Document ID: SEC-2022-0323-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2022-03-10T05:00Z

[Federal Register Volume 87, Number 47 (Thursday, March 10, 2022)]
[Notices]
[Pages 13781-13783]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-05021]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-94365; File No. SR-FINRA-2021-030]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Amendment No. 1 and Order 
Approving a Proposed Rule Change, as Modified by Amendment No. 1, 
Relating to TRACE Reporting of Corporate Bond Trades That Are Part of a 
Larger Portfolio Trade

March 4, 2022.

I. Introduction

    On November 22, 2021, 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 require members to append a modifier to a 
corporate bond trade that is part of a larger portfolio trade when 
reporting to FINRA's Trade Reporting and Compliance Engine (``TRACE''). 
The proposed rule change was published for comment in the Federal 
Register on December 7, 2021.\3\ On January 20, 2022, pursuant to 
Section 19(b)(2) of the Act,\4\ the Commission designated a longer 
period within which to approve the proposed rule change, disapprove the 
proposed rule change, or institute proceedings to determine whether to 
disapprove the proposed rule change.\5\ The Commission received three 
comments on the proposal.\6\ On March 4, 2022, FINRA filed Amendment 
No. 1 to the proposed rule change.\7\ The Commission is publishing 
notice of Amendment No. 1 and approving the proposed rule change, as 
modified by Amendment No. 1, on an accelerated basis.
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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. 93699 (December 1, 
2021), 86 FR 69337 (December 7, 2021) (``Notice'').
    \4\ 15 U.S.C. 78s(b)(2).
    \5\ See Securities Exchange Act Release No. 94011 (January 20, 
2022), 87 FR 4097 (January 26, 2022).
    \6\ See Letter from Howard Meyerson, Managing Director, 
Financial Information Forum, to Vanessa A. Countryman, Secretary, 
SEC, dated December 23, 2021 (``FIF Letter''); Letter from Chris 
Killian, Managing Director, Securitization and Credit, Securities 
Industry and Financial Markets Association, to Vanessa A. 
Countryman, Secretary, SEC, dated December 28, 2021 (``SIFMA 
Letter''); Letter from Michael Grogan, V.P. & Head of US Fixed 
Income Trading--Investment Grade, Dwayne Middleton, V.P. & Heading 
of Fixed Income Trading, Brian Rubin, V.P. & Head of US Fixed Income 
Trading--Below Investment Grade, and Jonathan Siegal, V.P. & Senior 
Legal Counsel--Legislative & Regulatory Affairs, T. Rowe Price, to 
Vanessa A. Countryman, Secretary, SEC, dated December 30, 2021 (``T. 
Rowe Price Letter'').
    \7\ In Amendment No. 1, FINRA revised the proposal to remove any 
requirements relating to delayed Treasury spot trades so that it can 
further consider this issue, and responded to comments relating to 
the portfolio trade aspects of the proposal. Amendment No. 1 to the 
proposed rule change is available at https://www.sec.gov/comments/sr-finra-2021-030/srfinra2021030.htm.
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II. Description of the Proposed Rule Change, as Modified by Amendment 
No. 1

