
[Federal Register Volume 77, Number 208 (Friday, October 26, 2012)]
[Notices]
[Pages 65436-65438]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-26399]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68084; File No. SR-FINRA-2012-042]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Granting Approval 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

October 23, 2012.

I. Introduction

    On August 29, 2012, the Financial Industry Regulatory Authority, 
Inc. (``FINRA'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change relating to post-trade transparency for Agency 
Pass-Through Mortgage-Backed Securities (``MBS'') traded in Specified 
Pool Transactions (``SPT'' and, together with MBS, ``MBS SPT'') and 
Asset-Backed Securities backed by loans guaranteed as to principal and 
interest by the Small Business Administration (``SBA-Backed ABS'') and 
traded either SPT (``SBA-Backed ABS SPT'') or To Be Announced (``TBA'' 
and, together with SBA-Backed ABS, ``SBA-Backed ABS TBA'').\3\ The 
proposed rule change was published for comment in the Federal Register 
on September 13, 2012.\4\ The Commission received no comments on the 
proposal. This order approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ The terms ``Asset-Backed Security,'' ``TBA,'' ``Agency Pass-
Through Mortgage-Backed Security'' and ``Specified Pool 
Transaction'' are defined in FINRA Rules 6710(m), (u), (v) and (x), 
respectively.
    \4\ See Securities Exchange Act Release No. 67798 (September 7, 
2012), 77 FR 56686 (``Notice'').
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II. Description of the Proposal

    FINRA utilizes the Trade Reporting and Compliance Engine 
(``TRACE'') to collect from its members and publicly disseminate 
information on secondary over-the-counter transactions in corporate 
debt securities and Agency Debt Securities and certain primary market 
transactions. FINRA also utilizes TRACE to collect information on 
transactions in Asset-Backed Securities but, until recently, FINRA did 
not disseminate such information publicly.\5\ Earlier this year, 
however, FINRA amended its rules to reduce the reporting timeframe for 
and to provide for public dissemination of information regarding 
transactions in Agency Pass-Through Mortgage-Backed Securities traded 
TBA (``MBS TBA''), a type of Asset-Backed Security.\6\ FINRA has now 
proposed to reduce the reporting timeframe for and to provide for 
public dissemination of information regarding transactions in 
additional types of Asset-Backed Securities, namely, MBS SPT and SBA-
Backed ABS transactions, and to make certain other changes.
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    \5\ See Securities Exchange Act Release No. 61566 (February 22, 
2010), 75 FR 9262 (March 1, 2010) (approving SR-FINRA-2009-065).
    \6\ See Securities Exchange Act Release No. 66829 (April 18, 
2012), 77 FR 24748 (April 25, 2012) (approving SR-FINRA-2012-020) 
(``FINRA-2012-020 Approval'').
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Reduction of Reporting Period

    FINRA has proposed to amend its Rule 6730 to reduce the period for 
reporting MBS SPT and SBA-Backed ABS transactions to TRACE. The 
reduction would occur in two stages. First, for a pilot program of 
approximately 180 days, FINRA will reduce the reporting period from no 
later than the close of the TRACE system on the date of execution to no 
later than two hours from the Time of Execution.\7\ Second, after 
approximately 180 days, the pilot program will expire and the reporting 
period will be reduced from no later than two hours from the

[[Page 65437]]

Time of Execution to no later than one hour from the Time of 
Execution.\8\
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    \7\ However, there are exceptions for transactions that are 
executed within two hours of the close of the TRACE system and for 
transactions executed when TRACE is closed.
    \8\ See supra note 7.
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Dissemination of MBS SPT and SBA Backed ABS Transaction Information

    Recently, FINRA Rule 6750(b)(4) was amended to provide for 
dissemination of information on MBS TBA transactions immediately upon 
receipt of the transaction report.\9\ FINRA's current proposal would 
amend Rule 6750(b)(4) so that it also provides for dissemination of 
information on MBS SPT and SBA Backed ABS transactions immediately upon 
receipt of the transaction report. Specifically, FINRA has proposed to 
amend Rule 6750(b)(4) to provide that FINRA will not disseminate 
information on a transaction in an Asset-Backed Security, except in the 
case of MBS transactions--which include MBS TBA as well as MBS SPT--or 
SBA-Backed ABS transactions. As a result of this proposed change and 
the reduced reporting periods that FINRA has proposed for MBS SPT and 
SBA-Backed ABS transactions, information on such transactions will be 
disseminated within two hours of the Time of Execution during the pilot 
period and within one hour of the Time of Execution after the pilot 
period expires.
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    \9\ See FINRA 2012-020 Approval.
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Dissemination Protocols

