
[Federal Register Volume 77, Number 178 (Thursday, September 13, 2012)]
[Notices]
[Pages 56686-56692]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-22555]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-67798; File No. SR-FINRA-2012-042]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Proposed Rule Change Relating to 
Post-Trade Transparency for Agency Pass-Through Mortgage-Backed 
Securities Traded in Specified Pool Transactions and SBA-Backed Asset-
Backed Securities Transactions

September 7, 2012.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that, on August 29, 2012, the Financial Industry Regulatory Authority, 
Inc. (``FINRA'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I, 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 and Trade 
Reporting and Compliance Engine (``TRACE'') dissemination protocols 
regarding the reporting and dissemination of transactions in TRACE-
Eligible Securities that are: (1) Agency Pass-Through Mortgage-Backed 
Securities traded in Specified Pool Transactions (``MBS Specified Pool 
transactions'') and (2) Asset-Backed Securities backed by loans 
guaranteed as to principal and interest by the Small Business 
Administration (``SBA-Backed ABS'') and traded either in Specified Pool 
Transactions or to be announced (``TBA'') (collectively, ``SBA-Backed 
ABS transactions'').\3\
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    \3\ The terms TRACE-Eligible Security, Agency Pass-Through 
Mortgage-Backed Security, Specified Pool Transaction, Asset-Backed 
Security and To Be Announced are defined in, respectively, Rule 
6710(a), Rule 6710(v), Rule 6710(x), Rule 6710(m) and Rule 6710(u). 
The definition of SBA-Backed ABS is proposed in Rule 6710(bb).
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    The text of the proposed rule change is available on FINRA's Web 
site at http://www.finra.org, at the principal office of FINRA and at 
the Commission's Public Reference Room.

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

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

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

1. Purpose
    On April 18, 2012, the SEC approved the TBA Amendments to provide 
for the dissemination of MBS TBA transactions, subject to dissemination 
caps, and concomitant reductions in the reporting periods for such 
transactions, which will become effective November 5, 2012.\4\ FINRA is 
proposing to expand transparency further in the market for Asset-Backed 
Securities in the proposed rule change, which provides for the 
dissemination of MBS Specified Pool and SBA-Backed ABS transactions, 
subject to dissemination caps, and concomitant reductions in the 
reporting periods for such transactions.
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    \4\ The proposed rule text includes the amendments to the FINRA 
Rule 6700 Series to provide for reduced reporting times and 
dissemination of transactions in TRACE-Eligible Securities that are 
Agency Pass-Through Mortgage-Backed Securities that are traded To Be 
Announced (``TBA'') (``MBS TBA transactions''), which were approved 
by the SEC and will become effective November 5, 2010. See 
Securities Exchange Act Release No. 66829 (April 18, 2012), 77 FR 
24748 (April 25, 2012) (Order Approving File No. SR-FINRA-2012-020) 
and Regulatory Notice 12-26 (May 2012) (``TBA Amendments'').
    The TBA Amendments distinguished between MBS TBA transactions 
for good delivery (``MBS TBA transactions GD'') and not for good 
delivery (``MBS TBA transactions NGD''). In response to comments, 
FINRA proposed a longer period to timely report, and lower 
dissemination caps for, MBS TBA transactions NGD than the 
requirements proposed for MBS TBA transactions GD.
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    FINRA proposes to amend Rule 6730 to reduce, in two stages, the 
time frames to report MBS Specified Pool and SBA-Backed ABS 
transactions. FINRA also proposes minor clarifying amendments to Rule 
6730(a)(3)(D) and (E) to specify that the reporting requirements set 
forth therein apply solely to MBS TBA transactions. In connection with 
such changes, FINRA proposes amendments in Rule 6710 to the definitions 
of ``Agency Pass-Through Mortgage-Backed Security,'' ``To Be Announced 
(`TBA'),'' and ``Specified Pool Transaction,'' and a new defined term, 
``SBA-Backed ABS.'' Finally FINRA proposes to amend Rule 6750 to 
provide for the dissemination of MBS Specified Pool and SBA-Backed ABS 
transactions, and proposes to establish, as part of TRACE dissemination 
protocols, the specific data elements of the transactions that will be 
disseminated as well as a $10 million dissemination cap for such 
transactions.
MBS Specified Pool Transactions
    Generally, Agency Pass-Through Mortgage-Backed Securities are 
traded either TBA or in Specified Pool Transactions as defined in Rule 
6710(u) and (x), respectively. In MBS Specified Pool transactions, on 
the date of trade (trade date), the seller agrees to deliver to the 
buyer a specific Agency Pass-Through Mortgage-Backed Security 
identifiable by a unique identification number, representing a specific 
pool of mortgage loans. In an MBS TBA transaction, the mortgage pools 
to be delivered are described (e.g., by program, interest rate, type of 
residential mortgage, maturity) but are not specifically identified, 
and will not be identified until shortly before settlement. While the 
majority of Agency Pass-Through Mortgage-Backed Securities are traded 
TBA, the daily volume of MBS Specified Pool transactions represents 
significant economic activity in mortgage-related securities, and FINRA 
believes that additional transparency in such securities is 
appropriate. The reported transaction data shows that MBS Specified 
Pool transaction pricing is strongly correlated to (and in general is 
priced at a premium over) the pricing of similar mortgage pools traded 
in the substantially larger MBS TBA market. Moreover, the two market 
sectors exhibit similar trading characteristics, and the same programs 
dominate both markets. For example, approximately 98 percent of the 
total volume in MBS Specified Pool transactions, and approximately 95 
percent of the total volume in MBS TBA transactions, occurs in 
securities backed by single-family mortgage loans.\5\ Accordingly, the 
TRACE data sets are complimentary and the dissemination of the 
additional pricing information for MBS Specified Pool transactions will 
further improve

