
[Federal Register Volume 81, Number 129 (Wednesday, July 6, 2016)]
[Notices]
[Pages 44065-44073]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-15918]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-78196; File No. SR-FINRA-2016-023]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of a Proposed Rule Change To Increase 
Transparency for CMO Transactions

June 29, 2016.
    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 June 27, 2016, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission 
(``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.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing to to [sic] amend the FINRA Rule 6700 Series and 
the Trade Reporting and Compliance Engine (``TRACE'') dissemination 
protocols to provide for dissemination of transactions in an additional 
type of Securitized Products--specifically, collateralized mortgage 
obligations (``CMOs''). In addition, FINRA is proposing a corresponding 
change to Rule 6730 to reduce the reporting period for CMOs from end-
of-day to 60 minutes, and also to amend Rule 6730 to simplify the 
reporting requirements for transactions in CMOs executed prior to 
issuance. FINRA further proposes technical and conforming changes to 
the FINRA Rule 6700 Series and Rule 7730 in connection with the changes 
referenced above.
    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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    FINRA proposes to amend the Rule 6700 Series and the TRACE 
dissemination protocols to: (1) Provide for the dissemination of 
transactions in CMOs,\3\ an additional group of Securitized Products 
\4\ not yet subject to dissemination; (2) reduce the reporting 
timeframe for CMOs from end-of-day to 60 minutes; and (3) simplify the 
reporting requirements for pre-issuance CMO transactions. FINRA also 
proposes technical and conforming changes to the Rule 6700 Series and 
Rule 7730.
---------------------------------------------------------------------------

    \3\ The term ``Collateralized Mortgage Obligation,'' or CMO, is 
defined in FINRA Rule 6710(dd) to mean a type of Securitized Product 
backed by Agency Pass-Through Mortgage-Backed Securities as defined 
in paragraph (v), mortgage loans, certificates backed by project 
loans or construction loans, other types of mortgage-backed 
securities or assets derivative of mortgage-backed securities, 
structured in multiple classes or tranches with each class or 
tranche entitled to receive distributions of principal and/or 
interest according to the requirements adopted for the specific 
class or tranche, and includes a real estate mortgage investment 
conduit (``REMIC'').
    \4\ The term ``Securitized Product'' is defined in Rule 6710(m) 
to mean a security collateralized by any type of financial asset, 
such as a loan, a lease, a mortgage, or a secured or unsecured 
receivable, and includes but is not limited to an asset-backed 
security as defined in Section 3(a)(79)(A) of the Exchange Act, a 
synthetic asset-backed security, and any residual tranche or 
interest of any security specified above, which tranche or interest 
is a debt security for purposes of paragraph (a) and the Rule 6700 
Series.
---------------------------------------------------------------------------

Background
    FINRA requires members to report transactions in any security that 
meets the definition of ``TRACE-Eligible Security'' \5\ to TRACE. Most 
transactions

[[Page 44066]]

must be reported to TRACE within 15 minutes of the time of execution 
and are subsequently disseminated.
---------------------------------------------------------------------------

    \5\ Rule 6710 generally defines a ``TRACE-Eligible Security'' 
as: (1) 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 Securities Act Rule 144A); or (2) a debt security that 
is U.S. dollar-denominated and issued or guaranteed by an ``Agency'' 
as defined in Rule 6710(k) or a ``Government-Sponsored Enterprise'' 
as defined in Rule 6710(n).
---------------------------------------------------------------------------

    Securitized Products were the last major group of fixed income 
securities to become subject to TRACE reporting. Initially, FINRA 
received reports of transactions in these products for regulatory audit 
trail purposes only and did not disseminate transaction data. FINRA 
used the transaction reports it received to study the liquidity and 
trading characteristics of various types of Securitized Products. Based 
on its study, FINRA then started a phased approach to disseminating 
transaction information for certain Securitized Products.
    For the first phase, on November 12, 2012, FINRA began 
disseminating transactions in Agency Pass-Through Mortgage-Backed 
Securities traded To Be Announced (``TBA'') (``MBS TBA'' transactions), 
which are the most liquid types of Securitized Products.\6\ Next, on 
July 22, 2013, FINRA began disseminating transactions in Agency Pass-
Through Mortgage-Backed Securities and SBA-Backed ABS (as defined in 
FINRA Rule 6710(bb)) traded in Specified Pool Transactions.\7\ On June 
30, 2014, FINRA began to disseminate information on transactions in 
TRACE-Eligible Securities effected as Rule 144A transactions, provided 
that such transactions were in securities that would be subject to 
dissemination if effected in non-Rule 144A transactions.\8\ And most 
recently, on June 1, 2015, FINRA began to disseminate transactions in 
Asset-Backed Securities.\9\ Today, the remaining types of Securitized 
Products not yet subject to dissemination are CMOs, commercial 
mortgage-backed securities (``CMBSs''), and collateralized debt 
obligations (``CDOs'').\10\ CMOs are the largest and most actively 
traded of these remaining Securitized Products types. In addition, CMOs 
typically have relatively smaller transaction sizes than those for 
CMBSs and CDOs.
---------------------------------------------------------------------------

