
[Federal Register Volume 81, Number 142 (Monday, July 25, 2016)]
[Notices]
[Pages 48465-48475]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-17446]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-78359; File No. SR-FINRA-2016-027]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of a Proposed Rule Change Relating to 
the Reporting of U.S. Treasury Securities to the Trade Reporting and 
Compliance Engine

July 19, 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 July 18, 2016, 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 and 
II 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 expand the Trade Reporting and Compliance 
Engine (``TRACE'') reporting rules to include most secondary market 
transactions in marketable U.S. Treasury securities.
    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
(i) Background
    The market in U.S. Treasury securities--or ``Treasuries'' \3\--is 
the deepest and most liquid government securities market in the 
world.\4\ Treasuries are traded by broker-dealers as well as commercial 
bank dealers and principal trading firms (``PTFs'') that are not 
registered as broker-dealers with the SEC or members of FINRA. There is 
not currently a complete public repository

[[Page 48466]]

or audit trail for information on transactions in Treasuries.\5\
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    \3\ When used throughout this filing, the term ``Treasuries'' 
includes all debt securities issued by the U.S. Department of the 
Treasury, and the term ``U.S. Treasury Securities'' reflects the 
definition of that term in the TRACE Rules, which comprises a 
narrower group of Treasuries. See Rule 6710(p). The term 
``Treasuries'' does not include Treasury futures, and as discussed 
below, the proposed rule change would not apply to transactions in 
Treasury futures.
    \4\ Treasuries--such as bills, notes, and bonds--are debt 
obligations of the U.S. government. Because these debt obligations 
are backed by the ``full faith and credit'' of the government, and 
thus by its ability to raise tax revenues and print currency, 
Treasuries are generally considered the safest of all investments. 
As of April 30, 2016, there was approximately $13.4 trillion 
outstanding of interest-bearing marketable U.S. Treasury debt. See 
U.S. Department of the Treasury, Bureau of the Fiscal Service, 
Monthly Statement of the Public Debt, April 30, 2016, available at 
http://www.treasurydirect.gov/govt/reports/pd/mspd/2016/opds042016.prn. According to data compiled by the Securities 
Industry and Financial Markets Association (``SIFMA''), average 
daily trading volumes by primary dealers in June 2016 was estimated 
at slightly over $512.5 billion. See U.S. Treasury Trading Volume, 
available at http://www.sifma.org/research/statistics.aspx.
    \5\ See Joint Staff Report: The U.S. Treasury Market on October 
15, 2014, at 9 (July 13, 2015) (``JSR''), available at https://www.sec.gov/reportspubs/special-studies/treasury-market-volatility-10-14-2014-joint-report.pdf. (``Several agencies under a range of 
authorities are responsible for regulating various components of the 
Treasury market and its participants.''). Transactions in Treasury 
futures are ultimately reported to the Commodity Futures Trading 
Commission (``CFTC''), which has jurisdiction over futures. See id. 
at 10-12.
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    On October 15, 2014, the market for Treasuries (as well as for 
Treasury futures and other closely-related financial markets) 
experienced an unusually high level of volatility and a rapid round-
trip in prices. In response to the unexplained volatility, an existing 
interagency working group (``IAWG'') led by the U.S. Department of the 
Treasury (``Treasury Dept.'') analyzed both the conditions that 
contributed to the events of October 15 and the structure of the U.S. 
Treasury market more generally.\6\ A detailed joint staff report 
(``JSR''), was issued on July 13, 2015, that included a set of 
preliminary findings on the October 15 volatility, described the 
current state of the U.S. Treasury market, and proposed a series of 
four ``next steps'' in understanding the evolution of the U.S. Treasury 
market.\7\ Included among these ``next steps'' was an assessment of the 
data available to regulators and to the public regarding the cash 
market for Treasuries.\8\
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    \6\ The IAWG consists of representatives of the Treasury Dept., 
the Federal Reserve Board of Governors, the Federal Reserve Bank of 
New York, the SEC, and the CFTC.
    \7\ See JSR, supra note 5, at 7.
    \8\ See JSR, supra note 5, at 6-7, 45-49.