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transparency in the Agency Pass-Through Mortgage-Backed Securities 
market.
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    \5\ Over half of all transactions in MBS Specified Pool 
transactions, and approximately 77 percent of all transactions in 
MBS TBA transactions, occur in Federal National Mortgage Association 
(``Fannie Mae'') program securities. The information is based on 
FINRA staff's review of all Asset-Backed Securities transactions 
reported to TRACE from May 16, 2011 through October 31, 2011.
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SBA-Backed ABS Transactions
    SBA-Backed ABSs are Asset-Backed Securities created from pooling 
loans made to small business by banks and other financial institutions 
in conformity with the program requirements of the Small Business 
Administration (``SBA''). Loans that meet the SBA's requirements are 
guaranteed by SBA as to the timely payment of principal and interest, 
and pools are then created to issue SBA-Backed Asset-Backed Securities.
    SBA-Backed ABS also are traded TBA and in Specified Pool 
Transactions.\6\ Like Agency Pass-Through Mortgage-Backed Securities 
discussed above, such TBA trading may occur because market participants 
may anticipate with some certainty the creation of loan pools and are 
aware of the pool characteristics, and the extent to which such loan 
pools are fungible with previously-settled SBA-Backed ABS. FINRA 
proposes that both types of SBA-Backed ABS transactions be subject to 
dissemination.
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    \6\ SBA-Backed ABS transactions constitute a very minor portion 
of all Specified Pool Transactions. SBA-Backed ABS Specified Pool 
Transactions account for only 0.41 percent of the combined total 
volume of all Specified Pool Transactions (i.e., the total volume of 
Agency Pass-Through Mortgage Backed-Securities and SBA-Backed ABS 
traded in Specified Pool Transactions).
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Amendments to Defined Terms
    FINRA proposes to define ``SBA-Backed ABS'' in proposed Rule 
6710(bb) as an Asset-Backed Security issued in conformity with a 
program of the Small Business Administration (``SBA''), for which the 
timely payment of principal and interest is guaranteed by the SBA, 
representing ownership interest in a pool (or pools) of loans and 
structured to ``pass through'' the principal and interest payments made 
by the borrowers in such loans to the holders of the security on a pro 
rata basis.
    In connection with the proposed addition of the definition of SBA-
Backed ABS, FINRA also proposes amendments to the definitions of ``To 
Be Announced (`TBA')'' and ``Specified Pool Transaction'' in Rule 
6710(u) and Rule 6710(x), respectively. Both definitions currently 
apply only to Agency Pass-Through Mortgage-Backed Securities. As 
amended, both terms would include transactions in SBA-Backed ABS.\7\ In 
addition, FINRA proposes amendments to the definition of ``Agency Pass-
Through Mortgage-Backed Security'' in Rule 6710(v) to incorporate 
minor, technical changes to the defined term.\8\
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    \7\ As revised, Rule 6710(u) would provide:
    ``To Be Announced'' (``TBA'') means a transaction in an Agency 
Pass-Through Mortgage-Backed Security as defined in paragraph (v) or 
an SBA-Backed ABS as defined in paragraph (bb) where the parties 
agree that the seller will deliver to the buyer a pool or pool(s) of 
a specified face amount and meeting certain other criteria but the 
specific pool or pool(s) to be delivered at settlement is not 
specified at the Time of Execution, and includes TBA transactions 
``for good delivery'' (``GD'') and TBA transactions ``not for good 
delivery'' (``NGD'').
    As revised, Rule 6710(x) would provide:
    ``Specified Pool Transaction'' means a transaction in an Agency 
Pass-Through Mortgage-Backed Security as defined in paragraph (v) or 
an SBA-Backed ABS as defined in paragraph (bb) requiring the 
delivery at settlement of a pool or pool(s) that is identified by a 
unique pool identification number at the Time of Execution.
    \8\ As revised, Rule 6710(v) would provide:
    ``Agency Pass-Through Mortgage-Backed Security'' means a type of 
Asset-Backed Security issued in conformity with a program of an 
Agency or a Government-Sponsored Enterprise (``GSE''), for which the 
timely payment of principal and interest is guaranteed by the Agency 
or GSE, representing ownership interest in a pool (or pools) of 
mortgage loans structured to ``pass through'' the principal and 
interest payments to the holders of the security on a pro rata 
basis.
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Reduction of Reporting Period
    Currently, Asset-Backed Securities transactions (except certain 
pre-issuance transactions in collateralized mortgage obligations 
(``CMOs'') and real estate mortgage investment conduits (``REMICs'')) 
that are executed on a business day through 5:00:00 p.m. Eastern Time 
must be reported to TRACE on the Trade Date during TRACE System Hours, 
as provided in Rule 6730(a)(3)(A)(i), subject to the exceptions for 
transactions executed after 5:00:00 p.m. and during times when the 
TRACE System is not open in Rule 6730(a)(3)(A)(ii) and (iii). In 
contrast, secondary market transactions in all other TRACE-Eligible 
Securities must be reported within 15 minutes of the Time of 
Execution.\9\ With certain exceptions, transaction information on such 
TRACE-Eligible Securities is disseminated as soon as the transaction is 
reported, and the 15-minute reporting requirement results in meaningful 
price transparency for market participants trading such securities.\10\ 
In addition, effective November 5, 2012, MBS TBA transactions will be 
disseminated, and, in connection with their dissemination, the 
timeframes for timely reporting such transactions will be reduced to 
provide market participants meaningful and timely price information 
about MBS TBA transactions.\11\
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    \9\ The term Time of Execution is defined in Rule 6710(d).
    \10\ See Rule 6750(b) for exceptions to dissemination. See also 
supra note 4 regarding the TBA Amendments and dissemination of MBS 
TBA transactions.
    \11\ See supra note 4. Under the TBA Amendments, which become 
effective November 5, 2012, MBS TBA transactions GD must be reported 
generally within 45 minutes of the Time of Execution until May 10, 
2013 (reduced to 15 minutes after May 10, 2013), and MBS TBA 
transactions NGD be reported within 120 minutes until May 10, 2013 
(reduced to 60 minutes after May 10, 2013). Both reporting 
requirements are subject to exceptions for transactions executed 
close to the end of the business day or when the TRACE system is not 
open.
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    In connection with proposing that MBS Specified Pool and SBA-Backed 
ABS transactions be disseminated, FINRA proposes to reduce the 
reporting timeframes for such transactions for the same reasons. The 
proposed reduction of the reporting timeframes would occur in two 
stages to permit industry participants time to adjust policies and 
procedures and to make required technological changes, as also done in 
connection with the TBA Amendments.
    The requirements to report MBS Specified Pool and SBA-Backed ABS 
transactions are set forth in, respectively, proposed Rule 
6730(a)(3)(F) and proposed Rule 6730(a)(3)(G). First, FINRA proposes to 
reduce the reporting period for MBS Specified Pool and SBA-Backed ABS 
transactions from no later than the close of the TRACE system on Trade 
Date to no later than two hours (i.e., 120 minutes) from the Time of 
Execution for the duration of the proposed MBS Specified Pool Pilot 
Program and the proposed SBA-Backed ABS Pilot Program in, respectively, 
proposed Rule 6730(a)(3)(F)(i) and proposed Rule 6730(a)(3)(G)(i).\12\ 
Like the reporting requirements currently in effect for other TRACE-
Eligible Securities, FINRA also proposes exceptions to the 120-minute 
timeframe for transactions executed near the end of the business day or 
when the TRACE system is not open.\13\ Second, after the pilot programs