    \6\ See Securities Exchange Act Release No. 66829 (April 18, 
2012), 77 FR 24748 (April 25, 2012) (Order Approving File No. SR-
FINRA-2012-020); Regulatory Notice 12-26 (May 2012) and Regulatory 
Notice 12-48 (November 2012).
    \7\ See Securities Exchange Act Release No. 68084 (October 23, 
2012), 77 FR 65436 (October 26, 2012) (Order Approving File No. SR-
FINRA-2012-042) and Regulatory Notice 12-56 (December 2012).
    \8\ See Securities Exchange Act Release No. 70345 (September 6, 
2013), 78 FR 56251 (September 12, 2013) (Order Approving File No. 
SR-FINRA-2013-029) and Regulatory Notice 13-35 (October 2013).
    \9\ See Securities Exchange Act Release No. 71607 (February 24, 
2014), 79 FR 11481 (February 28, 2014) (Order Approving File No. SR-
FINRA-2013-046) and Regulatory Notice 14-34 (August 2014).
    \10\ A ``Collateralized Debt Obligation,'' or CDO, would be 
defined in proposed FINRA Rule 6710(ff) to mean a type of 
Securitized Product backed by fixed-income assets (such as bonds, 
receivables on loans, or other debt) or derivatives of these fixed-
income assets, structured in multiple classes or tranches with each 
class or tranche entitled to receive distributions of principal and/
or interest in accordance with the requirements adopted for the 
specific class or tranche. A CDO includes, but is not limited to, a 
collateralized loan obligation, or CLO, and a collateralized bond 
obligation, or CBO.
---------------------------------------------------------------------------

Current Proposal
    FINRA is proposing to expand the dissemination of Securitized 
Products to include CMOs. Under the proposal, a CMO transaction will be 
subject either to dissemination immediately upon receipt of the TRACE 
transaction report, or to aggregate, periodic dissemination, depending 
on the size of the transaction and the number of transactions in the 
CMO security during a given period.
    Specifically, transactions in CMOs, including transactions effected 
pursuant to Securities Act Rule 144A, will be subject to aggregate, 
periodic dissemination on a weekly and monthly basis where the 
transaction value is $1 million or more (calculated based upon original 
principal balance) and where there have been five or more transactions 
of $1 million or more in the reporting period reported by at least two 
different market participant identifiers (``MPIDs'').\11\ For the 
smaller-size transactions--i.e., transactions valued under $1 million 
(calculated based upon original principal balance)--FINRA will 
disseminate trade-by-trade information immediately upon receipt by 
TRACE.\12\
---------------------------------------------------------------------------

    \11\ For example, if five transactions occurred in a particular 
CMO security during each of the four weeks in a calendar month and 
were reported by at least two unique MPIDs, then four weekly reports 
would be disseminated; in addition, information on those 
transactions would be included in the aggregate monthly report for 
that calendar month. If five transactions occurred over the course 
of a calendar month, but did not occur during a single week, then a 
weekly report would not be available for that security (but the 
transaction information would be included in the monthly report 
provided the transactions were reported by at least two unique 
MPIDs). For purposes of determining if a CMO security has been 
reported by at least two different MPIDs, FINRA notes that it would 
consider an interdealer trade to be reported by one MPID--the sell 
side dealer--even though the trade is reported by both sides of the 
transaction.
    \12\ Also in connection with the proposed dissemination of 
information on CMO transactions, FINRA proposes to amend Rule 7730 
(fees for TRACE) to reflect the addition of CMOs to the applicable 
data sets. Disseminated periodic reports will become available as 
part of the Securitized Products Data Set and all CMO transactions--
even if not previously disseminated upon receipt or as part of a 
periodic report--will become part of the Historic Securitized 
Products Data Set in FINRA Rule 7730. Similarly, disseminated 
periodic reports for transactions in CMOs issued pursuant to Rule 
144A will become part of the Rule 144A Data Set, and all Rule 144A 
transactions in CMOs will become part of the Historic Rule 144A Data 
Set. The inclusion of this additional data in such data sets will 
not affect the fees currently in effect.
---------------------------------------------------------------------------

    The proposal will provide for this approach to CMO dissemination by 
amending FINRA Rule 6750 (Dissemination of Transaction Information). 
Rule 6750 currently contains two operative paragraphs--paragraph (a), 
which provides generally for the dissemination of TRACE-Eligible 
Securities immediately upon receipt of a transaction report, and 
paragraph (b), which contains an exception to the general dissemination 
provision in paragraph (a) and which notes the security or transaction 
types that are not subject to dissemination. Currently, the remaining 
Securitized Products--CMOs, CMBSs, and CDOs, are found within paragraph 
(b) and are therefore not subject to dissemination.
    Under the proposal, current paragraph (b) will be replaced with a 
paragraph that provides specifically for the dissemination of larger-
size ($1 million or more) CMO transactions on a periodic, rather than 
immediate, basis, provided the transaction occurs in a CMO security 
that meets the minimum activity threshold described above (i.e., at 
least five transactions in the period reported by at least two 
different MPIDs). The exception paragraph, which sets forth the 
transaction types not subject to dissemination, will be new paragraph 
(c). It will be revised to note that the only Securitized Products not 
subject to dissemination are CMBSs, CDOs, and CMOs where the CMO 
transaction value is $1 million or more (calculated based upon original 
principal balance) and the transaction does not qualify for periodic 
dissemination. However, as noted above, all transactions in CMOs will 
become part of the historic data sets even if they were not subject to 
dissemination upon receipt or periodic dissemination.\13\
---------------------------------------------------------------------------

    \13\ See supra note 12.
---------------------------------------------------------------------------

    To facilitate the proposed dissemination of CMOs, the proposal will 
also amend Rule 6730(a)(3) to reduce the time period for reporting to 
TRACE transactions in CMOs to TRACE executed on or after issuance.\14\ 
Currently, these CMO transactions must be reported to TRACE no later 
than the close of the TRACE system on the date

[[Page 44067]]

of execution.\15\ Under the proposal, paragraph (H) would be added to 
require that transactions in these CMOs must be reported to TRACE 
within 60 minutes of execution.\16\
---------------------------------------------------------------------------