    The dissemination of information on MBS SPT and SBA Backed ABS 
transactions will be subject to certain dissemination protocols, in 
addition to the dissemination cap discussed below. SBA-Backed ABS TBA 
transactions will be subject to the same protocols that apply to MBS 
TBA transactions ``not for good delivery'' and standard data elements 
will be displayed.\10\
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    \10\ See FINRA 2012-020 Approval; see also Notice, 77 FR at 
56688 and n.20.
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    With respect to MBS SPT and SBA Backed ABS SPT transactions, 
however, FINRA has proposed not to disseminate the specific CUSIP of 
the security traded. Instead, FINRA has proposed to disseminate certain 
publicly available data elements that correspond to the reported CUSIP 
(without actually disseminating the CUSIP).\11\ Specifically, for each 
MBS SPT transaction reported to TRACE, FINRA would disseminate in lieu 
of a CUSIP, the 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''). For each SBA-Backed ABS SPT transaction reported to TRACE, 
FINRA would disseminate in lieu of a CUSIP, the amortization type, 
coupon, original maturity, WAC, WAM, and WALA, except that such values 
would be based on SBA-backed pooled loans. Each numerical data element 
(which would not include issuing agency, product type or amortization 
type) will be expressed in ranges (i.e., the information will be 
truncated and rounded up or down).
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    \11\ See Notice, 77 FR at 56688-90.
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Dissemination Cap

    FINRA has proposed a dissemination cap of $10 million for MBS SPT 
and SBA Backed ABS transactions, which would prevent the display in 
disseminated TRACE data of the actual size (volume) of MBS SPT and SBA 
Backed ABS transactions with a par value over $10 million; rather, such 
transactions will be displayed as ``10MM+.'' \12\
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    \12\ See Notice, 77 FR at 56690. Certain dissemination caps are 
already in place. There are $5 million and $1 million caps for 
TRACE-Eligible Securities that are rated Investment Grade and Non-
Investment Grade, respectively, which pre-date the FINRA-2012-020 
Approval. See id. There are also $25 million and $10 million 
dissemination caps for transactions in MBS TBA, with the $25 million 
cap applying to one subset of MBS TBA transactions and the $10 
million cap applying to another subset. See FINRA-2012-020 Approval.
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Other Rule Changes

    FINRA has proposed to amend FINRA Rule 6710 to add ``SBA-Backed 
ABS'' as a defined term \13\ and to make conforming amendments to the 
definitions of TBA, MBS, and SPT in Rules 6710(u), (v), and (x), 
respectively, in order to incorporate SBA-Backed ABS.
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    \13\ See proposed Rule 6710(bb).
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Regulatory Notice

    FINRA has stated that it would announce the effective date of the 
proposed rule change in a Regulatory Notice to be published no later 
than 60 days following Commission approval, and that the effective date 
be no later than 180 days following publication of that Regulatory 
Notice.