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expire, the reporting periods for MBS Specified Pool and SBA-Backed ABS 
transactions would be reduced from no later than two hours (120 
minutes) from the Time of Execution to no later than one hour (60 
minutes) from the Time of Execution, as set forth in, respectively, 
proposed Rule 6730(a)(3)(F)(ii) and proposed Rule 
6730(a)(3)(G)(ii).\14\ Currently, approximately 84 percent of MBS 
Specified Pool and SBA-Backed ABS transactions are reported within two 
hours of execution, and approximately 75 percent are reported within 
one hour of execution.
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    \12\ Proposed Rule 6730(a)(3)(F)(i) and proposed Rule 
6730(a)(3)(G)(i) each incorporate by reference Rule 
6730(a)(3)(E)(i)a. through d., which provides for a 120-minute 
reporting timeframe in Rule 6730(a)(3)(E)(i)b.
    Each of the pilot programs would expire after approximately 180 
days. To accommodate member requests that, if possible, rule changes 
requiring technology changes occur on a Friday, proposed Rule 
6730(a)(3)(F)(i) and proposed Rule 6730(a)(3)(G)(i) provide that the 
MBS Specified Pool Pilot Program and the SBA-Backed ABS Pilot 
Program each would expire on a Friday (i.e., on the 180th day, if a 
Friday, or, if the 180th day is not a Friday, on the Friday next 
occurring that the TRACE system is open).
    \13\ See proposed Rule 6730(a)(3)(F)(i) and proposed Rule 
6730(a)(3)(G)(i), which incorporate by reference Rule 
6730(a)(3)(E)(i)a., c., and d., which apply to transactions executed 
near the end of the business day or when the TRACE system is not 
open. Under Rule 6730(a)(3)(E)(i)a., transactions executed on a 
business day at or after 12:00:00 a.m. Eastern Time through 7:59:59 
a.m. Eastern Time must be reported the same day no later than 120 
minutes after the TRACE system opens. Under Rule 6730(a)(3)(E)(i)c., 
transactions executed on a business day less than 120 minutes before 
6:30:00 p.m. Eastern Time (the time the TRACE system closes) must be 
reported no later than 120 minutes after the TRACE system opens the 
next business day (T + 1), and if reported on T + 1, designated 
``as/of'' and include the date of execution. Under Rule 
6730(a)(3)(E)(i)d., transactions executed on a business day at or 
after 6:30:00 p.m. Eastern Time through 11:59:59 p.m. Eastern Time 
or on a Saturday, a Sunday, a federal or religious holiday or other 
day on which the TRACE system is not open at any time during that 
day (determined using Eastern Time) must be reported the next 
business day (T + 1), no later than 120 minutes after the TRACE 
system opens, designated ``as/of'' and include the date of 
execution.
    \14\ Proposed Rule 6730(a)(3)(F)(ii) and proposed Rule 
6730(a)(3)(G)(ii)--the ``post-pilot program'' reporting provisions--
incorporate by reference the reporting requirements set forth in 
Rule 6730(a)(3)(E)(ii)a. through d., including the exceptions to the 
requirement to report within 60 minutes that apply to transactions 
executed near the end of the business day or when the TRACE system 
is not open in Rule 6730(a)(3)(E)(ii)a., c., and d.
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    After the 60-minute reporting requirement is implemented, FINRA 
will continue to review the reporting of MBS Specified Pool and SBA-
Backed ABS transactions and may recommend further reductions in the 
reporting period.
    FINRA also proposes minor clarifying amendments to Rule 
6730(a)(3)(D) and (E) to specify that the reporting requirements set 
forth therein apply solely to MBS TBA transactions.
Dissemination
Amendment to Rule 6750
    Although members began reporting transactions in Asset-Backed 
Securities to TRACE on May 16, 2011, FINRA currently does not 
disseminate publicly Asset-Backed Securities transaction data reported 
to TRACE as provided in Rule 6750(b)(4). However, on November 5, 2012, 
transparency in Asset-Backed Securities transactions will increase 
significantly with the dissemination of MBS TBA transactions, which 
represent approximately 87 percent of the average daily volume traded 
in all Asset-Backed Securities.\15\ After obtaining the SEC's approval 
to disseminate such transaction information, FINRA continued to examine 
transactions in Asset-Backed Securities to determine if FINRA should 
propose to disseminate additional Asset-Backed Securities. The SEC has 
been supportive of such efforts.\16\
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    \15\ See supra note 4.
    \16\ See Securities Exchange Act Release No. 61566 (February 22, 
2010), 75 FR 9262, 9265 (March 1, 2010) (Order Approving File No. 
SR-FINRA-2009-065).