    \14\ As discussed in further detail below, reporting 
requirements for transactions in a CMO prior to that CMO's issuance 
are addressed separately in FINRA Rule 6730(a)(3)(C). FINRA notes 
that it will also make a technical, clarifying edit to Rule 
6730(a)(3) that is otherwise unrelated to this proposal; 
specifically, FINRA will delete language in Rule 6730(a)(3)(B) that 
describes the transitional reporting phase for Asset-Backed 
Securities, since the transitional phase is now complete.
    \15\ See FINRA Rule 6730(a)(3)(A). As part of this proposal, 
FINRA is proposing a technical, clarifying change to Rule 
6730(a)(3)(A). This paragraph currently is titled ``General 
Reporting Requirements'' for Securitized Products, but because only 
CDOs and CMBSs will remain subject to the paragraph after this 
proposal becomes effective, FINRA will rename this paragraph to make 
clear that applies specifically to CDOs and CMBSs.
    \16\ As with other TRACE-Eligible Securities that are subject to 
60-minute reporting, under proposed Rules 6730(a)(3)(H)(iii)-(iv), 
transactions in CMOs, CMBSs, and CDOs that are executed less than 60 
minutes before the TRACE system closes, or after, would need to be 
reported no later than 60 minutes after TRACE opens the following 
business day.
---------------------------------------------------------------------------

    Finally, FINRA proposes to modify the reporting timeframe for pre-
issuance CMO transactions. FINRA is proposing to amend Rule 
6730(a)(3)(C) to provide that transactions in CMOs that are executed 
before the date of issuance of the security must be reported no later 
than the first settlement date of the security. Under the current rule, 
firms generally must report CMO transactions that are executed prior to 
issuance on the earlier of the business day that the security is 
assigned a CUSIP, or the date of issuance of the security. FINRA is 
aware that some firms, particularly small and mid-size firms, have had 
difficulty in determining with accuracy in a timely manner when the 
reporting obligation has been triggered, due to inconsistencies in 
communicating the relevant information between underwriters and trading 
parties. As a result, these firms do not always report trades in these 
instruments on the earlier of the two dates specified in the current 
rule. FINRA believes that, because new issuances in CMOs generally 
settle on the last business day of the month, the amended proposal 
would provide for a uniform reporting deadline that can be easily 
ascertained by all firms.
    If the Commission approves the proposed rule change, FINRA will 
announce the operative date of the proposed rule change in a Regulatory 
Notice to be published no later than 90 days following Commission 
approval. The operative date will be no later than 365 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,\17\ 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. As discussed throughout the filing, FINRA believes 
that the proposed rule change will promote greater transparency in the 
marketplace for CMOs. Based on dialogue with a variety of market 
participants, FINRA believes the information it proposes to disseminate 
would be valuable to assist in price discovery, determination of 
execution quality, and, in particular, valuation of securities 
positions. Furthermore, FINRA believes the proposal strikes an 
appropriate balance between promoting transparency and preserving 
anonymity, which may facilitate larger size trades and liquidity 
provision. Based on FINRA's ongoing study of the trading 
characteristics of Securitized Products, FINRA believes this proposal 
is an important next phase in dissemination that will position FINRA to 
evaluate whether and how to complete its expansion of dissemination to 
cover all Securitized Product types.
---------------------------------------------------------------------------

    \17\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

    FINRA further believes that the proposed change to 60-minute trade 
reporting will facilitate CMO dissemination by ensuring that FINRA is 
able to receive and disseminate CMO transaction information in a timely 
manner. Accordingly, FINRA believes this element of the filing will 
help promote transparency and enhance investor protection and the 
public interest.
    Finally, FINRA believes the proposed change to the reporting 
timeframe for pre-issuance CMOs will further just and equitable 
principles of trade by providing greater clarity and promoting 
compliance with applicable reporting rules.

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. FINRA has undertaken an 
economic impact assessment, as set forth below, to analyze the 
regulatory need for the proposed rule change, its potential economic 
impacts, including anticipated costs and benefits, and the alternatives 
FINRA considered in assessing how to best meet its regulatory 
objectives.
Need for the Rule
    As discussed above, FINRA believes this proposal is necessary and 
appropriate to further promote transparency in the markets for 
additional Securitized Products. FINRA believes the proposed 
dissemination of transaction information for CMOs would be valuable to 
assist in price discovery, determination of execution quality, and, in 
particular, valuation of securities positions. FINRA believes the 
proposed transition to 60-minute trade reporting for transactions in 
CMOs executed on or after issuance is necessary to facilitate 
meaningful dissemination of information for these securities. Finally, 
FINRA believes the proposed change to the reporting timeframe for 
transactions in pre-issuance CMOs is necessary to simplify the 
reporting process, given that some firms, small and medium size firms 
in particular, may have difficulty in determining with accuracy and in 
a timely manner when their reporting obligations have been triggered.
Economic Impacts
    FINRA believes that enhanced transparency in CMOs will benefit 
market participants, as discussed above, by contributing to more 
efficient pricing and better execution quality for market participants 
and clients. However, the proposed changes may impose direct and 
indirect costs on market participants; for example, the proposal might 
impose direct costs associated with more timely reporting of CMO 
transactions and indirect costs associated with the potential leakage 
of proprietary information. In the analysis below, we individually 
assess the impact on market participants of each proposed change--(1) 
dissemination of CMO transactions, (2) reducing the timeframe for 
reporting CMO transactions, and (3) simplifying the reporting 
requirements for pre-issuance CMO transactions.
(1) Dissemination of CMO Transactions
    The proposed dissemination of CMO transactions will enhance 
transparency, which should benefit market participants and clients via 
improved market quality. However, while enhanced transparency should 
provide benefits broadly to the marketplace, it may impose indirect 
costs on certain market participants, like those whose transaction 
information is subject to dissemination. FINRA is cognizant of the 
concern that the risk of information leakage could potentially harm 
market quality if it discourages liquidity provision. Accordingly, 
FINRA staff considered the potential for indirect costs associated with 
providing information publicly that might permit competitors to reverse 
engineer the disseminated data to produce private