    For purposes of the proposed rule change, FINRA considers a 
``portfolio trade'' to be a trade between two parties for a basket of 
corporate bonds at a single aggregate price for the entire basket. 
FINRA rules do not allow for reporting of a single portfolio trade with 
an aggregated price. Instead, a member firm must report to TRACE a 
trade for each individual bond in the portfolio with an attributed 
dollar price for each bond. FINRA believes that, in many cases, the 
reported price for each bond in a portfolio trade is in line with the 
bond's current market price, while in other cases the attributed price 
reported for an individual bond might deviate from its current market 
price.
    In 2020, the Commission's Fixed Income Market Structure Advisory 
Committee (``FIMSAC'') \8\ approved a recommendation that FINRA amend 
the TRACE reporting rules to require members to identify corporate bond 
trades that are part of a portfolio trade.\9\
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    \8\ The FIMSAC is a federal advisory committee formed in 
November 2017 to provide the Commission with advice and 
recommendations on matters related to fixed income market structure. 
See https://www.sec.gov/files/fimsac-charter.pdf.
    \9\ See FIMSAC, Recommendation Regarding Additional TRACE 
Reporting Indicators for Corporate Bond Trades (February 10, 2020), 
available at: https://www.sec.gov/spotlight/fixed-income-advisory-committee/fimsac-additional-trace-flags-recommendation.pdf.
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    Accordingly, FINRA is proposing to add new paragraph (d)(4)(H) to 
Rule 6730 to require a member to append a designated modifier if 
reporting a transaction in a corporate bond that: (i) Is executed 
between only two parties;

[[Page 13782]]

(ii) involves a basket of corporate bonds of at least ten \10\ unique 
issues; \11\ and (iii) has a single agreed price for the entire basket. 
The new portfolio trade modifier would be disseminated through TRACE, 
together with other information about the transaction, immediately upon 
receipt of a transaction report. FINRA will publish the specific format 
for the new portfolio trade modifier in the TRACE technical 
specifications. FINRA also has represented that it will publish a 
Regulatory Notice announcing the effective date of the proposed rule 
change no later than 90 days following Commission approval, and the 
effective date will be no later than 365 days following publication of 
the Regulatory Notice.
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    \10\ The FIMSAC recommended a size threshold for portfolio 
trades of at least 30 unique issuers. In the Notice, FINRA stated 
that it was proposing a lower size threshold--ten rather than 30--
believing that the lower threshold would provide greater 
informational benefits to market participants by capturing a greater 
number of transactions that satisfy the other conditions the rule.
    \11\ In the Notice, FINRA stated its belief that using the 
number of issues, rather than the number of issuers, would provide a 
simpler and more effective way to identify portfolio trades for 
purposes of the proposed rule change.
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    The Notice also included proposed requirements relating to TRACE 
reporting of a delayed Treasury spot trade, defined by FINRA in the 
Notice to mean a transaction in a corporate bond that occurs on the 
basis of a spread to a benchmark U.S. Treasury Security, where the 
agreed-upon spread is later converted to a dollar price by ``spotting'' 
the benchmark U.S. Treasury Security at a designated time. As discussed 
further below, FINRA amended the proposed rule change to remove the 
provisions relating to delayed Treasury spot trades.

