Comments

    The Commission received one comment on the proposal,\40\ and two 
responses to the comment from FINRA.\41\ The commenter argues that the 
proposal ``has the potential to negatively impact liquidity, as 
previous proposals have done in the TBA, specified pool and the high-
yield markets.'' \42\ Therefore, the commenter requests ``that FINRA 
not implement this proposal, and instead engage in further discussion 
with the industry as to how best to preserve ABS market liquidity, and 
re-propose this proposal after such discussions.'' \43\
---------------------------------------------------------------------------

    \40\ See SIFMA Letter.
    \41\ See FINRA Letter I; FINRA Letter II.
    \42\ SIFMA Letter at 1.
    \43\ Id.
---------------------------------------------------------------------------

    According to the commenter, FINRA's prior implementation of post-
trade transparency in the high-yield bond market, and more recently in 
the markets for mortgage-backed securities traded TBA and in specified 
pools,\44\

[[Page 11484]]

has contributed to liquidity decreases in those markets; the commenter 
believes that the result in the Asset-Backed Security market would be 
the same.\45\ The commenter asserts that market makers are less willing 
to take on large trades from their buy-side counterparties when the 
identity of their position becomes immediately known.\46\ In addition, 
the commenter references a recent study that, according to the 
commenter, concluded that the implementation of mandatory transparency 
through TRACE in the corporate bond market caused a significant 
decrease in price dispersion for all bonds and significant decrease in 
trading activity for certain categories of bonds.\47\ The commenter 
states that the study's results indicate that mandated transparency may 
help some investors and dealers through a decline in price dispersion, 
while it harms others through a reduction in trading activity. 
According to the commenter, in the markets where post-trade 
transparency has already been implemented, the benefits of improved 
price discovery have been far outweighed by the costs of decreased 
liquidity.\48\
---------------------------------------------------------------------------

    \44\ See supra notes 7 and 9.
    \45\ See SIFMA Letter at 2.
    \46\ See id.
    \47\ See id. (citing Asquith, Covert, and Pathak, ``The Effects 
of Mandatory Transparency in Financial Markets Design: Evidence from 
the Corporate Bond Market'' (2013) (the ``Asquith et al. study'')).
    \48\ See id.
---------------------------------------------------------------------------

    In response, FINRA notes that TRACE has been subject to extensive 
academic interest since its inception, and that studies have shown 
multiple benefits of transparency, including a narrowing of the bid-ask 
spread, reduction in trade execution costs, and improved valuation 
precision in mark-to-market valuations.\49\ FINRA acknowledges the 
study referenced by the commenter, and notes that the study examined 
trading volume and the dispersion of transaction prices of corporate 
bonds over the period July 1, 2002, through December 31, 2006--a period 
during which FINRA implemented post-trade transparency in four stages. 
According to FINRA, the Asquith et al. study evaluated the change in 
dispersion of transaction prices and trading volume for windows of 90, 
60, and 30 days before and after the implementation of each stage, and 
for the time frame examined concluded that increases in post-trade 
transparency were associated with a statistically significant decrease 
in price dispersion in all stages, generally benefitting investors. 
Further, FINRA asserts that the study found no negative impact on 
trading activity for the first three stages of transparency 
implementation, and it found a statistically significant decrease in 
trading activity only for the last stage of dissemination, which was 
composed of non-investment grade and inactively-traded bonds. FINRA 
notes, however, that the study captured only the temporary adjustment 
in trading activity for the 90 days after implementation of 
dissemination, which FINRA states may have been a time period when 
market participants were adjusting to the new information available.
---------------------------------------------------------------------------

    \49\ See FINRA Letter I at 3 (citing, e.g., Goldstein, 
Hotchkiss, and Sirri, ``Transparency and Liquidity: A Controlled 
Experiment on Corporate Bonds'' (March 2006); Bessembinder, Maxwell, 
and Venkataraman, ``Optimal Market Transparency: Evidence From the 
Initiation of Trade Reporting in Corporate Bonds'' (January 2005); 
and Cici, Gibson, and Merrick, ``Missing the Marks: Dispersion in 
Corporate Bond Valuation'' (May 2008)).
---------------------------------------------------------------------------