[[Page 44068]]

information about trade participants, their trade positions and 
possibly their trading strategies.
    To investigate whether dissemination, as proposed, could 
potentially allow market participants to reverse-engineer the 
identities of broker-dealers or positions, FINRA staff examined the 
distribution of the number of MPIDs reporting transactions in each CMO 
CUSIP, over the time period spanning May 13, 2011 to August 14, 2015. 
Table 1 suggests that trading activity in CMOs, on a per-CUSIP basis, 
is quite concentrated, with 32,200 CUSIPs--33.3% of all CMO CUSIPs--in 
the sample traded by only one MPID over the sample period. These CUSIPs 
traded by only one MPID are referred to as ``concentrated'' CUSIPs. 
There were 64,449 remaining CUSIPs in the sample traded by two or more 
MPIDs, referred to as ``non-concentrated'' CUSIPs.\18\ CUSIPs are 
classified as concentrated and non-concentrated based on a threshold of 
one MPID, as it represents cases where the information about firm 
activity is most concentrated.
---------------------------------------------------------------------------

    \18\ Concentrated CUSIPs have a Herfindahl-Hirschman Index (HHI) 
of one, while non-concentrated have an HHI that is less than one. 
Algebraically, HHI is calculated as follows: HHI = 
[Sigma]Ni = 1 si2 where si is the market share 
of firm i, and there are N total firms in a market. HHI is a 
succinct measure of market concentration, and it is widely used in 
analyses of monopoly power, antitrust litigation, and other 
prominent issues in industrial organization. The HHI of a market can 
range from 0 to 1 (some publications use 0 to 10,000, but the 
interpretation is the same after adjusting for scale), where HHI = 1 
represents a perfectly concentrated market (one firms controls the 
entire market) and HHI = 0 represents a perfectly competitive market 
(infinitely many firms have infinitesimally small market share).

      Table 1--The Number of Different MPIDs Trading in CMO CUSIPs
------------------------------------------------------------------------
                Number of MPIDs                    CUSIPs         %
------------------------------------------------------------------------
1.............................................       32,220         33.3
2.............................................       17,792         18.4
3.............................................       10,573         10.9
4.............................................        6,677          6.9
5.............................................        4,595          4.8
6.............................................        3,511          3.6
7.............................................        2,737          2.8
8.............................................        2,229          2.3
9.............................................        1,903          2.0
10............................................        1,590          1.6
11............................................        1,317          1.4
12............................................        1,128          1.2
13............................................          955          1.0
14............................................          869          0.9
15............................................          753          0.8
15+...........................................        7,820          8.1
                                               -------------------------
    Total.....................................       96,669          100
------------------------------------------------------------------------

    Table 2 reports trading activity (the number of transactions and 
trading volume) for the sample by concentrated versus non-concentrated 
CUSIPs. Trading activity in concentrated CUSIPs represents only 1.73% 
of transactions, but 15.75% of the trading volume. This suggests that 
concentrated CUSIPs have relatively larger trade sizes.

          Table 2--Aggregate Trading Activity by Concentration
------------------------------------------------------------------------
                                                 Number of      Volume
                                               transactions    ($bil.)
------------------------------------------------------------------------
HHI = 1......................................        50,714       $1,692
HHI < 1......................................     2,879,089        9,049
                                              --------------------------
    Total....................................     2,929,803       10,741
------------------------------------------------------------------------

    Table 3 reports that the typical concentrated CUSIP trades only 
about one to two times over the entire sample period. For non-
concentrated CUSIPs reported by two or more MPIDs, the typical CMO 
trades 44.67 times over the sample period.\19\ In general, concentrated 
CUSIPs have on average about half of the trading volume of non-
concentrated CUSIPs.
---------------------------------------------------------------------------

    \19\ On average, CMOs trade in 10.74 days out of 1,071 days in 
the sample period.

               Table 3--Average Trading Activity per CUSIP
------------------------------------------------------------------------
                                                    Mean        Median
------------------------------------------------------------------------
HHI = 1......................  Number of               1.57         1.00
                                transactions/
                                CUSIP.
                               Transaction           $33.37       $10.60
                                size ($mil.).
                               Volume ($mil.).       $52.52       $19.00
------------------------------------------------------------------------
HHI < 1......................  Number of              44.67        10.00
                                transactions/
                                CUSIP.
                               Transaction            $3.14        $0.03
                                size ($mil.).
                               Volume ($mil.).      $140.40       $41.85
------------------------------------------------------------------------
Overall......................  Number of              30.31         5.00
                                transactions/
                                CUSIP.
                               Transaction            $3.67        $0.03
                                size ($mil.).
                               Volume ($mil.).      $111.11       $30.67
------------------------------------------------------------------------

    FINRA staff also investigated the trading activity above and below 
the proposed threshold for immediate dissemination upon receipt, $1 
million in original principal balance traded. Table 4 reports the 
frequency of transactions that would have fallen above and below the 
proposed threshold had they been in place during the sample period, 
broken down by concentrated and non-concentrated CUSIPs. In the sample, 
79.21% (0.36% + 78.85%) of transactions and 1.64% (0.02% + 1.62%) of 
trading volume in CMOs would have been below the proposed threshold, 
and thus would have been disseminated immediately upon receipt to FINRA 
under the proposal.