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    Following publication of the JSR, on January 19, 2016, the Treasury 
Dept. published a Request for Information (``RFI'') seeking public 
comment on structural changes in the U.S. Treasury market and their 
implications for market functioning.\9\ One of the RFI's stated intents 
was to develop a holistic view of trading and risk management practices 
in the U.S. Treasury market, particularly in light of the evolution of 
the market resulting from technological advances over the past two 
decades, including the associated growth of high-speed electronic 
trading. The RFI noted that, given this evolution, ``access to timely 
and comprehensive data across related markets is increasingly 
important,'' and the Treasury Dept. is therefore ``interested in the 
most efficient and effective ways for the official sector to obtain 
additional market data and in ways to more effectively monitor diverse 
but related markets.'' \10\ The RFI stated that the Treasury Dept. was 
also interested in ``the potential benefits and costs of additional 
transparency with respect to Treasury market trading activity and 
trading venue policies and practices.'' \11\
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    \9\ The RFI, which was written in consultation with the staffs 
of all of the agencies involved in the JSR, was published in the 
Federal Register on January 22, 2016. See Notice Seeking Public 
Comment on the Evolution of the Treasury Market Structure, 81 FR 
3928 (January 22, 2016) (``RFI Notice'').
    \10\ RFI Notice, supra note 9, at 3929.
    \11\ RFI Notice, supra note 9, at 3929.
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    The RFI included four sections, each of which expanded upon one of 
the four ``next steps'' identified in the JSR, and each section 
included numerous questions for public consideration, ranging from 
broad high-level questions to detailed and specific questions on 
discrete issues. Section I requested comment on the evolution of the 
U.S. Treasury market, the primary drivers of that evolution, and 
implications for market functioning and liquidity. Section II asked for 
information on risk management practices and market conduct across the 
U.S. Treasury market and on implications for operational risks and 
risks to market functioning and integrity. Section III requested 
comment on official sector access to data regarding the cash market for 
Treasuries. Section IV focused on whether dissemination of U.S. 
Treasury market transaction data to the public would be beneficial.
    The comment period on the RFI closed on April 22, 2016, and 52 
comment letters were submitted. As discussed below, approximately 30 of 
the letters addressed reporting to the official sector or public 
dissemination. Following receipt and review of the comment letters, on 
May 16, 2016, the Treasury Dept. and the SEC announced that ``they are 
working together to explore efficient and effective means of collecting 
U.S. Treasury cash market transaction information[, and that as] part 
of those efforts, the agencies are requesting that [FINRA] consider a 
proposal to require its member brokers and dealers to report Treasury 
cash market transactions to a centralized repository.'' \12\ The 
Treasury Dept. noted that it ``will continue working with other 
agencies and authorities to develop a plan for collecting similar data 
from institutions who actively trade U.S. Treasury securities but are 
not FINRA members.'' The proposed rule change is FINRA's proposal to 
require reporting by its members of transactions in U.S. Treasury 
Securities.
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    \12\ Press Release, U.S. Department of the Treasury, Statement 
on Trade Reporting in the U.S. Treasury Market (May 16, 2016), 
available at https://www.treasury.gov/press-center/press-releases/Pages/jl0457.aspx (``Treasury Press Release''). See also Press 
Release, U.S. Securities and Exchange Commission, Statement on Trade 
Reporting in the U.S. Treasury Market (May 16, 2016), available at 
https://www.sec.gov/news/pressrelease/2016-90.html.
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(ii) Proposed Rule Change
    As described below, the proposed rule change would require all 
FINRA members involved in transactions in U.S. Treasury Securities, as 
defined in the TRACE rules, to report most transactions in those 
securities to TRACE.
(A) Scope of Securities
    The TRACE reporting rules apply to ``Reportable TRACE 
Transactions,'' as defined in Rule 6710(c), involving ``TRACE-Eligible 
Securities,'' as defined in Rule 6710(a). Any ``U.S. Treasury 
Security,'' as defined in Rule 6710(p), is currently excluded from the 
definition of TRACE-Eligible Security; consequently, no trading 
activity by FINRA members in U.S. Treasury Securities is required to be 
reported to TRACE. Rule 6710(p) defines ``U.S. Treasury Security'' as 
``a security issued by the U.S. Department of the Treasury to fund the 
operations of the federal government or to retire such outstanding 
securities.''