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    FINRA has reviewed the data reported for Asset-Backed Securities 
other than MBS TBA transactions, including MBS Specified Pool and SBA-
Backed ABS transactions, and studied the total volume of MBS Specified 
Pool and SBA-Backed ABS transactions, the concentration of trading in 
such securities, and the pricing disparity among various types of MBS 
Specified Pool and SBA-Backed ABS transactions to understand their 
liquidity and fungibility. The market activity reported and reviewed 
reveals that for MBS Specified Pool transactions, the market is 
generally active and liquid, and with liquidity comparable to that of 
corporate bonds.\17\ Based on the review, FINRA believes that it is 
appropriate to amend Rule 6750 to provide for the immediate 
dissemination of MBS Specified Pool and SBA-Backed ABS transaction 
information, and that such dissemination will benefit market 
participants by improving transparency in both market segments. 
Specifically, Rule 6750(b)(4) would be amended to provide that FINRA 
will not disseminate information on a transaction in a TRACE-Eligible 
Security that is an Asset-Backed Security, except: (A) An Agency Pass-
Through Mortgage-Backed Security; and (B) an SBA-Backed ABS.\18\ Thus, 
information would be disseminated on MBS Specified Pool and SBA-Backed 
ABS transactions immediately upon receipt of the transaction report and 
no later than 120 minutes, or, after the expiration of the applicable 
pilot program, no later than 60 minutes, from the Time of 
Execution.\19\
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    \17\ Liquidity as measured by par value traded is comparable to 
corporate bonds. Although MBS TBA transactions account for 
approximately 93 percent of all trading in Agency Pass-Through 
Mortgage-Backed Securities, the average daily volume of MBS 
Specified Pool transactions is significant--approximately $17.5 
billion is traded daily on average, in approximately 3,000 trades 
per day. The information is based on FINRA staff's review of all 
Asset-Backed Securities transactions reported to TRACE from May 16, 
2011 through October 31, 2011.
    \18\ See supra, note 4.
    \19\ FINRA continues to review Asset-Backed Security transaction 
information in other sectors of the Asset-Backed Securities market 
and, at a later date, may propose that transactions in other Asset-
Backed Securities be disseminated.
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Dissemination Protocols
    SBA-Backed ABS Transactions Traded TBA. The dissemination protocols 
applicable to SBA-Backed ABS transactions traded TBA would be the same 
as the dissemination protocols for MBS TBA transactions NGD and subject 
to the dissemination cap discussed below. Generally, such securities 
will be disseminated immediately upon receipt of transaction 
information, and the standard data elements will be displayed.\20\
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    \20\ Standard data elements include, among other things, CUSIP, 
time of transaction, size (subject to dissemination caps), price, 
counterparty type (customer or dealer), and buy/sell indicator. 
FINRA has represented that the CUSIP for a TBA transaction 
identifies the issuer and the characteristics of the pools of 
mortgages that can be delivered to satisfy a TBA transaction but 
differs from a standard CUSIP in that it is not unique to a security 
and will be re-assigned to future TBA transactions requiring 
delivery of the same type of pools on the same month of delivery. 
See email dated September 4, 2012 from Sharon Zackula of FINRA to 
Geoffrey Pemble, Special Counsel, Commission and Michael Bradley, 
Attorney-Advisor, Commission.
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    MBS and SBA-Backed ABS Specified Pool Transactions. FINRA proposes 
to modify the dissemination protocols for MBS Specified Pool 
transactions and SBA-Backed ABS traded in Specified Pool Transactions 
(collectively ``MBS and SBA-Backed ABS Specified Pool transactions'') 
from those initially proposed by FINRA, to strike a balance between 
certain anonymity concerns and providing meaningful transparency.\21\ 
Unlike the dissemination protocols for other disseminated TRACE-
Eligible Securities, including MBS TBA transactions, FINRA proposes not 
to disseminate the CUSIP of the MBS or the SBA-Backed ABS Specified 
Pool transaction.\22\ Instead, certain specified data elements that are 
integral to describing and valuing the security traded, with numeric 
values expressed within specific ranges (i.e., the information will be 
truncated and, depending on the data element, rounded up or down) would 
be disseminated. Although FINRA has determined not to disseminate the 
specific CUSIP of the