                    Table 4--Distribution of Transactions Above and Below Proposed Threshold
----------------------------------------------------------------------------------------------------------------
                                                      Number of
                                                     transactions      Percent      Volume ($bil.)     Percent
----------------------------------------------------------------------------------------------------------------
HHI = 1 Below Threshold.........................             10,526         0.36              $1.97         0.02
HHI = 1 At/Above Threshold......................             40,188         1.37           1,690.13        15.74
HHI < 1 Below Threshold.........................          2,310,110        78.85             173.98         1.62
HHI < 1 At/Above Threshold......................            568,979        19.42           8,874.67        82.63
                                                 ---------------------------------------------------------------

[[Page 44069]]

 
    Total.......................................          2,929,803       100.00          10,740.75       100.00
----------------------------------------------------------------------------------------------------------------

    The total number of transactions and the trading volume that would 
be disseminated under the $1 million threshold and the minimum five-
trade per CUSIP requirement are presented in Table 5. The table shows 
that approximately 8.65% (6.24% + 2.41%) of transactions and 28.63% 
(16.64% + 7.99%) of trading volume in CMOs would be disseminated in 
weekly and monthly reports.

  Table 5--Aggregate Percentage of Transactions by Type and Dissemination With Minimum Two MPID Requirement for
                                                Periodic Reports
----------------------------------------------------------------------------------------------------------------
                                                   Transactions          %        Volume ($bil.)         %
----------------------------------------------------------------------------------------------------------------
Immediate.......................................       2,320,636           79.21             176            1.64
Weekly..........................................         182,893            6.24           1,787           16.64
Monthly.........................................          70,528            2.41             858            7.99
Not dis.........................................         355,746           12.14           7,919           73.73
                                                 ---------------------------------------------------------------
    Total.......................................       2,929,803          100.00          10,741          100.00
----------------------------------------------------------------------------------------------------------------

    Table 6 reports the average trade characteristics by concentration 
at the MPID level. As illustrated by the table, 79.29% of an MPID's CMO 
transactions would be disseminated immediately upon receipt, with 0.18% 
in concentrated CUSIPs and 79.11% in non-concentrated CUSIPs. 
Similarly, 11.74% (9.19% + 2.55%) of CMO transactions for the typical 
MPID would be disseminated via weekly and monthly periodic reports, 
with all transactions in non-concentrated CUSIPs. Finally, on average, 
8.97% of an MPID's CMO transactions would not be subject to any 
dissemination under the proposal, with 0.36% of in concentrated CUSIPs 
and 8.61% in non-concentrated CUSIPs.

             Table 6--Average Trading Activity per MPID by Dissemination Frequency and Concentration
----------------------------------------------------------------------------------------------------------------
                                                                     (Number of MPIDs = 1,002)
                                                 ---------------------------------------------------------------
                                                         % of transactions                  % of volume
                                                 ---------------------------------------------------------------
                                                      HH = 1          HH < 1          HH = 1          HH < 1
----------------------------------------------------------------------------------------------------------------
Immediate.......................................            0.18           79.11            0.13           58.17
Weekly..........................................            0.00            9.19            0.02           20.46
Monthly.........................................            0.00            2.55            0.00            4.31
Not dis.........................................            0.36            8.61            0.85           16.05
----------------------------------------------------------------------------------------------------------------

    This analysis suggests that information leakage may not be a 
significant issue based on the concentration of trading activity in 
certain CUSIPs. Tables 5 and 6 confirm that it would be difficult to 
ascertain significant information about a single MPID's trading 
strategy from both the real time and periodic dissemination of CMO 
trades, as less than 1% of trading in concentrated CUSIPs is expected 
to be disseminated. Moreover, there are no concentrated CUSIPs where 
the proposed rule would have led to dissemination of all trades by any 
individual MPID.\20\
---------------------------------------------------------------------------

    \20\ 463 MPIDs would have all of their CMO trades disseminated 
immediately upon receipt; however, none of those trades are in 
concentrated CUSIPs.
---------------------------------------------------------------------------

(2) Reducing the Timeframe for Reporting CMO Transactions
    The second proposed change, reducing the reporting timeframe for 
CMOs from end-of-day to 60 minutes is intended to facilitate timely 
dissemination of information for these securities. However, FINRA is 
aware that a narrower reporting window may impose direct costs on firms 
to the extent that the firms have to modify or upgrade their reporting 
systems to comply with the reduced time period for transactions in CMOs 
executed on or after issuance.
    In a sample of 2,476,666 transactions reported on the day of the 
execution, the average and median reporting time after execution are 
approximately 19 minutes and 33 seconds, respectively.\21\ 
Approximately 92% of CMO transactions are currently reported to TRACE 
within 60 minutes. Reports received 60 minutes or more after the 
transaction execution are significantly larger than those that are 
reported within 60 minutes.\22\
---------------------------------------------------------------------------

    \21\ The sample for the analysis of the reporting timeframes 
excludes 453,137 ``as of'' trades that were in the original sample, 
since such trades are reported at least a day after the transaction 
day and are disseminated with a ``late'' flag and are subject to a 
fine.
    \22\ Trades that are reported after 60 minutes have an average 
transaction size of approximately $9.76 million, whereas the same 
figure is approximately $2.76 million for trades that are reported 
within 60 minutes. The difference of $7.00 million is statistically 
significant at the 1% level.
---------------------------------------------------------------------------

    Of the 974 market participants that reported CMO trades during the 
sample period, 417 reported all transactions

