Document ID: SEC-2009-1521-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of Proposed Rule Change To Define Asset-Backed Securities, Mortgage-Backed Securities, and Other Similar Securities as TRACE-Eligible Securities and Require the Reporting of Transactions in Such Securities to TRACE
Posted Date: 2009-10-28T04:00Z

[Federal Register: October 28, 2009 (Volume 74, Number 207)]
[Notices]               
[Page 55600-55606]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr28oc09-127]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-60860; File No. SR-FINRA-2009-065]

 
Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Proposed Rule Change To Define 
Asset-Backed Securities, Mortgage-Backed Securities, and Other Similar 
Securities as TRACE-Eligible Securities and Require the Reporting of 
Transactions in Such Securities to TRACE

October 21, 2009.
    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 October 1, 2009, 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, II, and III below, which Items have been prepared by FINRA. 
The Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing to amend the FINRA Rule 6700 Series (except for 
Rule 6740) and FINRA Rule 7730 to designate asset-backed securities, 
mortgage-backed securities and other similar securities (collectively 
defined hereinafter as ``Asset-Backed Securities'') as Trade Reporting 
and Compliance Engine (``TRACE'') TRACE-Eligible Securities, and 
establish reporting, fee and other requirements relating to such 
securities as follows:
    (1) In Rule 6710, to amend the defined term: (A) ``TRACE-Eligible 
Security'' to include Asset-Backed Securities; and make certain 
technical changes in Rule 6710(a); (B) ``Reportable TRACE Transaction'' 
to include specific requirements regarding certain Asset-Backed 
Securities in Rule 6710(c); (C) ``Agency Debt Security'' to incorporate 
proposed defined terms in Rule 6710(l); and (D) ``TRACE System Hours'' 
to transfer the defined term from Rule 6730(a) to Rule 6710(bb);
    (2) In Rule 6710, to add the defined terms, ``Sponsor,'' ``Issuing 
Entity,'' ``TBA,'' ``Agency Pass-Through Mortgage-Backed Security,'' 
``Factor,'' ``Specified Pool Transaction,'' ``Stipulation 
Transaction,'' ``Dollar Roll,'' and ``Remaining Principal Balance,'' 
as, respectively, new paragraphs (s) through (aa);
    (3) In Rule 6730, to provide for reporting of Asset-Backed 
Securities transactions;
    (4) In Rule 6750, to provide that information on a transaction in a 
TRACE-Eligible Security that is an Asset-Backed Security will not be 
disseminated;
    (5) In Rule 6760, to require a member that is a Sponsor or an 
Issuing Entity of an Asset-Backed Security to provide notice as 
required under the Rule, and to modify the notification requirements to 
accept a mortgage pool number in certain circumstances;
    (6) In Rule 7730, to establish transaction reporting fees for 
Asset-Backed Securities that are TRACE-Eligible Securities at the same 
rates in effect for corporate bonds; for certain Asset-Backed 
Securities, to identify size (volume) for determining a trade reporting 
fee, and to provide that for purposes of Rule 7730(b), a transaction in 
an Agency Pass-Through Mortgage-Backed Security is not a List or Fixed 
Offering Price Transaction or a Takedown Transaction; and
    (7) In the Rule 6700 Series, except for Rule 6740, and Rule 7730 to 
incorporate certain technical, administrative and clarifying changes.
    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.

[[Page 55601]]