III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change, as modified by Amendment No. 1, is consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to a national securities association.\12\ In particular, the 
Commission finds that the proposed rule change is consistent with 
Section 15A(b)(6) of the Act,\13\ which requires, among other things, 
that FINRA's rules be designed to prevent fraudulent and manipulative 
acts and practices; promote just and equitable principles of trade; 
foster cooperation and coordination with persons engaged in regulating, 
clearing, settling, processing information with respect to, and 
facilitating transactions in securities; remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system; and, in general, protect investors and the public interest.
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    \12\ 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).
    \13\ 15 U.S.C. 78o-3(b)(6).
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    The proposal appears reasonably designed to improve transparency 
for portfolio trades, and the individual components thereof, without 
imposing undue burdens on members who report these trades and who must 
report other TRACE modifiers under FINRA rules.\14\ Requiring a TRACE 
modifier for each corporate bond transaction that is part of a 
portfolio trade will allow market participants and other market 
observers to know that the price reported for that transaction might 
not reflect the price for the individual bond if it were individually 
negotiated. The Commission also believes that the criteria for defining 
the scope of portfolio trades for which the modifier must be used, as 
set forth in new paragraph (d)(4)(H) of Rule 6730, are reasonably 
designed to facilitate implementation of the proposed rule change.
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    \14\ See, e.g., Rule 6730(d)(4)(B) (requiring members to append 
a trade report modifier if the price of the transaction is 
determined using a weighted average price method); Rule 
6730(d)(4)(F) (requiring members to append a trade report modifier 
where a trade report does not reflect either a commission, mark-up, 
or mark-down).
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    No issues were raised by commenters that would preclude Commission 
approval of this proposed rule change. Although one commenter stated 
that ``the incremental benefit to transparency of this flag is somewhat 
limited,'' \15\ another commenter broadly supported the proposal for a 
portfolio trade modifier to increase transparency.\16\ Commenters also 
requested certain clarifications to the proposal, which FINRA provided 
in Amendment No. 1.\17\ One commenter noted the changes between the 
FINRA proposal and the FIMSAC recommendation but did not raise an 
objection to those changes.\18\ Finally, issues raised by commenters 
pertaining to the proposed requirements relating to delayed Treasury 
spot trades are moot in light of Amendment No. 1.
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    \15\ SIFMA Letter at 1.
    \16\ See T. Rowe Price Letter at 1.
    \17\ For example, one commenter sought guidance on the meaning 
of ``single aggregate price'' for the entire basket as used in 
proposed Rule 6730(d)(4)(H)(iii). See SIFMA Letter at 2-3. FINRA 
responded that, where the parties to a trade aggregate individual 
prices obtained from a pricing list or service without further 
negotiation, it would not be considered within the scope of the 
rule. Another commenter asked whether the TRACE system will validate 
whether the counterparties to a trade consistently identify a trade 
as being part of a portfolio trade. See FIF Letter at 3. FINRA 
stated that the portfolio trade modifier will not be part of the 
TRACE system's matching logic.
    \18\ See SIFMA Letter at 2 (supporting the change to base the 
definition on the number of issues rather than the number of issuers 
and stating, with regard to lowering the numerical threshold from 30 
to ten issues: ``We do not have a consensus view on the number, 
however, we would point out that as the number of securities in the 
basket gets lower, our members believe it is less likely that any 
individual security traded would be off market'').
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IV. Solicitation of Comments on Amendment No. 1 to the Proposed Rule 
Change

    Interested persons are invited to submit written data, views, and 
arguments concerning whether Amendment No. 1 is consistent with the 
Act. Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-FINRA-2021-030 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-FINRA-2021-030. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549, on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of FINRA. All comments received 
will be posted without change. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment

[[Page 13783]]

submissions. You should submit only information that you wish to make 
available publicly. All submissions should refer to File Number SR-
FINRA-2021-030, and should be submitted on or before March 31, 2022.

V. Accelerated Approval of Proposed Rule Change, as Modified by 
Amendment No. 1

    The Commission finds good cause to approve the proposed rule 
change, as modified by Amendment No. 1, prior to the thirtieth day 
after the date of publication of notice of the filing of Amendment No. 
1 in the Federal Register. In Amendment No. 1, FINRA removed all 
provisions relating to delayed Treasury spot trades. In doing so, FINRA 
noted that it would ``continue to consider whether any potential 
alternative to the proposed approach may better meet FINRA's regulatory 
objectives in this area.'' The parts of the proposed rule change 
relating to the modifier for corporate bond transactions that are part 
of a larger portfolio trade remain identical to those noticed for 
comment, to which commenters had opportunity to respond and have in 
fact responded. Therefore, the Commission finds good cause, pursuant to 
Section 19(b)(2) of the Act,\19\ to approve the proposed rule change, 
as modified by Amendment No. 1, on an accelerated basis.
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    \19\ 15 U.S.C. 78s(b)(2).
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VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\20\ that the proposed rule change (SR-FINRA-2021-030), as modified 
by Amendment No. 1, be, and hereby is, approved on an accelerated 
basis.
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    \20\ Id.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\21\
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    \21\ 17 CFR 200.30-3(a)(12).
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J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2022-05021 Filed 3-9-22; 8:45 am]
BILLING CODE 8011-01-P