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security, FINRA believes that investor [sic] must be provided 
sufficient information such that the investor can appropriately 
interpret the price transparency provided by the TRACE data. Part of 
the valuation analysis of any Asset-Backed Security includes a 
projection of its cash flow which in turn relies on assumptions about 
prepayment rates. FINRA believes that the data elements outlined below 
provide information that will allow market participants to perform such 
analysis.
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    \21\ See Item C of this filing for a discussion of SR-FINRA-
2012-021.
    \22\ FINRA notes that notwithstanding the proposed changes to 
dissemination protocols, FINRA is not proposing to change any of the 
reporting requirements applicable to such securities, including the 
requirement to report the CUSIP number.
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MBS Specified Pool Transactions
    In lieu of a CUSIP, the following information would be disseminated 
for each MBS Specified Pool transaction reported to TRACE: Product 
type; amortization type; issuing agency; coupon; original maturity; 
weighted average coupon (``WAC''); weighted average maturity (``WAM''); 
weighted average loan age (``WALA''); average loan size (``ALS''); and 
original loan-to-value (``original LTV'') information. Each data 
element (except issuing agency, product type and amortization type) 
would be provided in ranges (truncated and disseminated after rounding) 
to further reduce the potential for ``reverse engineering'' transaction 
data to determine the identification of a market participant and/or the 
participant's trading strategies. FINRA believes that these data 
elements will permit investors to meaningfully assess the value and 
price of the security. If in the future, FINRA identifies additional 
data elements that would significantly improve transparency using this 
approach, FINRA may add such data elements to the dissemination 
protocol for MBS Specified Pool transactions discussed herein.
    Product type, amortization type, issuing agency, coupon and 
original maturity would be disseminated to permit identification of the 
security type traded. Product type refers to the type of properties (or 
real-estate related projects) subject to the mortgages underlying the 
Agency-Pass Through Mortgage-Backed Security (e.g., single family 
residential dwelling mortgage loans, multi-family residential dwelling 
mortgage loans, or project loans). Amortization type identifies the 
underlying mortgage types (e.g., level payment, adjustable rate 
mortgages (``ARMs'') or balloons). Issuing agency refers to the Agency 
or Government-Sponsored Enterprise (GSE) that issues the certificate 
and guarantees the payment of principal and interest of the Agency 
Pass-Through Mortgage-Backed Security (e.g., Fannie Mae, the Federal 
Home Loan Mortgage Corporation (``Freddie Mac'') and the Government 
National Mortgage Association (``Ginnie Mae'')). Coupon refers to the 
stated annual percentage rate of interest paid on the Agency-Pass 
Through Mortgage-Backed Security, and would be disseminated after 
rounding down to the nearest quarter percentage point (e.g., an 
interest rate of 5.12 percent would be disseminated at 5.00 percent). 
Original maturity refers to the original stated term after which the 
principal amount of the security is due to be repaid in full, or the 
end of the life of the Agency-Pass Through Mortgage-Backed Security 
(e.g., 30 years (expressed as 360 months)). Original maturity would be 
disseminated after rounding up to the nearest 10 (e.g., an original 
maturity of 358 months would be disseminated at 360).
    In addition, FINRA will disseminate WAC, WAM, WALA, ALS, and 
original LTV to provide information on recent and historic cash flows 
and prepayments, and permit investors to develop projections or 
assumptions regarding future payments, prepayments, and cash flows. WAC 
is the weighted average interest rate of the underlying mortgage loans 
or pools that serve as collateral for a mortgage security, weighted by 
the size of the principal loan balances.\23\ WAC would be disseminated 
after truncating to a single decimal (e.g., WAC of 7.13% would be 
disseminated as 7.1). WAM is the weighted average number of months to 
the final payment of each loan backing an Agency Pass-Through Mortgage-
Backed Security (or other mortgage-backed security), weighted by the 
size of the principal loan balances.\24\ WAM would be disseminated 
rounded down to the nearest 10 (e.g., WAM of 87 months would be 
disseminated as 80). WALA is the weighted average number of months 
since the date of the loan origination of the mortgages (i.e., the age 
of the loans) backing an Agency Pass-Through Mortgage Security (or 
other mortgage-backed security), weighted by the size of the principal 
loan balances. WALA would be disseminated rounded up to the nearest 10 
(e.g., WALA of 163 months would be disseminated as 170). Current ALS is 
obtained by dividing the current mortgage loan outstanding principal 
balance by the number of loans that remain outstanding. ALS would be 
rounded down to the nearest 25 (e.g., an ALS of 113 (i.e., $113,000 
average loan size) would be disseminated as 100). Original LTV ratio 
expresses the amount of a first mortgage lien as a percentage of the 
total appraised value of real property, and also would be disseminated 
rounded down to the nearest 25 (e.g., an original LTV of 92 (i.e., 92 
percent) would be disseminated as 75).
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    \23\ WAC is calculated by weighting the interest rate of each 
mortgage loan in the pool by the amount of the mortgage outstanding.
    \24\ WAM is calculated by weighting the remaining number of 
months to maturity for each mortgage loan in the pool by the amount 
of the mortgage outstanding.
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    The data elements are publicly available as they are published on a 
monthly basis by the issuing agency. Upon receipt of a transaction 
report, the TRACE system will automatically disseminate the above data 
elements corresponding to the CUSIP reported in lieu of disseminating 
the CUSIP number.
Dissemination of SBA-Backed ABS Traded in Specified Pool Transactions
    For Specified Pool transactions in SBA-Backed ABS, FINRA generally 
proposes that dissemination protocols be established that are 
substantially similar to those discussed above for MBS Specified Pool 
transactions. The dissemination protocols would result in the 
dissemination of substantially the same data elements for SBA-Backed 
ABS Specified Pool transactions as those disseminated for MBS Specified 
Pool transactions, in lieu of the dissemination of the specific CUSIP. 
Specifically, upon receipt of a transaction report, FINRA would 
disseminate amortization type; coupon; original maturity; WAC; WAM; and 
WALA, except that such values would be based on SBA-backed pooled 
loans. The values, like those for MBS Specified Pool transactions, 
would be rounded and truncated prior to dissemination to reduce the 
possibility of potential identification of a market participant by 
``reverse engineering'' of a transaction. In addition, if in the 
future, FINRA identifies additional data elements that would 
significantly improve transparency using this approach, FINRA may add 
such data elements to the dissemination protocol for SBA-Backed ABS 
Specified Pool transactions.
    FINRA believes that, in the absence of disseminating CUSIP data, 
disseminating the information set forth above will help ensure 
meaningful price transparency, by providing relevant information 
commonly used to identify, value and price MBS and SBA-Backed ABS 
Specified Pool transactions. FINRA believes that its proposal strikes 
the appropriate balance in achieving meaningful transparency while 
significantly reducing the potential to ``reverse engineer'' 
transaction data to