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

1. Purpose
Introduction
(A) Background
    FINRA proposes to expand TRACE to include Asset-Backed Securities, 
as defined in Rule 6710(m), as TRACE-Eligible Securities, requiring 
members to report transactions in such securities to TRACE. For 
purposes of this proposed rule change, the term ``Asset-Backed 
Security'' is broadly defined, and the reporting of such securities to 
TRACE will permit FINRA to obtain additional transaction information 
and observe patterns of trading, facilitating the oversight and 
regulation of the Asset-Backed Securities market. FINRA will study the 
reported data to determine the volume and trading in various types of 
Asset-Backed Securities.
    Generally, FINRA's policy favors transparency in the debt 
securities markets, and for most TRACE-Eligible Securities, real-time 
dissemination of transaction information is provided for under Rule 
6750(a). Although at this time FINRA does not propose that transaction 
information on Asset-Backed Securities be disseminated, FINRA believes 
that the transparency in corporate bonds provided by TRACE today has 
contributed to better pricing, more precise valuations and reduced 
investor costs. After FINRA has had an opportunity to review data over 
a period of time, FINRA may determine that dissemination of some 
transaction information for Asset-Backed Securities is warranted.\3\
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    \3\ FINRA used this approach previously when it implemented 
dissemination in phases for various types of corporate bonds. 
Similarly, any proposal to adopt dissemination protocols for Asset-
Backed Securities will be subject to rulemaking under Section 
19(b)(1) of the Act, 15 U.S.C. 78s(b)(1).
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(B) Summary of Proposed Amendments
    To incorporate Asset-Backed Securities in TRACE, FINRA proposes 
significant amendments to Rule 6710, Rule 6730 and Rule 6750 and lesser 
amendments to Rule 6720, Rule 6760 and Rule 7730. In Rule 6710, FINRA 
proposes to revise the defined terms, ``TRACE-Eligible Security'' and 
``Reportable TRACE Transaction,'' \4\ and to add nine defined terms, 
most of which relate to the trading of Agency Pass-Through Mortgage-
Backed Securities \5\ and other types of Asset-Backed Securities that 
are collateralized by mortgages or other assets that are self-
amortizing. In Rule 6730, FINRA proposes more liberal trade reporting 
requirements for transactions in Asset-Backed Securities than those in 
effect for corporate bonds, modifications to the reporting requirements 
relating to particular structural aspects or other features of certain 
Asset-Backed Securities, and, in Rule 6750(b), not to disseminate 
transaction information on Asset-Backed Securities. The proposed 
amendments to Rule 6760 characterize a member that is a Sponsor or an 
Issuing Entity \6\ of an Asset-Backed Security as a managing 
underwriter, requiring such persons to provide notice as required under 
the rule. FINRA proposes amendments to Rule 7730 to apply the fees 
currently in effect under the rule at the same rates to transactions in 
Asset-Backed Securities; to provide that a transaction in an Agency 
Pass-Through Mortgage-Backed Security will not be treated as a List or 
Fixed Offering Price Transaction or a Takedown Transaction for purposes 
of trade reporting fees; and to define size (volume) for purposes of 
the reporting fees payable for transactions in certain Asset-Backed 
Securities. Finally, several minor, technical or clarifying amendments 
are proposed to the Rule 6700 Series (except for Rule 6740) and Rule 
7730.
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    \4\ FINRA also proposes technical or clarifying amendments to 
``Agency Debt Security,'' ``Asset-Backed Security'' and ``TRACE 
System Hours'' as defined, respectively, in Rule 6710(l), Rule 
6710(m) and Rule 6710(bb).
    \5\ ``Agency Pass-Through Mortgage-Backed Security'' is defined 
in proposed Rule 6710(v) and discussed, infra.
    \6\ ``Sponsor'' and ``Issuing Entity'' are defined in proposed 
Rule 6710(s) and proposed Rule 6710(t) and discussed, infra.
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Discussion
(A) ``TRACE-Eligible Security''; Other Defined Terms
    TRACE-Eligible Security and Asset-Backed Security. Under Rule 
6710(a), a TRACE-Eligible Security is a debt security that is U.S. 
dollar denominated and issued by a U.S. or foreign private issuer, and 
if a ``restricted security'' as defined in Securities Act Rule 
144(a)(3), sold pursuant to Rule 144A; or is a U.S. dollar denominated 
security that is issued or guaranteed by an Agency or a Government-
Sponsored Enterprise (``GSE'').\7\ Securities excluded from ``TRACE-
Eligible Security'' include U.S. Treasury Securities, foreign sovereign 
securities and other securities not issued by a private issuer, Money 
Market Instruments and Asset-Backed Securities.\8\
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    \7\ ``Agency'' is defined in Rule 6710(k) and ``Government-
Sponsored Enterprise'' (``GSE'') is defined in Rule 6710(n).
    \8\ ``U.S. Treasury Security'' is defined in Rule 6710(p); 
``Money Market Instrument'' is defined in Rule 6710(o); and ``Asset-
Backed Security'' is defined in Rule 6710(m).
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    In Rule 6710(m), ``Asset-Backed Security'' is defined broadly to 
include a security that is defined as such under Securities Act 
Regulation AB,\9\ a

[[Page 55602]]