    Furthermore, FINRA states that, during the time period beyond 90 
days from the last stage of dissemination, it appears that the trading 
activity of such bonds recovered to pre-dissemination levels, while the 
reduction in price dispersion was maintained. FINRA asserts this based 
on its understanding of the information and analysis provided in the 
same study referenced in the SIFMA Letter.\50\ Specifically, FINRA 
notes that, for phase 3B bonds, which the authors identified as the 
bonds that have experienced a large and significant reduction in 
trading activity, Figure 1 on page 35 of the paper shows that the 
average weekly daily trading volume, which was in the $200,000 to 
$400,000 range when the final stage of transparency was implemented in 
February 2005, declined below the $200,000 level over the next several 
months after dissemination, but then by December and January 2006, 
recovered to the $200,000 to $400,000 range.\51\
---------------------------------------------------------------------------

    \50\ See FINRA Letter II.
    \51\ See id. FINRA states that a similar trend is shown in 
Figure 2 on page 36 of the Asquith et al. study.
---------------------------------------------------------------------------

    In addition, FINRA disputes the commenter's assertion that the 
implementation of post-trade transparency in the markets for mortgage-
backed securities traded TBA and in specified pools has caused 
decreased liquidity in these markets. According to FINRA, while there 
has been a decline in trading in these markets, there is no direct 
evidence that transparency has contributed to the decline.\52\ FINRA 
states that TRACE data and statistics published on SIFMA's Web site 
indicate that the issuance of mortgage-related products has declined to 
the same extent or greater than trading volumes, affecting both 
disseminated and non-disseminated products.\53\ FINRA also believes 
that market participants have been focused on macro factors in general, 
and in particular the current and future impact of the Federal Reserve 
buying program and any tapering thereof.\54\
---------------------------------------------------------------------------

    \52\ See FINRA Letter I at 3-4.
    \53\ See id. at 4.
    \54\ See id.
---------------------------------------------------------------------------

    The commenter also states that its members are ``generally in 
agreement with the re-definition of ABS that includes securities backed 
by consumer or student loans, a lease or a secured or unsecured 
receivable but excludes Agency Pass-MBS, Agency CMOs and Agency and 
Non-Agency RMBS.'' \55\ The commenter warns, however, that ``the 
inclusion of CDOs, CLOs and Non-Agency-Backed CMBS is pressing the 
revised definition of ABS beyond what is appropriate.'' \56\ According 
to the commenter, unlike the consumer Asset-Backed Securities with 
which they are grouped under the original proposal, the credit analysis 
for CDOs, CLOs, and Non-Agency CMBS require extensive work and an in-
depth study of the underlying assets in order to formulate an opinion 
on the value of the tranche.\57\ The commenter states, therefore, that 
``[i]f prices were disseminated to the market on these securities 
without appropriate consideration, it would likely be the case that 
inexperienced investors could use the trade print in one junior bond as 
a proxy for a nominally similar piece of paper.'' \58\ Furthermore, the 
commenter cautions that disseminated prices for CMBS and CDO tranches 
may be influenced by technical factors and thus ``TRACE prices may not 
always reflect the fundamental credit risk of a security.'' \59\
---------------------------------------------------------------------------

    \55\ SIFMA Letter at 3.
    \56\ Id.
    \57\ See id.
    \58\ Id.
    \59\ Id. at 4 (stating, for example, that ``it is not uncommon 
in markets for deeply discounted legacy CMBS credit that a party may 
seek to purchase a specific tranche as a means of obtaining control 
rights in a transaction. As a result, a bond can trade at a 
pronounced premium to its fundamental value because the control 
right is worth a significant amount for a special servicer who can 
extract value with special servicing and liquidation fees which are 
not available to a typical investor'').
---------------------------------------------------------------------------

    In its response, FINRA stated that it ``agrees that the credit 
analysis for [these securities] differs from those Securitized Products 
backed by consumer or student loans, a lease, or a secured or unsecured 
receivable.'' \60\ Accordingly, in Amendment No. 1, FINRA revised the 
proposal to exclude these securities--as well as collateralized bond 
obligations--from the defined group of Asset-Backed Securities that 
would be disseminated

[[Page 11485]]

under the proposal.\61\ FINRA states that, instead, it will consider 
potential additional transparency in these securities in conjunction 
with other tranched securities, such as Collateralized Mortgage 
Obligations, as appropriate.\62\
---------------------------------------------------------------------------

    \60\ FINRA Letter I at 2.
    \61\ See id.; Amendment No. 1.
    \62\ See FINRA Letter I at 2.
---------------------------------------------------------------------------

    Finally, the commenter suggests an increased reporting period for 
TRACE-reportable Regulation S securities, stating that they require a 
manual and time-consuming booking process which would be difficult if 
not impossible to complete within the proposed timeframes.\63\ In 
response, FINRA states that it considers this suggestion to be outside 
the scope of its proposal.\64\
---------------------------------------------------------------------------