III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities 
association.\14\ In particular, the Commission finds that the proposed 
rule change is consistent with Section 15A(b)(6) of the Act,\15\ which 
requires, among other things, that FINRA rules be designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, and, in general, to protect investors 
and the public interest.
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    \14\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \15\ 15 U.S.C. 78o-3(b)(6).
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    In approving the original TRACE rules, the Commission stated that 
price transparency plays a fundamental role in promoting fairness and 
efficiency of U.S. capital markets.\16\ To further the goal of 
increasing price transparency in the debt markets in general and the 
MBS SPT and SBA-Backed ABS markets in particular, the Commission now 
believes that it is reasonable and consistent with the Act for FINRA to 
extend post-trade price transparency to transactions in MBS SPT and 
SBA-Backed ABS in the manner set forth in the proposal.
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    \16\ See Securities Exchange Act Release No. 43873 (January 23, 
2001), 66 FR 8131, 8136 (January 29, 2001).
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    As discussed above, FINRA recently amended its rules to provide for 
public dissemination (and timelier reporting to TRACE) of information 
on transactions in MBS TBA.\17\ The current proposal will continue this 
initiative by making information on MBS SPT and SBA-Backed ABS 
transactions publicly available for the first time. In doing so, the 
proposal could encourage greater participation in the market, and 
thereby contribute to deeper liquidity and increased competition. In 
addition, the proposal appears reasonably designed to reduce the 
potential for manipulation and promote just and equitable principles of 
trade by allowing market participants to make more accurate assessments 
of, and enhancing their ability to negotiate fair and competitive 
prices in, the MBS SPT and SBA-Backed ABS markets.
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    \17\ See FINRA-2012-020 Approval.
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    Further, the Commission believes that the proposed dissemination 
protocols for MBS SPT and SBA-Backed ABS SPT transactions, pursuant to 
which specified data elements would be disseminated in lieu of actual 
CUSIPs, strike an appropriate balance between providing meaningful 
post-trade transparency and, at the same time, reducing the potential 
for ``reverse engineering'' of transaction data that could permit 
identification of a market participant and/or its trading strategy. 
According to FINRA, part of the valuation analysis of any Asset-Backed 
Security includes a projection of its cash flow which, in turn, relies 
on

[[Page 65438]]

assumptions about prepayment rates.\18\ FINRA believes that the 
specified data elements that will be disseminated for MBS SPT and SBA-
Backed ABS SPT transactions provide information that will allow market 
participants to perform such an analysis.\19\ Moreover, FINRA has 
represented that, in the future, it could determine to propose 
dissemination of additional data elements that it believes would 
improve transparency for such transactions.\20\
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    \18\ See Notice, 77 FR at 56689.
    \19\ See id.
    \20\ See id.
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    Additionally, the proposed reduction in reporting times for MBS SPT 
and SBA-Backed ABS transactions is an important corollary to the 
expansion of post-trade transparency for such transactions. Timelier 
reporting should be more conducive to the dissemination of meaningful 
(and close-to-real time) MBS SPT and SBA-Backed ABS transaction 
information. The Commission believes that reducing the reporting period 
as set forth in the proposal would result in important trade 
information reaching the market more quickly, thus contributing to 
enhanced price transparency for the MBS SPT and SBA-Backed ABS asset 
classes.
    Firms covered by these new reporting requirements for MBS SPT and 
SBA-Backed ABS transactions could incur certain compliance burdens. 
However, the Commission believes that any such burdens are justified by 
the overall benefits of increasing transparency in the MBS SPT and SBA-
Backed ABS markets. The Commission notes that FINRA has proposed to 
shorten the reporting period for MBS SPT and SBA-Backed ABS 
transactions in stages. The Commission believes that this approach is 
reasonably designed to ease the compliance burdens on those affected by 
the proposal without significantly compromising FINRA's ability to 
disseminate more timely transaction information for MBS SPT and SBA-
Backed ABS transactions.
    The Commission recognizes that the $10 million dissemination cap 
FINRA has proposed would, to a certain extent, limit the transparency 
provided by FINRA's proposal.\21\ However, the Commission notes that 
dissemination caps are already in place for transactions in other 
TRACE-Eligible Securities.\22\ Moreover, public dissemination of 
information on MBS SPT and SBA-Backed ABS transactions has heretofore 
not existed in the MBS SPT and SBA-Backed ABS markets. The 
dissemination cap will allow FINRA to implement post-trade price 
transparency in those markets incrementally. Furthermore, FINRA has 
represented that it will continue to review the volume of and liquidity 
in those markets and, if warranted in the future, may propose that the 
dissemination cap be set at a higher level in order to provide 
additional transparency.\23\
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    \21\ The Commission notes that, as calculated by FINRA, the $10 
million dissemination cap would have limited the display of actual 
size for approximately 80% of total volume traded in MBS SPT and 
SBA-Backed ABS during the period May 16, 2011 through January 4, 
2012. See Notice, 77 FR at 56690 and n.28.
    \22\ See supra note 13.
    \23\ See Notice, 77 FR at 56690.
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\24\ that the proposed rule change (SR-FINRA-2012-042) be, and it 
hereby is, approved.
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    \24\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\25\
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    \25\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-26399 Filed 10-25-12; 8:45 am]
BILLING CODE 8011-01-P