[[Page 56690]]

identify a market participant and/or determine its trading 
strategies.\25\
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    \25\ As noted above, with respect to both MBS and SBA-Backed ABS 
Specified Pool transactions, if FINRA identifies additional data 
elements that would significantly improve transparency, FINRA may 
add such data elements to the dissemination protocols for such 
securities.(e.g., FICO).
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Dissemination Caps
    FINRA has established TRACE dissemination caps for disseminated 
TRACE data generally, such that the actual size of a transaction over a 
certain par value is not displayed in disseminated TRACE transaction 
data. For TRACE-Eligible Securities that are rated Investment Grade, 
the dissemination cap is $5 million (``$5MM''), and the size of 
transactions in excess of $5MM is displayed as ``$5MM+.'' For TRACE-
Eligible Securities that are rated Non-Investment Grade, the 
dissemination cap is $1 million (``$1MM''), and the size of a 
transaction in excess of $1MM is displayed as ``$1MM+.'' \26\ As of 
November 5, 2012, a $25 million (``$25MM'') dissemination cap will 
apply to MBS TBA transactions GD (with the size of a transaction in 
excess of $25MM displayed as ``$25MM+'') and a $10 million (``$10MM'') 
dissemination cap will apply to MBS TBA transactions NGD (with the size 
of a transaction in excess of $10MM displayed as ``$10MM+'').\27\
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    \26\ The dissemination caps for Investment Grade corporate bonds 
limit the display of actual size for approximately 1.6 percent of 
trades representing approximately 48 percent of total par value 
traded, and, for Agency Debt Securities, approximately 6 percent of 
trades representing approximately 74 percent of total par value 
traded. The dissemination cap for Non-Investment Grade corporate 
bonds limits the display of actual size for approximately 15 percent 
of trades representing approximately 84 percent of total par value 
traded. The information is based on a review of all transactions in 
Investment Grade corporate bonds, Agency Debt Securities and Non-
Investment Grade corporate bonds reported to TRACE from May 16, 2011 
through January 4, 2012.
    The terms Investment Grade, Non-Investment Grade and Agency Debt 
Security are defined in, respectively, Rule 6710(h), Rule 6710(i) 
and Rule 6710(l).
    \27\ See supra note 4.
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    FINRA has analyzed the distribution of MBS Specified Pool and SBA-
Backed ABS transactions to determine an appropriate dissemination cap, 
and proposes a $10 million (``$10MM'') dissemination cap for MBS 
Specified Pool and SBA-Backed ABS transactions initially. Accordingly, 
the size of MBS Specified Pool and SBA-Backed ABS transactions greater 
than $10 million would be displayed in disseminated data as ``$10MM+.'' 
In setting the dissemination caps, FINRA took into account the 
liquidity and trading activity in these segments, and at $10 million, 
approximately nine percent of transactions and approximately 80 percent 
of par value traded would be disseminated subject to the $10MM cap.\28\ 
FINRA believes that the proposed dissemination caps will allow the 
marketplace time to adjust to the new levels of transparency.
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    \28\ See supra note 4. The proposed dissemination caps for MBS 
TBA transactions GD would limit display of actual size for 
approximately 20 percent of trades representing approximately 84 
percent of par value traded and for MBS TBA transactions NGD would 
limit the display of actual size for approximately 42 percent of 
trades representing approximately 85 percent of par value traded. 
The information is based on a review of all MBS TBA, MBS Specified 
Pool and SBA-Backed ABS transactions reported to TRACE from May 16, 
2011 through January 4, 2012.
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    As dissemination of MBS Specified Pool and SBA-Backed ABS 
transactions is implemented, FINRA will continue to review the volume 
of and liquidity in these securities, and may recommend that such 
dissemination caps be set at higher levels to provide additional 
transparency to market participants.
    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,\29\ 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. FINRA believes that the proposed rule change to 
increase fixed income market transparency is designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, and, generally to protect investors and 
the public because transparency in MBS Specified Pool and SBA-Backed 
ABS transactions will enhance the ability of investors and other market 
participants to identify and negotiate fair and competitive prices for 
these securities, and because the dissemination of price and other 
information publicly will promote just and equitable principles of 
trade among participants in the more transparent market, and will aid 
in the prevention of fraudulent and manipulative acts and practices in 
the Asset-Backed Securities market.
---------------------------------------------------------------------------