    \63\ See SIFMA Letter at 4.
    \64\ See FINRA Letter I at 4. FINRA also reiterates that the 
proposal is consistent with the Act and should be approved for the 
reasons set forth in the proposal. See id.
---------------------------------------------------------------------------

IV. Discussion and Commission Findings

    After careful review, 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.\65\ In particular, the Commission finds that the proposed 
rule change is consistent with Section 15A(b)(6) of the Act,\66\ which 
requires, among other things, that FINRA's 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.
---------------------------------------------------------------------------

    \65\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \66\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

    In approving the original TRACE rules, the Commission stated that 
price transparency plays a fundamental role in promoting the fairness 
and efficiency of U.S. capital markets.\67\ The Commission believes 
that real-time dissemination of last-sale information could aid dealers 
in deriving better quotations, because they would know the prices at 
which other market participants had recently transacted in the same or 
similar instruments. This information also could aid all market 
participants in evaluating current quotations, because they could 
inquire why dealer quotations might differ from the prices of recently 
executed transactions. Furthermore, post-trade transparency affords 
market participants a means of testing whether dealer quotations before 
the last sale were close to the price at which the last sale was 
executed. In this manner, post-trade transparency can promote price 
competition between dealers and more efficient price discovery, and 
ultimately lower transaction costs. For similar reasons, FINRA believes 
that dissemination of Asset-Backed Security transaction information may 
enhance price discovery, allow investors to better assess the quality 
of their executions, assist broker-dealers in complying with best 
execution obligations, and enable broker-dealers and other 
institutional investors to improve the accuracy of their valuations of 
their Asset-Backed Security positions.\68\ The Commission agrees.\69\
---------------------------------------------------------------------------

    \67\ See Securities Exchange Act Release No. 43873 (January 23, 
2001), 66 FR 8131, 8136 (January 29, 2001) (approving SR-NASD-99-65) 
(``2001 TRACE Order'').
    \68\ See Notice, 78 FR at 70607; see also FINRA Letter I, at 4.
    \69\ See Edwards, A. K., Harris, L. E. & Piwowar, M. S., 
``Corporate Bond Market Transaction Costs and Transparency'' (June 
2007); Goldstein, Hotchkiss, and Sirri, ``Transparency and 
Liquidity: A Controlled Experiment on Corporate Bonds'' (March 
2006); and Bessembinder, Maxwell, and Venkataraman, ``Optimal Market 
Transparency: Evidence From the Initiation of Trade Reporting in 
Corporate Bonds'' (January 2005).
---------------------------------------------------------------------------

    The Commission has considered the commenter's argument that post-
trade transparency in the Asset-Backed Security market has the 
potential to negatively impact liquidity in that market. The commenter 
references an academic study that found that the implementation of 
mandatory transparency through TRACE in the corporate bond market is 
associated with a significant decrease in price dispersion for all 
bonds and a significant decrease in trading activity for certain 
categories of bonds. FINRA notes in response to the comment that the 
study found a statistically significant decrease in trading activity 
only in the last of the four stages of transparency implementation in 
high-yield corporate bonds, and no impact on trading activity in the 
first three stages.\70\ FINRA also notes that, according to the same 
study, trading activity in those corporate bonds eventually normalized 
to pre-dissemination levels, while the reduction in price dispersion 
remained.\71\ The Commission notes that both the commenter and the 
Asquith et al. study believe that mandated post-trade transparency 
under TRACE has caused a reduction in price dispersion of the affected 
bonds. This feature appears consistent with the view that post-trade 
transparency reduces information asymmetries and promotes price 
competition in the market. Although the Asquith et al. study claims 
that post-trade transparency may cause a reduction in the level of 
trading of illiquid bonds, the Commission also notes that some question 
exists about whether that feature--even if real in the short term--
persists over time or is detrimental. The Commission believes that the 
comment does not preclude approval of the proposal at this time, 
particularly in light of FINRA's representation that it will ``observe 
the trading in Asset-Backed Securities to monitor the impact of price 
transparency in the market for Asset-Backed Securities.'' \72\
---------------------------------------------------------------------------

    \70\ See FINRA Letter I.
    \71\ See FINRA Letters I and II.
    \72\ Notice, 78 FR at 70605.
---------------------------------------------------------------------------