mortgage-backed security, a collateralized mortgage obligation, a 
synthetic asset-backed security, or any instrument involving or based 
on the securitization of mortgages or other credits or assets, 
including but not limited to a collateralized debt obligation, a 
collateralized bond obligation, a collateralized debt obligation of 
Asset-Backed Securities or a collateralized debt obligation of 
collateralized debt obligations. These instruments include any 
instrument involving or based on the securitization of mortgages or 
other credits or assets, such as asset-backed securities backed by a 
pool credit card receivables, automobile loans, student loans, or Small 
Business Administration loans. The term includes Asset-Backed 
Securities that are issued or guaranteed by an Agency or a GSE.\10\
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    \9\ Securities Act Regulation AB, Section 1101(c) defines 
``asset-backed security'' as:
    (1)`Asset-backed security' means a security that is primarily 
serviced by the cash flows of a discrete pool of receivables or 
other financial assets, either fixed or revolving, that by their 
terms convert into cash within a finite time period, plus any rights 
or other assets designed to assure the servicing or timely 
distributions of proceeds to the security holders; provided that in 
the case of financial assets that are leases, those assets may 
convert to cash partially by the cash proceeds from the disposition 
of the physical property underlying such leases.
    (2) The following additional conditions apply in order to be 
considered an asset-backed security:
    (i) Neither the depositor nor the issuing entity is an 
investment company under the Investment Company Act of 1940 (15 
U.S.C. 80a-1 et seq.) nor will become an investment company as a 
result of the asset-backed securities transaction.
    (ii) The activities of the issuing entity for the asset-backed 
securities are limited to passively owing or holding the pool of 
assets, issuing the asset-backed securities supported or serviced by 
those assets, and other activities reasonably incidental thereto.
    (iii) No non-performing assets are part of the asset pool as of 
the measurement date.
    (iv) Delinquent assets do not constitute 50% or more, as 
measured by dollar volume, of the asset pool as of the measurement 
date.
    (v) With respect to securities that are backed by leases, the 
portion of the securitized pool balance attributable to the residual 
value of the physical property underlying the leases, as determined 
in accordance with the transaction agreements for the securities, 
does not constitute:
    (A) For motor vehicle leases, 65% or more, as measured by dollar 
volume, of the securitized pool balance as of the measurement date.
    (B) For all other leases, 50% or more, as measured by dollar 
volume, of the securitized pool balance as of the measurement date.
    (3) Notwithstanding the requirement in paragraph (c)(1) of this 
section that the asset pool be a discrete pool of assets, the 
following are considered to be a discrete pool of assets for 
purposes of being considered an asset-backed security:
    (i) Master Trusts. The offering related to the securities 
contemplates adding additional assets to the pool that backs such 
securities in connection with future insurances of asset-backed 
securities backed by such pool. The offering related to the 
securities also may contemplate additions to the asset pool, to the 
extent consistent with paragraphs (c)(3)(ii) and (c)(3)(iii) of this 
section, in connection with maintaining minimum pool balances in 
accordance with the transaction agreements for master trusts with 
revolving periods or receivables or other financial assets that 
arise under revolving accounts.
    (ii) Prefunding Periods. The offering related to the securities 
contemplates a prefunding account where a portion of the proceeds of 
that offering is to be used for the future acquisition of additional 
pool assets, if the duration of the prefunding period does not 
extend for more than one year from the date of insurance of the 
securities and the portion of the proceeds for such prefunding 
account does not involve in excess of:
    (A) For master trusts, 50% of the aggregate principal balance of 
the total asset pool whose cash flows support the securities; and
    (B) For other offerings, 50% of the proceeds of the offering.
    (iii) Revolving Periods. The offering related to the securities 
contemplates a revolving period where cash flows from the pool 
assets may be used to acquire additional pool assets, provided, 
that, for securities backed by receivables or other financial assets 
that do not arise under revolving accounts, the revolving period 
does not extend for more than three years from the date of issuance 
of the securities and the additional pool assets are of the same 
general character as the original pool assets.
    \10\ The defined term ``Agency Debt Security'' in Rule 6710(l) 
does not include an Asset-Backed Security, even if such security is 
issued or guaranteed by an Agency or a GSE.
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    FINRA proposes to amend the defined term ``TRACE-Eligible 
Security'' in Rule 6710(a) to include all Asset-Backed Securities as 
broadly defined in Rule 6710(m) as TRACE-Eligible Securities. The 
specific exclusion of Asset-Backed Securities in the definition of 
``TRACE-Eligible Security'' will be deleted. The proposed amendment 
will include in TRACE a significant, high dollar volume and increasing 
number of debt securities.
    In addition, in Rule 6710(m) FINRA proposes minor amendments to the 
term, ``Asset-Backed Security,'' which will clarify but will not change 
the scope or meaning of the definition. As amended, the definition will 
provide:

    ``Asset-Backed Security'' means a security collateralized by any 
type of financial asset, such as loans, leases, mortgages, or 
secured or unsecured receivables, and includes but is not limited to 
an asset-backed security as used in Securities Act Regulation AB, 
Section 1101(c), a mortgage-backed security, a collateralized 
mortgage obligation, a synthetic asset-backed security, a 
collateralized debt obligation, a collateralized bond obligation, a 
collateralized debt obligation of Asset-Backed Securities or a 
collateralized debt obligation of collateralized debt obligations.