[[Page 44070]]

within 60 minutes. Another 400 market participants reported at least 
90%, but less than 100% of their CMO transactions within 60 minutes of 
execution. Finally, 157 market participants reported less than 90% of 
their transactions within 60 minutes; of these, only six reported all 
of their transactions more than 60 minutes after execution, but each of 
the six reported fewer than five trades during the sample period.
    This analysis suggests that many market participants will require 
no change in behavior to meet the proposed rule, and, as such, should 
face no material costs. A second group of market participants currently 
meet the proposed reporting standards at least 90% of the time, 
suggesting that their costs for compliance should also be low. The data 
indicate that there are a small but material number of market 
participants that currently do not report in a manner consistent with 
the proposed rule, but these firms engage in small numbers of 
transactions in CMO securities. The cost that these firms would be 
expected to incur as a result of the shorter reporting timeframe would 
depend on the extent of the modification or upgrade to the reporting 
systems to stay in compliance with the proposed rule.
(3) Simplifying the Reporting Requirements for Pre-Issuance CMO 
Transactions
    The final proposed change would impact the reporting timeframe for 
pre-issuance CMO transactions and is expected to benefit firms, since 
it is intended to eliminate potential confusion about when the 
reporting obligation has been triggered. The proposed requirement that 
transactions in CMOs that are executed before the issuance of the 
security must be reported no later than the first settlement date 
provides firms with more time to report the transactions than they have 
today.
Alternatives Considered
    As discussed in detail below, FINRA staff also considered the 
dissemination of CMBSs and CDOs in addition to CMOs. Likely due to 
differences in the customers that trade Securitized Products, CMOs 
typically have relatively smaller transactions sizes than those for 
CMBSs and CDOs and thus would be more likely disseminated under the 
thresholds applied in this rule. For example, Table 5 above 
demonstrates that 79.21% (0.36% + 78.85%) of CMO transactions would 
have been below the proposed threshold, and thus would have been 
disseminated immediately upon receipt under the proposal, whereas, 
FINRA staff found that, under the same thresholds, only 29.51% and 
37.92% of CDO and CMBS transactions would have been disseminated, 
respectively, upon receipt. This observation suggests that differences 
in average trade characteristics may lead to different outcomes for 
dissemination across security types. Therefore, FINRA believes that 
proceeding with CMO dissemination is a sensible next step, and it will 
continue to analyze the potential for enhanced transparency for the 
remaining Securitized Product types.
    FINRA staff also assessed whether the five-transaction requirement 
for periodic dissemination of trades in weekly and monthly reports is 
reasonable and appropriate based on trading frequency. The staff found 
that increasing the requirement from five to ten transactions creates a 
significant shift of transactions from aggregate, periodic 
dissemination to no dissemination. If the threshold were increased to a 
minimum of 20 transactions, then approximately 96% of trading volume 
would not be disseminated.
    A higher minimum transaction number threshold may also result in 
aggregate, periodic dissemination for transactions reported by far 
fewer market participants. For example, based on the sample data 
referenced above and assuming a five-transaction threshold for periodic 
dissemination, 14 MPIDs would have had all of their transactions 
disseminated weekly and an additional three MPIDs would have had all of 
their transactions disseminated monthly. However, if the minimum trade 
threshold were increased to ten, there would only be a single MPID 
whose transactions would be consistently disseminated in weekly 
reports, and another single MPID whose transactions would be 
consistently disseminated via monthly reports.
    The analysis implies that increasing the minimum transaction number 
threshold for periodic dissemination would dramatically reduce the 
amount of information that is disseminated. In addition, it may 
actually increase the risk of reverse-engineering the identity or 
trading strategies of the single or few MPIDs whose trades would be 
subject to dissemination under a higher minimum transaction number 
threshold.
    Another alternative that FINRA considered was a 15-minute reporting 
requirement for CMO transactions, rather than the 60-minute requirement 
that FINRA proposes in this filing. As noted above, based on sample 
data that FINRA has analyzed, the median reporting time for CMO 
transactions is just under 20 minutes. Accordingly, FINRA believes that 
a 15-minute reporting requirement may impose significantly greater 
costs than a 60-minute requirement. Notably, FINRA believes that the 60 
minute requirement is still expected to provide sufficiently timely 
transparency to the market. FINRA also notes that the proposed 60-
minute requirement for CMOs mirrors the 60-minute requirement currently 
in place for another type of Securitized Product--agency pass-through 
mortgage-backed securities traded to be announced not good for 
delivery.
    Finally, with respect to the reporting process for pre-issuance 
CMOs, FINRA considered requiring that transactions be reported no later 
than two days prior to the first settlement date. However, FINRA 
understands that in many cases, particularly for private label 
securities, the characteristics of a new issue may not be finalized 
until the first settlement date of the securities. As a result, FINRA 
is instead proposing that pre-issuance CMO transactions be reported by 
the first settlement date.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    The proposed rule change was published for comment in Regulatory 
Notice 15-04 (February 2015). Five comments were received in response 
to the Regulatory Notice.\23\ A copy of the Regulatory Notice is 
attached as Exhibit 2a. Copies of the comment letters received in 
response to the Regulatory Notice are attached as Exhibit 2c. The 
comments are summarized below.
---------------------------------------------------------------------------

    \23\ See Letters from Letters from the Financial Information 
Forum, dated April 7, 2015 (``FIF Letter''); Bond Dealers of 
America, dated April 9, 2015 (``BDA Letter''); Association of 
Institutional INVESTORS, dated April 10, 2015 (``INVESTORS 
Letter''); Bloomberg's Valuation Service, dated April 10, 2015 
(``BVAL Letter''); and the Securities Industry and Financial Markets 
Association, dated April 13, 2015 (``SIFMA Letter'').
---------------------------------------------------------------------------

    As an initial step, prior to issuing Regulatory Notice 15-04, FINRA 
staff solicited industry input from several of its industry advisory 
committees. At this stage, as in the Regulatory Notice, FINRA was 
contemplating expanding dissemination to all remaining Securitized 
Products, including CMOs, CMBSs, and CDOs. FINRA was also considering 
reducing the reporting timeframe for these remaining Securitized 
Products to 15 minutes. The committees were generally supportive. To 
the extent the committees raised concerns, they were focused primarily