    The Commission believes that the proposed reduction in reporting 
times for Asset-Backed Security transactions (except those that are 
effected as primary market List or Fixed Offering Price Transactions or 
Takedown Transactions) is an important corollary to the expansion of 
post-trade transparency for such transactions. Reducing the reporting 
period for these transactions as set forth in the proposal will result 
in important trade information reaching the market more quickly, thus 
contributing to enhanced price transparency for Asset-Backed 
Securities. The Commission also believes that FINRA's two-stage phased 
approach to implementing the reduced reporting period is reasonably 
designed to ease the compliance burdens on those affected by the 
proposal without significantly compromising FINRA's ability to 
disseminate more timely transaction information. Further, the 
Commission believes that it is reasonable and appropriate to allow 
members that effect primary market Asset-Backed Security transactions 
as List or Fixed Ordering Price Transactions or Takedown Transactions 
to continue to take advantage of the more flexible treatment of those 
transactions provided for in FINRA Rules 6730(a)(2), 6750(b)(3), and 
7730(b)(1)(C).
    The Commission believes that the proposed $10 million dissemination 
cap for Asset-Backed Security transactions is reasonable and consistent 
with the Act. FINRA has represented that it will observe the effects of 
the $10 million dissemination cap on the market and may propose 
modifications to the cap size in the future if warranted. The 
Commission expects FINRA to periodically re-evaluate whether the 
dissemination caps, including the caps for Asset-Backed Security 
transactions being approved today, continue to be appropriate. 
Furthermore, the Commission believes that the additional

[[Page 11486]]

proposed dissemination protocols for Asset-Backed Security 
transactions, pursuant to which the dealer/customer and buy/sell 
indicators would not be disseminated, strike an appropriate balance 
between enhancing post-trade transparency and protecting counterparty 
confidentiality.
    The Commission further believes that including disseminated Asset-
Backed Security transaction data in the SP Data Set and Historic SP 
Data Set (as renamed under the proposal) while maintaining the current 
fee levels in effect for those data sets is reasonable and consistent 
with the Act. The rules that establish the existing data sets have been 
approved by the Commission,\73\ and including the additional Asset-
Backed Securities to be disseminated under the instant proposal in 
those data sets does not appear to raise any issues. Finally, the 
Commission believes that the proposal's minor, conforming, and 
technical revisions to the FINRA Rule 6700 series and FINRA Rule 7730 
are consistent with the Act.
---------------------------------------------------------------------------

    \73\ See Securities Exchange Act Release No. 66829 (April 18, 
2012), 77 FR 24748 (April 25, 2012) (approving SR-FINRA-2012-020, 
which, among other things, established real-time and historic market 
data sets for certain Asset-Backed Securities traded ``To Be 
Announced''); Securities Exchange Act Release No. 68084 (October 23, 
2012), 77 FR 65436 (October 26, 2012) (approving SR-FINRA-2012-042, 
which, among other things, established real-time and historic market 
data sets for certain other Asset-Backed Securities).
---------------------------------------------------------------------------

    The Commission finds good cause to approve the proposed rule 
change, as amended by Amendment No. 1, prior to the thirtieth day after 
the date of publication of notice of filing thereof in the Federal 
Register. The amendment responds to an issue raised by one commenter on 
the proposal by excluding certain tranched securities from the Asset-
Backed Securities to be disseminated. Thus, the scope of proposal, as 
amended, is narrower than the initial proposal. In addition, the 
initial proposal underwent a full notice-and-comment period and 
generated no comment from any other parties. Accelerated approval would 
allow FINRA to expand post-trade transparency to transactions in the 
Asset-Backed Securities set forth in the amended proposal without 
delay. Accordingly, the Commission believes that good cause exists, 
consistent with Sections 15A(b)(6) and 19(b) of the Act,\74\ to approve 
the proposed rule change, as amended by Amendment No. 1, on an 
accelerated basis.
---------------------------------------------------------------------------

    \74\ 15 U.S.C. 78o-3(b)(6); 15 U.S.C. 78s(b).
---------------------------------------------------------------------------

V. Solicitation of Comments on Amendment No. 1

    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-2013-046 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-2013-046. 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 
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available 
for inspection and copying at the principal office of FINRA. All 
comments received will be posted without change; 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-2013-046 and should be 
submitted on or before March 21, 2014.

VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\75\ that the proposed rule change (SR-FINRA-2013-046), as modified 
by Amendment No. 1, be, and it hereby is, approved on an accelerated 
basis.
---------------------------------------------------------------------------

    \75\ 15 U.S.C. 78s(b)(2).
    \76\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\76\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-04390 Filed 2-27-14; 8:45 am]
BILLING CODE 8011-01-P