    Reportable TRACE Transaction. FINRA recently amended the Rule 6700 
Series to require members to report primary market transactions, which 
harmonized the reporting requirements regarding such transactions with 
the requirements of The Municipal Securities Rulemaking Board 
(``MSRB'').\11\ Neither FINRA, with respect to TRACE-Eligible 
Securities, nor the MSRB, with respect to municipal securities, require 
that the initial sale from an issuer to an underwriter(s) or an initial 
purchaser(s) be reported as a primary market transaction.
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    \11\ Securities Exchange Act Release No. 60726 (September 28, 
2009), 74 FR 50991 (October 2, 2009) (Order Approving SR-FINRA-2009-
010) (hereinafter ``SEC Order Approving TRACE Expansion--Agency Debt 
Securities''). The MSRB requires the reporting of primary market 
transactions in municipal securities under MSRB Rule G-14.
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    FINRA proposes to amend the term ``Reportable TRACE Transaction'' 
in Rule 6710(c) to provide that, for Agency Pass-Through Mortgage-
Backed Securities, all transactions, including the initial sale of an 
Agency Pass-Through Mortgage-Backed Security from an Issuing Entity or 
a Sponsor to an underwriter or an initial purchaser, are Reportable 
TRACE Transactions. FINRA proposes that such initial sales in an Agency 
Pass-Through Mortgage-Backed Security be reported due to the particular 
origination process, including the manner in which such securities are 
sold initially. In most cases, the origination of a TRACE-Eligible 
Security involves an offering where an issuer sells securities to one 
or more underwriters or initial purchasers that then resell such 
securities. However, due in part to the TBA process, and their status 
as exempt securities, Agency Pass-Through Mortgage-Backed Securities 
generally are not sold in traditional private offerings (or a 
traditional public offering). Consequently, requiring the reporting of 
the initial transaction may be the only opportunity to elicit necessary 
information for a regulatory audit trail of Asset-Backed Securities. In 
addition, the proposed amendments clarify that similar primary market 
sale transactions from the issuer to an underwriter or initial 
purchaser in other TRACE-Eligible Securities will continue not to be 
Reportable TRACE Transactions.
    FINRA also proposes to streamline the definition, ``Agency Debt 
Security,'' in Rule 6710(l) by using proposed defined terms and to 
transfer the defined term ``TRACE System Hours'' from Rule 6730(a) to 
Rule 6710(bb), with a minor amendment to clarify that the TRACE system 
operates only on business days.
New Defined Terms
    FINRA proposes to add to Rule 6710 the following defined terms: 
``Sponsor'' as proposed Rule 6710(s); ``Issuing Entity'' as proposed 
Rule 6710(t); ``TBA'' as proposed Rule 6710(u); ``Agency Pass-Through 
Mortgage-Backed Security'' as proposed Rule 6710(v); ``Factor'' as 
proposed Rule 6710(w); ``Specified Pool Transaction'' as proposed Rule 
6710(x), ``Stipulation Transaction'' as proposed Rule 6710(y); ``Dollar 
Roll'' as proposed Rule 6710(z); and ``Remaining Principal Balance'' as 
proposed Rule 6710(aa).
    Sponsor and Issuing Entity. In Asset-Backed Securities, the Sponsor 
of an Asset-Backed Security is the person (i.e., usually a non-natural 
``person'' such as a corporation) that decides to issue a security and 
determines its structure, pool and features. FINRA proposed to 
incorporate the definition of ``Sponsor'' adopted by the Commission in 
Securities Act Regulation AB, Item 1101(l) as proposed Rule 6710(s). 
Securities Act Regulation AB, Item 1101(l) defines ``Sponsor'' as ``the 
person who organizes and initiates an asset-backed securities 
transaction by selling or transferring assets, either directly or 
indirectly, including through an affiliate, to the issuing entity.'' 
\12\
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    \12\ Securities Act Regulation AB, Item 1101(l), 17 CFR 
229.1101(l).
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    The Sponsor of an Asset-Backed Bond is generally not the issuer. In 
Asset-Backed Securities, the issuer is often a trust, or special 
purpose vehicle (``SPV'') or special purpose entity (``SPE'') that is 
established solely to issue the Asset-Backed Securities and hold the 
pool of assets that back the asset-backed security, and, in SEC 
Regulation AB, is referred to as the ``issuing entity.'' For purposes 
of TRACE, FINRA proposes to define ``Issuing Entity'' as the term is 
defined in Securities Act Regulation AB, Item 1101(f) in proposed Rule 
6710(t). Securities Act Regulation AB, Item 1101(f) defines an issuing 
entity as ``the trust or other entity created at the direction of the 
sponsor or depositor that owns or holds the pool assets and in whose 
name the asset-backed securities supported or serviced by the pool 
assets are issued.'' \13\ Among other things, under the TRACE 
provisions, members that are Sponsors or Issuing

[[Page 55603]]

Entities are required to provide notice to FINRA Operations under Rule 
6760.
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    \13\ Securities Act Regulation AB, Item 1101(f), 17 CFR 
229.1101(f).
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    TBA. FINRA proposes to add the defined term ``TBA'' as proposed 
Rule 6710(u). ``TBA'' stands for ``to be announced'' and refers to a 
transaction in an Agency Pass-Through Mortgage-Backed Security, as 
defined in proposed Rule 6710(v) and discussed in the following 
paragraph, where the parties agree to specific terms (i.e., face amount 
of the security, coupon, maturity, the Agency or GSE under which the 
mortgage pools will be issued or guaranteed, price and clearance and 
settlement in conformity with the uniform practices established as 
``good delivery'' on a standard pre-announced settlement date for such 
instruments), but do not identify the specific pool(s) of mortgages 
that will be delivered on settlement date.\14\
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    \14\ Specifically, proposed Rule 6710(u) provides:
    ``TBA'' means ``to be announced'' and refers to 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), 
at a specified price, and the parties will clear and settle the 
transaction in conformity with the uniform practices established as 
``good delivery'' for such transactions and will not impose any 
special conditions or stipulations.
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    Agency Pass-Through Mortgage-Backed Security. Proposed Rule 6710(v) 
defines Agency Pass-Through Mortgage-Backed Security to mean:

    [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.