[[Page 44071]]

on what an appropriate threshold would be to determine whether 
transactions are subject to immediate or periodic dissemination. At the 
time FINRA raised this proposal with the committees, it was proposing 
immediate dissemination for transactions below a threshold of $1 
million in transaction size, and aggregate periodic reporting for 
transactions greater than $1 million, provided there were at least five 
trade reports in the same security during the applicable reporting 
period. FINRA committed to vetting these proposed thresholds more 
completely through the Regulatory Notice comment process.
    FINRA then published Regulatory Notice 15-04 in February 2015 and 
received five comments in response. Like the industry advisory 
committees, commenters focused primarily on the merits of disseminating 
transaction information for the remaining Securitized Products, as well 
as the thresholds proposed for immediate versus aggregate, periodic 
reporting. Some of the commenters also discussed the elements of the 
proposal that would have reduced the reporting timeframe for the 
remaining Securities Products to 15 minutes.
    Two of the commenters took different views on the merits of 
expanding dissemination to include the remaining Securitized Products. 
The Association of Institutional INVESTORS (``INVESTORS'') strongly 
favored dissemination because ``transparency will be extremely 
beneficial to all market participants and greatly assist in price 
discovery and in decreasing price dispersion.'' \24\ In contrast, the 
Securities Industry and Financial Markets Association (``SIFMA'') 
acknowledged that dissemination may contribute to better price 
formation for additional Securitized Products but expressed its belief 
that dissemination may negatively impact market liquidity. In SIFMA's 
view, liquidity should be prioritized over enhancing price 
discovery.\25\
---------------------------------------------------------------------------

    \24\ INVESTORS Letter at 1.
    \25\ See SIFMA Letter at 1-2.
---------------------------------------------------------------------------

    With respect to the specific items of transaction information FINRA 
proposed in the Regulatory Notice to disseminate, the Financial 
Information Forum (``FIF'') argued that the information disseminated 
for the remaining Securitized Products should align with the 
information disseminated for Asset-Backed Securities. FIF specifically 
recommended suppressing the contra-party indicator and identifying 
transactions that meet the definition of a List or Fixed Offering Price 
Transaction.\26\ SIFMA similarly argued that only secondary trades in 
CMOs should be disseminated, to align dissemination for additional 
Securitized Products with dissemination for corporate and agency debt 
and Asset-Backed Securities. SIFMA also expressed concerns about the 
ability to reverse engineer transactions more easily if last sale price 
and last sale date information were included in the periodic 
reports.\27\
---------------------------------------------------------------------------

    \26\ See FIF Letter at 2. The term ``List or Fixed Price 
Transaction'' is defined in Rule 6710(q) to mean a primary market 
sale transaction sold on the first day of trading of a security, 
including an Asset-Backed Security as defined in paragraph (cc), but 
excluding any other Securitized Product as defined in paragraph (m): 
(i) By a sole underwriter, syndicate manager, syndicate member or 
selling group member at the published or stated list or fixed 
offering price, or (ii) in the case of a primary market sale 
transaction effected pursuant to Securities Act Rule 144A, by an 
initial purchaser, syndicate manager, syndicate member or selling 
group member at the published or stated fixed offering price.
    \27\ See SIFMA Letter at 3.
---------------------------------------------------------------------------

    Four of the commenters disagreed with the $1 million real-time 
dissemination threshold that FINRA proposed in the Regulatory Notice, 
although they took opposing views as to whether the threshold would 
result in too many or too few transactions being subject to real-time 
dissemination. According to INVESTORS, $1 million is too low given that 
the market for Securitized Products is primarily institutional, so 
INVESTORS recommended a $5 million threshold instead.\28\ Another 
commenter, Bloomberg's Valuation Service (``BVAL'') also stated that 
the $1 million threshold is too low to provide relevant pricing 
information to the market, since less than 1% of the market trades 
below $1 million, and the trades that do occur below the threshold 
involve a different buyer base and pricing model.\29\
---------------------------------------------------------------------------

    \28\ See INVESTORS Letter at 2-3.
    \29\ See BVAL Letter at 1.
---------------------------------------------------------------------------

    On the other hand, two of the commenters believed that the proposed 
$1 million threshold was too high. SIFMA stated that the threshold 
should be lowered from $1 million to $100,000 ``to ensure only truly 
retail-sized transactions'' are subject to real-time dissemination. 
According SIFMA, setting the threshold at $1 million would include 
inter-dealer trades as well as retail, and disseminating information on 
both types of transactions could be ``misleading'' to retail investors. 
Additionally, SIFMA expressed its belief that disseminating larger-size 
trades could harm liquidity in an already illiquid marketplace.\30\ The 
Bond Dealers of America (``BDA'') echoed the concern that disseminating 
trades up to $1 million in value could impact market pricing and 
liquidity and impact trading strategies.\31\
---------------------------------------------------------------------------

    \30\ See SIFMA Letter at 2.
    \31\ See BDA Letter at 3.
---------------------------------------------------------------------------

    Three of the commenters provided views on the proposed five 
transaction threshold for the dissemination of aggregate periodic 
reports for larger-size transactions. INVESTORS and BVAL did not 
believe that there should be any minimum number of transactions 
required per reporting period to qualify for dissemination, and that 
such a minimum would restrict the proposal's usefulness.\32\ In 
contrast, SIFMA argued that the five transaction minimum was too low, 
and believed that it should be raised from five to 20, because 
``[l]iquidity in the securitized products markets will be least 
impacted by price dissemination if only truly actively traded CUSIPs 
are captured in the weekly and monthly reports.'' \33\
---------------------------------------------------------------------------

    \32\ See INVESTORS Letter at 2-3 and BVAL Letter at 1.
    \33\ See SIFMA Letter at 2-3. This commenter further asked that 
the proposed aggregate periodic reports not include last price and 
trade date, to minimize the potential for reverse engineering.
---------------------------------------------------------------------------