    \29\ 15 U.S.C. 78o-3(b)(6).
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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

    On April 2, 2012, FINRA filed with the Commission SR-FINRA-2012-021 
(``April 2012 Filing''), a proposed rule change to amend the Rule 6700 
Series and TRACE dissemination protocols regarding the reporting and 
dissemination of (1) MBS Specified Pool transactions and (2) SBA-Backed 
ABS traded either in Specified Pool Transactions or to be announced 
(``TBA'') (collectively, ``SBA-Backed ABS transactions''). 
Specifically, FINRA proposed to amend Rule 6730 to reduce, in two 
stages, the time frames to report MBS Specified Pool and SBA-Backed ABS 
transactions. FINRA also proposed minor clarifying amendments to Rule 
6730(a)(3)(D) and (E) to specify that the reporting requirements set 
forth therein apply solely to MBS TBA transactions. In connection with 
such changes, FINRA proposed amendments to the definitions of ``To Be 
Announced (`TBA'),'' ``Specified Pool Transaction,'' and ``Agency Pass-
Through Mortgage-Backed Security'' and a new defined term, ``SBA-Backed 
ABS.'' Finally, FINRA proposed to amend Rule 6750 to provide for the 
dissemination of MBS Specified Pool and SBA-Backed ABS transactions, 
and proposed to establish, as part of TRACE dissemination protocols, a 
$10 million dissemination cap for such transactions. A copy of the Form 
19b-4 and original Exhibit 5 of the April 2012 Filing is attached as 
Exhibit 2a.
    On April 19, 2012, the April 2012 Filing was published for comment 
in the Federal Register.\30\ A copy of the Federal Register release is 
attached as Exhibit 2b. SEC received two comment letters in 
response.\31\ A list of the comment letters received in response to

[[Page 56691]]