    Several of the defined terms and other amendments to the Rule 6700 
Series and Rule 7730 in this proposed rule change address issues that 
are specific to transactions in Agency Pass-Through Mortgage-Backed 
Securities.
    Remaining Principal Balance and Factor. The related terms, 
``Remaining Principal Balance'' and ``Factor'' are defined, 
respectively, in proposed Rule 6710(aa) and proposed Rule 6710(w). 
Factors and Remaining Principal Balances are relevant in the pricing 
and valuation of mortgage-backed securities and certain other types of 
Asset-Backed Securities that are backed by mortgage pools or other 
pools containing assets that are self-amortizing. Proposed Rule 
6710(aa) defines ``Remaining Principal Balance'' to mean:

    [F]or an Asset-Backed Security backed by a pool of mortgages or 
other assets that are self-amortizing, the total unpaid principal 
balance of all such mortgages, or the equivalent remaining value of 
such self-amortizing assets held in the asset pool, at a specific 
time, such as the Time of Execution.

    A ``Factor'' is used by dealers and other market professionals to 
calculate the Remaining Principal Balance of an Asset-Backed Security 
that is backed by a pool of mortgages or other self-amortizing assets. 
Specifically, proposed Rule 6710(w) defines ``Factor'' as:

    [T]he decimal value representing the proportion of the 
outstanding principal value of a security to its original principal 
value.

    For example, at issuance, the Factor for every mortgage-backed 
security and certain other types of Asset-Backed Securities for which a 
Factor is used is 1.0. Over time, the Factor for the specific security 
changes, reflecting the Remaining Principal Balance of the pool of 
assets for such security.\15\ In a transaction in an Asset-Backed 
Security that is backed by mortgages or other assets that are self-
amortizing, under proposed amendments to Rule 6730(d)(2), discussed 
infra, a member will be required to report a Factor, which is used to 
price the security. However, not all types of Asset-Backed Securities 
are priced using a Factor.
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    \15\ For example, a mortgage-backed security with an original 
face value of $10 million that has a Factor of .5 on April 15, 2009 
has a Remaining Principal Balance of $5 million as of April 15, 2009 
(assuming all mortgage payments and prepayments have been included 
in the calculation of the Factor).
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    Specified Pool Transaction; Stipulation Transaction; Dollar Roll. 
In proposed Rule 6710(x), Rule 6710(y), and Rule 6710(z), respectively, 
FINRA defines three special types of transactions that occur solely in 
Agency Pass-Through Mortgage-Backed Securities. The term ``Specified 
Pool Transaction'' is defined in proposed Rule 6710(x). A ``Specified 
Pool Transaction'' is a transaction in an Agency Pass-Through Mortgage-
Backed Security that requires the seller to deliver at settlement ``one 
or more pools of mortgages that, at the Time of Execution, are 
identified by their unique pool identification numbers and original 
principal value.'' The conditions limiting the seller's delivery 
options affect pricing, and FINRA proposes that such transactions be 
reported with an indicator, as discussed infra.
    In proposed Rule 6710(y), the term ``Stipulation Transaction'' is 
defined to mean a transaction:

    [I]n an Agency Pass-Through Mortgage-Backed Security as defined 
in paragraph (v) where, at the Time of Execution, 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 that 
represents a pool (or pools) of mortgages, at a specified price, and 
the parties stipulate that the pool or pools to be delivered meet 
certain conditions that preclude settlement of the transaction in 
conformity with the uniform practices established as ``good 
delivery'' for an Agency Pass-Through Mortgage-Backed Security 
effected TBA.

    A transaction in an Agency Pass-Through Mortgage-Backed Security 
that is a Stipulation Transaction differs from a ``Specified Pool 
Transaction'' because good delivery, although conditioned by the 
special stipulations, is not limited to specific pools that the parties 
have identified by pool number. Again, the special conditions that 
limit the seller's flexibility as to delivery affect pricing, and FINRA 
proposes that such trades be reported with an indicator.
    The term ``Dollar Roll,'' as defined in proposed Rule 6710(z), 
describes simultaneous transactions that are executed pursuant to an 
agreement between a buyer and seller of an Agency Pass-Through 
Mortgage-Backed Security. At the time of the transactions, the initial 
buyer of the Agency Pass-Through Mortgage-Backed Security pays a 
specific purchase price, agrees to a settlement date, and also agrees 
to reverse the purchase transaction at a later occurring settlement 
date, at a different price, and deliver to the initial seller of such 
securities the same or substantially similar securities. FINRA also 
proposes amendments to Rule 6730 requiring a member to report any of 
such transactions with an indicator, as discussed, infra.\16\
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    \16\ Specifically, proposed Rule 6710(z) provides:
    ``Dollar Roll'' means a simultaneous sale and purchase of an 
Agency Pass-Through Mortgage-Backed Security as defined in paragraph 
(v) for different settlement dates, where the initial seller agrees 
to take delivery, upon settlement of the re-purchase transaction, of 
the same or substantially similar securities.
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(B) Reporting
    Rule 6730(a) requires members to report transactions to TRACE 
within 15 minutes of the Time of Execution, with certain exceptions for 
trades executed during non-TRACE System Hours.\17\ The 15 minute 
reporting requirement applies to all TRACE-Eligible Securities 
transactions, except primary market