    FINRA is proposing to amend the TRACE rules to require the 
reporting of transactions in all Treasuries with the exception of 
savings bonds.\13\ To effectuate this requirement, the proposed rule 
change amends the definition of ``TRACE-Eligible Security'' to include 
U.S. Treasury Securities and amends the definition of ``U.S. Treasury 
Security'' to exclude savings bonds. The term ``U.S. Treasury 
Securities'' will therefore include all marketable Treasuries, 
including Treasury bills, notes, and bonds, as well as separate 
principal and interest components of a U.S. Treasury Security that have 
been separated pursuant to the Separate Trading of Registered Interest 
and Principal of Securities (STRIPS) program operated by the Treasury 
Dept.\14\ Because Money Market Instruments are excluded from the

[[Page 48467]]

definition of TRACE-Eligible Security, the proposed rule change also 
amends the definition of ``Money Market Instrument'' to exclude U.S. 
Treasury Securities, including U.S. Treasury bills, which have 
maturities of one year or less, and therefore any U.S. Treasury 
Security, including U.S. Treasury bills, would be TRACE reportable 
under the proposed rule change.\15\
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    \13\ Unlike other Treasuries, savings bonds issued by the 
Treasury Dept. are generally non-transferable and are therefore not 
marketable securities purchased and sold in the secondary market. 
See, e.g., 31 CFR 353.15 (providing that Series EE and Series HH 
``[s]avings bonds are not transferable and are payable only to the 
owners named on the bonds, except as specifically provided in these 
regulations and then only in the manner and to the extent so 
provided''); see also 31 CFR 360.15 (establishing the same transfer 
provisions for Series I savings bonds).
    \14\ The STRIPS program is a program operated by the Treasury 
Dept. under which eligible securities are authorized to be separated 
into principal and interest components and transferred separately. 
See 31 CFR 356.2; see generally 31 CFR 356.31 (providing details on 
how the STRIPS program works).
    \15\ See 31 CFR 356.5(a). Rule 6710(o) defines a ``Money Market 
Instrument'' as ``a debt security that at issuance has a maturity of 
one calendar year or less, or, if a discount note issued by an 
Agency, as defined in paragraph (k), or a Government-Sponsored 
Enterprise, as defined in paragraph (n), a maturity of one calendar 
year and one day or less.''
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(B) Reportable Transactions
    In general, any transaction in a TRACE-Eligible Security is a 
``Reportable TRACE Transaction'' unless the transaction is subject to 
an exemption.\16\ Consequently, unless specifically exempted, the 
proposed rule change would define all transactions in U.S. Treasury 
Securities as ``Reportable TRACE Transactions,'' and therefore subject 
to TRACE reporting requirements. As is currently the case with all 
TRACE reporting obligations, any member that is a ``Party to a 
Transaction'' in a TRACE-Eligible Security is required to report the 
transaction; thus, a reportable transaction in U.S. Treasury Securities 
between two FINRA members must be reported by both members.\17\
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    \16\ For purposes of the trade reporting rules, FINRA considers 
a ``trade'' or a ``transaction'' to entail a change of beneficial 
ownership between parties. See, e.g., Securities Exchange Act 
Release No. 74482 (March 11, 2015), 80 FR 13940, 13941 (March 17, 
2015) (Order Approving SR-FINRA-2014-050) (noting that, in the 
context of TRACE reporting, ``[b]ecause the transaction between the 
member and its non-member affiliate represents a change in 
beneficial ownership between different legal entities, it is a 
reportable transaction and is publicly disseminated under the 
current rule''); Trade Reporting Frequently Asked Questions, Q100.4, 
available at http://www.finra.org/industry/trade-reporting-faq#100 
(defining ``trade'' and ``transaction'' for purposes of the equity 
trade reporting rules as a change in beneficial ownership). For this 
reason, although trading a principal or interest component of a U.S. 
Treasury Security that has been separated under the STRIPS program 
would constitute a Reportable TRACE Transaction, the act of 
separating or reconstituting the components of a U.S. Treasury 
Security under the STRIPS program would not constitute a Reportable 
TRACE Transaction. FINRA is proposing to adopt Supplementary 
Material .05 to Rule 6730 to clarify the reporting obligations in 
this scenario.
    \17\ See Rule 6730(a), (b)(1). The term ``Party to a 
Transaction'' is defined in Rule 6710(e) as ``an introducing broker, 
if any, an executing broker-dealer, or a customer.'' For purposes of 
the definition, the term ``customer'' includes a broker-dealer that 
is not a FINRA member. See Rule 6710(e).