the April 2012 Filing is attached as Exhibit 2c. Copies of the comment 
letters received in response to the April 2012 Filing are attached as 
Exhibit 2d.
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    \30\ See Securities Exchange Act Release No. 66804 (April 13, 
2012), 77 FR 23524 (April 19, 2012) (Notice of Filing of File No. 
SR-FINRA-2012-021).
    \31\ See Letter from Chris Killian, Managing Director, 
Securities Industry and Financial Markets Association (``SIFMA''), 
to Elizabeth M. Murphy, Secretary, SEC, dated May 10, 2012 (``SIFMA 
Letter'') and Letter from Michael Nicholas, Chief Executive Officer, 
Bond Dealers of America (``BDA''), to Elizabeth M. Murphy, 
Secretary, SEC, dated May 10, 2012 (``BDA Letter'').
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    One commenter focuses its comments solely on the aspects of the 
proposal relating to MBS Specified Pool transactions. The commenter 
states that a pool traded on a specified basis (i.e., by CUSIP) may not 
trade frequently, that most trades in pools--or at least those for 
smaller pools--are trades of the whole pool, which means that most 
pools are owned by a single investor, or two or three investors, 
instead of being widely held, and that most market participants track 
which pools they trade to and from their various counterparties. As a 
result, the commenter is concerned that FINRA's proposal to disseminate 
such a security's CUSIP as part of disseminated transaction information 
will compromise sensitive information regarding investors' trading 
strategies, volumes, identities and positions, and, over time, market 
participants will be able to ``reverse engineer'' and develop quite 
detailed and precise estimates of other participants strategies and 
positions. The commenter expresses concern that the impact of ``such 
diminution of confidentiality,'' especially regarding positions and 
strategy, may be quite negative and impair participation and liquidity 
in the market for such instruments.\32\ The second commenter discusses 
the same issues raised by the first,--though the second commenter 
raises such issues in connection with SBA-Backed TBA transactions as 
well as MBS and SBA-Backed Specified Pool transactions.\33\ Both 
commenters recommend that certain information be withheld from 
dissemination. One commenter recommended that pool number and CUSIP 
information, regardless of size, should be omitted.\34\ The other 
commenter recommended that for pools with an original face amount below 
$1 billion, the CUSIP information not be shown on disseminated trade 
reports for a three to six month period.\35\ This commenter also 
recommended that FINRA reduce the dissemination cap to $1 million.\36\ 
In addition, one commenter was concerned that broker-dealers affiliated 
with banks can effect MBS Specified Pool and SBA-Backed ABS 
transactions through the bank and avoid reporting such transactions to 
TRACE, giving such broker-dealers an unfair advantage.\37\
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    \32\ See SIFMA Letter, p. 3.
    \33\ See BDA Letter, pp. 1 and 2. (See, for example, the second 
commenter's statements: ``Much of the market in the Agency Specified 
Pool Securities is driven by institutional investors who take the 
time to research the performance of pools, to develop a strategy to 
generate a profit and ultimately to execute on that strategy.''; ``* 
* * the pools can be smaller in size and a single investor 
frequently owns the entire pool * * *''; regarding smaller pools, 
``* * * the market easily knows who these investors are and what 
pools they own.''; ``When a single investor owns a large percentage 
of a specified pool, if the FINRA proposal were finalized in its 
current form, the market would be able to know that this investor is 
buying or selling and the market would then be able to track this 
investor's activity, and reverse engineer and capitalize on its 
strategy.''; and, ``* * * a more fair approach to investors is if 
broker-dealers are allowed to omit the pool number and CUSIP 
information from TRACE dissemination regardless of the size of the 
transaction.'').
    \34\ See BDA letter, p. 1.
    \35\ See SIFMA Letter, p. 3.
    \36\ See SIFMA Letter, p. 3.
    \37\ See BDA Letter, p. 2.
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    FINRA withdrew the April 2012 Filing on July 12, 2012, prior to 
filing a response to comments. Accordingly, the comments to the April 
2012 Filing and FINRA's responses are discussed below.
    After careful consideration of the commenters' concerns, in this 
proposed rule change, FINRA proposes to modify the transaction 
dissemination protocols such that the disseminated information 
regarding MBS and SBA-Backed ABS Specified Pool transactions would not 
include the CUSIP of such securities. Instead, as detailed above, FINRA 
proposes to disseminate specific reference data elements, including 
information widely used to project cash flows and pre-payments, in 
specific ranges. FINRA believes that this approach would significantly 
limit the ability to ``reverse engineer'' transaction data to determine 
trading strategies and identities while providing valuable information 
about the mortgages/loans that are in MBS and SBA-Backed ABS Specified 
Pool transactions.
    The information set forth above will help provide meaningful price 
transparency, by providing relevant information commonly used to 
identify, value and price MBS and SBA-Backed ABS Specified Pool 
transactions. FINRA believes that the proposed rule change strikes the 
appropriate balance in achieving meaningful transparency while 
significantly reducing the potential for ``reverse engineering'' 
transaction data to determine trading strategies and/or participant 
identification. If in the future, FINRA identifies additional data 
elements that would significantly improve transparency, FINRA may add 
such data elements to the dissemination protocols for such securities 
(e.g., FICO).
    In addition, FINRA believes that the $10 million dissemination cap 
is appropriate and does not propose to reduce it. As noted in the 
proposed rule change and the April 2012 Filing, the size of MBS 
Specified Pool and SBA-Backed ABS transactions greater than $10 million 
would be displayed in disseminated data as ``$10MM+.'' At this level, 
approximately nine percent of transactions and approximately 80% of par 
value traded would be subject to the $10MM cap. FINRA believes this 
data is consistent with respect to dissemination caps for other 
securities.\38\
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    \38\ See note 21 and note 23 of the Form 19b-4 and Exhibit 1, 
respectively, in SR-FINRA-2012-021.
---------------------------------------------------------------------------

    Finally, with respect to the commenter's concern that a broker-
dealer affiliated with a bank may run MBS Specified Pool and SBA-Backed 
ABS transactions through the bank's balance sheet and avoid reporting 
such transactions to TRACE, FINRA notes that the statutory standard 
requires that FINRA's proposed rules not impose any burden on 
competition not necessary or appropriate in furtherance of the Act. 
FINRA believes that increased transparency in the securities trading 
market appropriately furthers the purposes the Act. As FINRA has 
previously noted, it defeats the purposes of the Act by referring to 
market participants that may not be subject to the Act (in whole or in 
part), as a basis for not approving the proposed rule change.\39\ Such 
a standard would undo much, if not all, regulation of broker-dealers 
and markets necessary for the protection of investors and the 
efficiency, competitiveness and integrity of securities markets. FINRA 
believes that the fact that there may be market participants that are 
not subject to the Act should not delay the reporting and dissemination 
of MBS Specified Pool and SBA-Backed ABS transactions and related 
changes regarding the reporting of such transactions.
---------------------------------------------------------------------------

    \39\ See Response to Comments on SR-FINRA-2009-010 (Proposed 
Rule Change Relating to Expansion of TRACE to Include Agency Debt 
Securities and Primary Market Transactions).
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III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

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

[[Page 56692]]

    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-FINRA-2012-042 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-FINRA-2012-042. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. Copies of the filing also will be available for 
inspection and copying at the principal office of FINRA. All comments 
received will be posted without change; the Commission does not edit 
personal identifying information from submissions. You should submit 
only information that you wish to make available publicly. All 
submissions should refer to File Number SR-FINRA-2012-042 and should be 
submitted on or before October 4, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\40\
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    \40\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-22555 Filed 9-12-12; 8:45 am]
BILLING CODE 8011-01-P