[[Page 55604]]

transactions that are List or Fixed Offering Price Transactions or 
Takedown Transactions.\18\ Rules 6730(a) through (d) list the 
information that must be reported, including certain trade reporting 
indicators and modifiers that are required for some transaction 
reports.
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    \17\ Rules 6730(a)(1) through (4) provides exceptions to the 
standard 15 minute reporting requirement if a member executes a 
transaction after or before TRACE System Hours or less than 15 
minutes before the TRACE system closes.
    \18\ See SEC Order Approving TRACE Expansion--Agency Debt 
Securities.
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End-of-Day Reporting
    FINRA proposes to liberalize the reporting period for Asset-Backed 
Securities transactions. Under proposed Rule 6730(a)(6), members 
executing Asset-Backed Securities transactions will have until the end 
of the business day--until the TRACE system closes--to report such 
transactions. If a transaction in an Asset-Backed Security is executed 
after 5 p.m. Eastern Time, a broker-dealer will have until the end of 
the next business day to report the transaction under proposed Rules 
6730(a)(6)(B)(i). In addition, if a broker-dealer executes an Asset-
Backed Securities transaction at any time outside of the TRACE System 
Hours, the broker-dealer will have until the end of the TRACE System 
Hours on the next business day to report such transactions under Rules 
6730(a)(6)(B)(ii) and (iii).\19\
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    \19\ In Rule 6730(a)(6)(B)(iii), the proposed reporting 
requirements for transactions in Asset-Backed Securities that a 
broker-dealer executes on a Saturday, a Sunday, or a Federal or 
religious holiday when the TRACE system is closed include specific 
information requirements and have parallels to the reporting 
requirements for transactions reported under Rule 6730(a)(4).
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    Generally, transactions must be reported within 15 minutes of the 
Time of Execution to facilitate better pricing and to enhance 
transparency.\20\ The more liberal end-of-day reporting requirements 
proposed for Asset-Backed Securities transactions are appropriate 
because, although pricing and other transaction information will be 
reviewed for surveillance, Asset-Backed Securities transactions 
initially will not be disseminated publicly to market participants. 
Also, the end-of-day reporting provisions will provide broker-dealers 
operational flexibility and will ease compliance burdens, particularly 
during the implementation of the proposed changes. FINRA will work with 
broker-dealers and third party vendors to ensure effective and cost 
efficient implementation.
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    \20\ The extended reporting period that was recently approved by 
the SEC for List or Fixed Offering Price Transactions and Takedown 
Transactions permits T + 1 reporting only of those transactions that 
occur at the fixed price stated in the offering materials and are 
executed on the first day of an offering. See SEC Order Approving 
TRACE Expansion--Agency Debt Securities.
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Additional Reporting Requirements for Asset-Backed Securities
    Security Identification. Rule 6730(c)(1) requires a member to 
identify a TRACE-Eligible Security by a CUSIP number or a FINRA symbol 
in each transaction report. However, certain Asset-Backed Securities 
may be traded without an assigned CUSIP. FINRA proposes to amend Rule 
6730(c)(1) to permit a member, when a CUSIP number is not available at 
the Time of Execution (or will not be assigned), to provide a similar 
numeric identifier, such as a mortgage pool number or a FINRA symbol. 
(FINRA symbols are assigned by FINRA Operations upon request.)
    Size (Volume). Currently, members report the size (or volume) of a 
transaction for TRACE-Eligible Securities by reporting the number of 
bonds, as provided in Rule 6730(c)(2) and Rule 6730(d)(2). The TRACE 
System converts the information to a dollar value for purposes of the 
dissemination of transaction information. The stated reporting 
requirement includes the assumption that one bond represents a specific 
par amount, typically $1,000 par (or principal) value.\21\
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    \21\ For example, a member reports a trade of 10 bonds and the 
total par value of $10,000 is displayed.
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    For certain Asset-Backed Securities, such as Agency Pass-Through 
Mortgage-Backed Securities, the principal value--the value of the 
collateral of the mortgages or other assets backing the security--
declines over time (e.g., the mortgagees in the pool of mortgages pay 
down their mortgages).\22\ In such cases, the size (volume) of such 
Asset-Backed Securities is the original face value or principal amount 
of the security at issuance, stated in dollars, and thereafter, the 
Remaining Principal Balance. The Remaining Principal Balance is 
calculated by multiplying the original face value by a Factor. FINRA 
proposes to amend Rule 6730(d)(2), which provides guidance on how to 
report size (volume) under Rule 6730(c)(2). In a transaction in an 
Asset-Backed Security for which par value is not used to measure the 
size (volume) of a transaction, the proposed amendments to Rule 
6730(d)(2) will require a member to report the original face value of 
such security and, in a second field, the Factor the member used at the 
Time of Execution. Generally, FINRA expects that the Factor a member 
uses to execute a transaction will be the Factor that was most recently 
published by the Sponsor or Issuing Entity of the security or other 
source providing such information periodically to market participants.
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    \22\ Occasionally, the value of the collateral increases--for 
example, in ``interest only'' mortgages, the loan balances may 
increase.
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    Price. Rule 6730(c)(3) and Rule 6730(d)(1) require members to 
report price. If a price field is not available, members are required 
to report the contract amount and the accrued interest. Accrued 
interest is not a component of the total sale price of Asset-Backed 
Securities. To harmonize the reporting provision in connection with the 
reporting of Asset-Backed Securities, proposed amended Rule 6730(d)(1) 
will require members to report accrued interest only if applicable.
    Settlement Modifiers. FINRA proposes several amendments to Rule 
6730(d)(4) providing for modifiers and indicators that will distinguish 
certain trades executed at special prices or subject to other 
conditions affecting price. FINRA proposes to amend Rule 6730(d)(4)(B) 
to clarify that many securities are conventionally settled on T + 3, by 
stating this specifically, instead of using the phrase ``regular way.'' 
The change is necessary because the T + 3 convention for settlement of 
many securities does not apply to certain Asset-Backed Securities to be 
included in TRACE.\23\ In addition, FINRA proposes additional 
amendments to Rule 6730(d)(4)(B) to reflect settlement conventions 
regarding Agency Pass-Through Mortgage-Backed Securities and the 
settlement of other Asset-Backed Securities. Transactions in Agency 
Pass-Through Mortgage-Backed Securities, by industry convention, are 
assigned one of four monthly settlement dates according to the type of 
Agency Pass-Through Mortgage-Backed Security to be settled.\24\ The 
proposed amendments to Rule 6730(d)(4)(B) will not require a member to 
use a settlement modifier for a transaction in an Agency Pass-Through 
Mortgage-Backed Security that the parties will settle in conformity 
with the uniform practices established as ``good delivery'' for such 
transactions on the next occurring monthly date announced for 
settlement of such