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    Rule 6730(e) currently includes six exemptions from the TRACE trade 
reporting requirements for certain types of transactions. The proposed 
rule change amends Rule 6730(e) to exempt from the reporting 
requirement purchases by a member from the Treasury Dept. as part of an 
auction. All U.S. Treasury Securities reportable to TRACE are offered 
to the public by the Treasury Dept. through an auction process.\18\ 
When-issued trading in these securities, however, which would be 
reportable under the proposed rule change, can begin before the auction 
takes place after the Treasury Dept. announces an auction.\19\
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    \18\ The regulations governing the sale and issuance of these 
Treasuries, as well as the auction process, are set forth in Part 
356 of Title 31 of the Code of Federal Regulations.
    \19\ See Kenneth D. Garbade and Jeffrey F. Ingber, The Treasury 
Auction Process: Objectives, Structure, and Recent Adaptations, 11 
Current Issues in Econ. & Fin., Feb. 2005, at 2, available at 
https://www.newyorkfed.org/research/current_issues/ci11-2.html.
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    The proposed rule change includes three new definitions for 
``Auction,'' ``Auction Transaction,'' and ``When-Issued Transaction'' 
to address members' reporting obligations involving when-issued trading 
activity and purchases directly from the Treasury Dept. as part of an 
auction. The proposed rule change amends Rule 6730(e) to exempt an 
``Auction Transaction,'' defined as the purchase of a U.S. Treasury 
Security in an Auction,\20\ from the TRACE reporting requirements. 
FINRA is proposing to exempt Auction Transactions from the reporting 
requirements because this transaction data is already maintained by the 
Treasury Dept. as part of the auction process and is readily accessible 
to regulators; therefore, reporting these transactions to TRACE would 
be duplicative and provide limited additional benefit to regulators. 
When-issued transactions, however, are not currently reported to the 
Treasury Dept., and the proposed rule change would require members to 
report ``When-Issued Transactions,'' defined as ``a transaction in a 
U.S. Treasury Security that is executed before the Auction for the 
security.''
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    \20\ The proposed rule change defines an ``Auction'' as ``the 
bidding process by which the U.S. Department of the Treasury sells 
marketable securities to the public pursuant to part 356 of Title 31 
of the Code of Federal Regulations.'' See 31 CFR 356.2.
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    The proposed rule change also amends the list of exempted 
transactions in Rule 6730(e) to codify a long-standing interpretation 
for all TRACE-Eligible Securities that repurchase and reverse 
repurchase transactions are not reportable to TRACE.\21\ Although 
repurchase and reverse repurchase transactions are structured as 
purchases and sales, the transfer of securities effectuated as part of 
these transactions is not made as the result of an investment decision 
but, rather, is more akin to serving as collateral pledged as part of a 
secured financing. Consequently, repurchase and reverse repurchase 
transactions are economically equivalent to financings, and the pricing 
components of these transactions are typically not the market value of 
the securities. For these reasons, historically, FINRA has taken the 
position that repurchase and reverse repurchase transactions should not 
be reported to TRACE and is proposing to codify this exemption as part 
of the proposed rule change.
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    \21\ See Reporting of Corporate and Agencies Debt Frequently 
Asked Questions, Question 4.6, available at http://www.finra.org/industry/faq-reporting-corporate-and-agencies-debt-frequently-asked-questions-faq.
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    The proposed rule change would require Reportable TRACE 
Transactions in U.S. Treasury Securities generally to be reported on 
the same day as the transaction on an end-of-day basis. Because FINRA 
is not currently proposing to disseminate any trade-level information 
to the public regarding transactions in U.S. Treasury Securities, the 
proposed rule change generally imposes a same-day reporting requirement 
as opposed to a more immediate requirement, such as 15 minutes. Under 
the proposed amendments to Rule 6730, Reportable TRACE Transactions in 
U.S. Treasury Securities executed on a business day at or after 
12:00:00 a.m. Eastern Time through 5:00:00 p.m. Eastern Time must be 
reported the same day during TRACE System Hours.\22\ Transactions 
executed on a business day after 5:00:00 p.m. Eastern Time but before 
the TRACE system closes must be reported no later than the next 
business day (T+1) during TRACE System Hours, and, if reported on T+1, 
designated ``as/of'' and include the date of execution. 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) during TRACE System Hours, 
designated ``as/of,'' and include the date of execution.
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    \22\ TRACE System Hours are currently 8:00:00 a.m. Eastern Time 
through 6:29:59 p.m. Eastern Time on a business day. See Rule 
6710(t).