    One commenter also addressed the proposed reduction of the 
reporting timeframe to 15 minutes for transactions in the remaining 
Securitized Products. BDA expressed concern that a reduced reporting 
timeframe could have a disproportionate impact on smaller dealers and 
may result in these products being traded less by dealers and more by 
banking institutions that do not have to comply with TRACE reporting 
requirements. BDA stated that additional Securitized Products typically 
trade in ``odd lot'' sizes, where liquidity has traditionally been 
provided by small to medium size dealers, who would face ``significant 
challenges'' complying with a 15-minute reporting requirement.\34\
---------------------------------------------------------------------------

    \34\ See BDA Letter at 2-3.
---------------------------------------------------------------------------

    Finally, three of the commenters addressed the element of the 
proposal that would simplify the reporting process for pre-issuance 
CMOs, which in the Regulatory Notice would have required reporting no 
later than two days prior to the first settlement date, with varying 
levels of support. SIFMA strongly supported the change as proposed.\35\ 
BDA expressed support for the proposed change, but recommended that the 
reporting deadline be moved back further, to settlement minus one 
day.\36\ FIF recommended greater relaxation of the reporting timeframe, 
proposing a settlement date deadline, rather than settlement minus two.

[[Page 44072]]

According to FIF, information for pre-issuance CMOs ``is not 
consistently available two days prior to the first settlement date.'' 
\37\
---------------------------------------------------------------------------

    \35\ See SIFMA Letter at 3.
    \36\ See BDA Letter at 4.
    \37\ See FIF Letter at 2.
---------------------------------------------------------------------------

    FINRA carefully considered the committee views and written 
comments. After analyzing this feedback, FINRA believes it is 
appropriate to proceed with the proposal as described and explained 
above in the filing, which has been modified from what FINRA proposed 
in Regulatory Notice 15-04. Based on FINRA's continued study of the 
impact of dissemination on TRACE-Eligible Securities, and Securitized 
Products in particular, in addition to dialogue with a variety of 
market participants and the feedback received on Regulatory Notice 15-
04, FINRA believes the proposed dissemination of transaction 
information for CMOs would be valuable to assist in price discovery, 
determination of execution quality, and, in particular, valuation of 
securities positions. FINRA recognizes, however, that CMOs generally 
are more complex and less fungible than the securities that are 
currently subject to dissemination. As a result, FINRA believes it is 
important to calibrate its proposal to provide for tiered dissemination 
of these products in a way that promotes transparency while minimizing 
potential negative impacts on liquidity. Importantly, while FINRA has 
decided not to expand dissemination to CMBSs and CDOs at this time, 
FINRA believes this proposal is a careful step towards enhanced 
transparency for these remaining Securitized Product types, and that it 
will allow FINRA and market participants to consider how best to 
approach the final phase of dissemination expansion.
    In an effort to further calibrate the proposal to provide 
additional safeguards against the risk of reverse-engineering, FINRA 
modified the minimum security activity threshold first proposed in 
Regulatory Notice 15-04 for periodic reporting. The Regulatory Notice 
proposed to disseminate larger-size transactions ($1 million or more) 
on an aggregate periodic basis provided there were five or more 
transactions in the security during the reporting period. In response 
to the feedback FINRA received, FINRA is now proposing to disseminate 
aggregate periodic reports for larger-size transactions provided there 
are five or more transactions in the security during the reporting 
period, and further that the transactions must be reported by at least 
two different MPIDs. FINRA believes that this modified threshold for 
aggregate periodic reporting will further the interests of transparency 
while being sensitive to the confidentiality of positions or trading 
strategies, particularly in securities that trade in a concentrated 
market made by just one dealer.
    Concerning the specific items of transaction information that FINRA 
would disseminate for CMOs, FINRA has modified the proposal in part to 
reflect the input it received from commenters. Specifically, FINRA will 
remove counterparty information from transactions that are disseminated 
and will also remove the data fields that it proposed in Regulatory 
Notice 15-04 for the periodic reports that would have conveyed last 
sale price, last sale date, customer buy, customer sell, and 
interdealer prices. FINRA believes these modifications are appropriate 
to address commenters' concerns about reverse engineering. FINRA has 
not modified the proposal, however, in response to commenters' 
suggestion to suppress new issue transactions in CMOs. The definition 
of List or Fixed Price Transaction does not apply to CMOs. FINRA 
believes that redefining the term List or Fixed Price Transaction to 
include CMOs would result in a significantly less effective proposal, 
according to input FINRA has received from various market participants.
    Concerning the reporting timeframe for transactions in CMOs 
executed on or after issuance, FINRA modified its proposal to allow for 
60-minute reporting rather than 15-minute reporting. FINRA believes 
this change is appropriate to minimize firms' reporting burdens while 
improving the timeliness in the receipt and dissemination of CMO 
transaction information. FINRA notes that the proposed 60-minute 
timeframe is the same as the reporting requirement for other 
Securitized Products, namely, agency pass-through mortgage-backed 
securities traded to be announced not for good delivery.
    Finally, FINRA has modified its approach to simplifying the 
reporting process for pre-issuance CMOs from what it proposed in its 
Regulatory Notice. As noted above, FINRA understands that in many 
cases, particularly for private label securities, the characteristics 
of a new issue may not be finalized until the first settlement date of 
the securities. As a result, FINRA is no longer proposing a reporting 
deadline two days prior to the first settlement date, but is instead 
proposing that pre-issuance CMO transactions be reported by the first 
settlement date.

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
    (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-2016-023 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-FINRA-2016-023. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549 on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of such

[[Page 44073]]

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-2016-023, and should be submitted on or before July 27, 2016.
---------------------------------------------------------------------------

    \38\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\38\
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-15918 Filed 7-5-16; 8:45 am]
 BILLING CODE 8011-01-P