[[Page 55605]]

securities. However, if the parties will settle other than in 
conformity with the uniform practices established as ``good delivery'' 
for such transactions, under the amendments members will be required to 
report using the settlement modifier (``.sNN''), indicating the number 
of days until settlement (e.g., ``.s55''). In addition, the proposed 
amendments to Rule 6730(d)(4)(B) will require members to report 
transactions in all other types of Asset-Backed Securities using the 
settlement modifier (``.sNN'') and providing the specified number of 
days to settlement (e.g., ``.s55'').
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    \23\ In some cases, certain types of Asset-Backed Securities 
transactions routinely may settle a number of months after trade 
date.
    \24\ Industry professionals involved in transactions in Agency 
Pass-Through Mortgage-Backed Securities effected TBA developed a 
convention for ``regular way'' settlement of these instruments. 
According to the type of security, such securities are settled 
monthly on specified settlement dates, which are announced for each 
month several months in advance. In total, four monthly Settlement 
Dates (A through D), per month, were established and published, to 
establish settlement conventions for the various types of securities 
being originated and traded.
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    Indicators for Specified Pool Transactions; Stipulation 
Transactions; Dollar Rolls. As discussed above, transactions in Agency 
Pass-Through Mortgage-Backed Securities that are Specified Pool 
Transactions or Stipulation Transactions contain additional terms and 
conditions, which affect price. Price also is impacted in a Dollar 
Roll, which is a third type of transaction also discussed above that 
occurs in Agency Pass-Through Mortgage-Backed Securities. FINRA 
proposes indicators that a member must use when reporting a Specified 
Pool Transaction, a Stipulation Transaction, a Dollar Roll, and a 
transaction that is both a Dollar Roll and a Stipulation Transaction 
in, respectively, proposed Rule 6730(d)(4)(E)(i), (ii), (iii) and (iv).
    Agency Pass-Through Mortgage-Backed Security Initial Sale. FINRA 
recently amended the Rule 6700 Series to require that primary market 
transactions be reported to TRACE. The reporting requirements for 
primary market transactions that are List or Fixed Offering Price 
transactions and Takedown Transactions are set forth in Rule 
6730(a)(5), and extend the reporting period to the close of the TRACE 
system on T + 1. FINRA proposes that these reporting requirements will 
not apply to a transaction in an Agency Pass-Through Mortgage-Backed 
Security, which are not sold in a traditional underwriting or placement 
as envisioned and incorporated in the definitions of List or Fixed 
Offering Price Transaction and Takedown Transaction.
(C) Dissemination
    Generally, FINRA's policy favors transparency in the debt 
securities markets, and for most TRACE-Eligible Securities, real-time 
dissemination of transaction information is provided for under Rule 
6750(a). Dissemination of the information occurs immediately upon 
receipt of the transaction report. The exceptions to the policy 
favoring dissemination in Rule 6750(b) are currently limited to 
transactions effected pursuant to Securities Act Rule 144A, transfers 
of certain proprietary positions effected in connection with broker-
dealer mergers or other broker-dealer consolidations, and List or Fixed 
Offering Price Transactions and Takedown Transactions.\25\
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    \25\ TRACE-Eligible Securities transactions that are not 
disseminated are set forth in Rule 6750(b). Rule 6750(b)(1) applies 
as to transactions in TRACE-Eligible Securities that are affected as 
Securities Act Rule 144A transactions. Under Rule 6750(b)(2), FINRA 
does not disseminate information on a transfer of proprietary 
securities positions between a member and another member or non-
member broker-dealer where the transfer: (A) Is effected in 
connection with a merger of one broker-dealer with the other broker-
dealer or a direct or indirect acquisition of one broker-dealer by 
the other broker-dealer or the other broker-dealer's parent company, 
and (B) is not in furtherance of a trading or investment strategy. 
Under recently approved Rule 6750(b)(3), FINRA will not disseminate 
List or Fixed Offering Price Transactions and Takedown Transactions.
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    However, at this time, FINRA proposes not to disseminate 
information on transactions in Asset-Backed Securities in proposed Rule 
6750(b)(4). The reporting of Asset-Backed Securities transactions will 
permit FINRA to obtain additional information, observe patterns of 
trading and otherwise engage in more in-depth surveillance of the 
Asset-Backed Securities market. FINRA will study the collected data to 
determine the volume and trading in various types of Asset-Backed 
Securities. FINRA may determine that dissemination of transaction 
information is warranted with respect to Asset-Backed Securities after 
it has had an opportunity to review data over a period of time. FINRA 
used this approach previously when it implemented dissemination in 
phases for various types of corporate bonds.
(D) Other Amendments to Rule 6700 Series
    Rule 6760. Currently, Rule 6760 requires members that are managing 
underwriters to notify FINRA that a new TRACE-Eligible Security is 
about to be offered and sold in a primary offering. FINRA must have 
this information in the TRACE system to facilitate timely transaction 
reporting by all members that have effected transactions in a newly 
issued TRACE-Eligible Security. For TRACE-Eligible Securities that are 
Asset-Backed Securities, for the purposes of Rule 6760, FINRA proposes 
to amend Rule 6760(a) to characterize a Sponsor and an Issuing Entity 
of an Asset-Backed Security, if members, as managing underwriters, and 
require them, like underwriters or initial purchasers of Asset-Backed 
Securities, to provide FINRA Operations notice of a new Asset-Backed 
Security and information that identifies the new security by CUSIP (or 
if a CUSIP number is not available, a similar numeric identifier (e.g., 
a mortgage pool number) or a FINRA symbol) and describes the security.
    For an Asset-Backed Security, FINRA proposes to amend the notice 
requirements in Rule 6760(b) to require the names of the Issuing Entity 
and the Sponsor, in addition to the CUSIP (or an alternative 
identifier) and other currently required information (i.e., coupon 
rate; maturity; the time the new issue is priced, and, if different, 
the time that the first transaction in the distribution or offering is 
executed; a brief description of the security type; and if the security 
will be traded subject to Securities Act Rule 144A).
    FINRA also proposes minor technical, stylistic, or conforming 
changes to the Rule 6700 Series, including renumbering certain 
provisions, incorporating the term TRACE System Hours in certain 
provisions, and restating certain requirements regarding settlement and 
settlement modifiers.
(E) Fees
    FINRA proposes that the current trade reporting fees set forth in 
Rule 7730 also apply to the reporting of transactions in Asset-Backed 
Securities. Because Asset-Backed Securities transaction information 
will not be disseminated, there will not be any market data available, 
and thus no market data fees are proposed. For transactions in Asset-
Backed Securities, such as Agency Pass-Through Mortgage-Backed 
Securities, for which par value is not used to determine the size (or 
volume) of a transaction, FINRA clarifies how transaction fees will be 
assessed. For purposes of trade reporting fees, proposed Rule 
7730(b)(1)(B) provides that transaction size for such securities will 
be the lesser of the original face amount or Remaining Principal 
Balance.
    In proposed Rule 7730(b)(1)(D), FINRA proposes that transactions in 
an Agency Pass-Through Mortgage-Backed Security not be considered List 
or Fixed Offering Price Transactions or Takedown Transactions for 
purposes of the reporting fees in Rule 7730(b), which will eliminate 
any possible application to Agency Pass-Through Mortgage-Backed 
Security transactions of the recently adopted provision in Rule 
7730(b)(1)(C). Rule 7730(b)(1)(C) provides that a member that reports a 
List or Fixed Offering Price Transaction or a Takedown Transaction 
shall not be charged the standard trade reporting fee assessed under 
Rule 7730(b)(1).

[[Page 55606]]

    Finally, FINRA proposes minor technical, stylistic, or conforming 
changes to Rule 7730, including changes to conform the fee chart to the 
changes in the rule text.
    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 later than 270 days 
following publication of the Regulatory Notice announcing Commission 
approval.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\26\ 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,\27\ 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 in that: (i) the proposed rule change will enhance 
FINRA's surveillance of the debt market in connection with Asset-Backed 
Securities transactions generally; and (ii) the proposed fee proposal 
provides for reporting fees that mirror the fees currently in effect 
for corporate bonds, and are reasonable and equitably allocated among 
members.
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    \26\ 15 U.S.C. 78o-3(b)(6).
    \27\ 15 U.S.C. 78o-3(b)(5).
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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

    Written comments were neither solicited nor received.

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

    Within 35 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 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 e-mail to rule-comments@sec.gov. Please include 
File Number SR-FINRA-2009-065 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-2009-065. This 
file number should be included on the subject line if e-mail 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 inspection 
and copying 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 will also 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 No. SR-FINRA-2009-065 and should be 
submitted on or before November 18, 2009.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\28\
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    \28\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. E9-25875 Filed 10-27-09; 8:45 am]

BILLING CODE 8011-01-P