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(C) Reportable Transaction Information
    Rule 6730(c) lists the following transaction information that must 
be

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reported to TRACE for each Reportable TRACE Transaction:
    (1) CUSIP number or, if a CUSIP number is not available at the Time 
of Execution, a similar numeric identifier or a FINRA symbol;
    (2) The size (volume) of the transaction, as required by Rule 
6730(d)(2);
    (3) Price of the transaction (or the elements necessary to 
calculate price, which are contract amount and accrued interest) as 
required by Rule 6730(d)(1);
    (4) A symbol indicating whether the transaction is a buy or a sell;
    (5) Date of Trade Execution (for ``as/of'' trades only);
    (6) Contra-party's identifier (MPID, customer, or a non-member 
affiliate, as applicable);
    (7) Capacity--Principal or Agent (with riskless principal reported 
as principal);
    (8) Time of Execution;
    (9) Reporting side executing broker as ``give-up'' (if any);
    (10) Contra side Introducing Broker in case of ``give-up'' trade;
    (11) The commission (total dollar amount);
    (12) Date of settlement; and
    (13) Such trade modifiers as required by either the TRACE rules or 
the TRACE users guide.
    The proposed rule change would generally apply the existing 
information requirements for Reportable TRACE Transactions to trade 
reports in Reportable TRACE Transactions in U.S. Treasury Securities; 
however, FINRA is proposing several amendments to Rule 6730 to clarify 
how some of this information would be reported if the transaction 
involves a U.S. Treasury Security. First, the proposed rule change 
amends Rule 6730 to clarify that, because when-issued trading is based 
on yield rather than on price as a percentage of face or par value, 
members should report the yield in lieu of the price when the 
transaction is a When-Issued Transaction, as defined in the TRACE 
rules. The proposed amendments also make clear that, as is the case 
whenever price is reported for a transaction executed on a principal 
basis, the yield reported by a member for a When-Issued Transaction 
must include any mark-up or mark-down. If the member, however, is 
acting in an agency capacity, the total dollar amount of any commission 
must be reported separately.
    Second, the proposed rule change would require reporting of a more 
precise time of execution for transactions in U.S. Treasury Securities 
that are executed electronically. A significant portion of the trading 
activity in the U.S. Treasury cash market is conducted on electronic 
platforms. As noted in the RFI, inter-dealer trading in the cash market 
increasingly makes use of electronic platforms operated by inter-dealer 
brokers, and ``a significant portion of trading in the dealer-to-
customer market occurs on platforms that facilitate the matching of buy 
and sell orders primarily through request for quote (``RFQ'') 
systems.'' \23\ Because many of these electronic platforms capture 
timestamps in sub-second time increments, FINRA is proposing new 
Supplementary Material .04 to Rule 6730 that would require that, when 
reporting transactions in U.S. Treasury Securities executed 
electronically, members report the time of execution to the finest 
increment of time captured in the member's system (e.g., milliseconds 
or microseconds) but, at a minimum, in increments of seconds. FINRA is 
not requiring members to update their systems to comply with a finer 
time increment; rather, the proposed rule change would simply require 
members to report the time of execution to TRACE in the same time 
increment the member's system captures.\24\
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    \23\ RFI Notice, supra note 9, at 3928.
    \24\ FINRA rules governing trade reporting of equity securities 
currently require members to report time to the millisecond if the 
member captures time to that level of granularity. See Rule 6380A, 
Supplementary Material .04; Rule 6380B, Supplementary Material .04; 
Rule 6622, Supplementary Material .04; see also Regulatory Notice 
14-21 (May 2014).
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    Finally, FINRA is proposing a new trade indicator and two new trade 
modifiers that reflect unique attributes of the U.S. Treasury cash 
market. The proposed rule change would establish a new trade indicator 
for any Reportable TRACE Transaction in a U.S. Treasury Security that 
meets the definition of ``When-Issued Transaction.'' Such an indicator 
is necessary so that FINRA can readily determine whether price is being 
reported on the transaction based on a percentage of face or par value 
or whether, as required for When-Issued Transactions, the member is 
reporting the yield. The indicator would also be used to validate 
trades in a U.S. Treasury Security that are reported with an execution 
date before the auction for the security has taken place.
    In addition to the new indicator, the proposed rule change would 
require the use of two new modifiers when applicable to reported 
transactions. Because individual transactions in U.S. Treasury 
Securities are often executed as part of larger trading strategies, 
individual transactions undertaken as part of these strategies can 
often be priced away from the current market for legitimate reasons. 
FINRA is proposing two new modifiers to indicate particular 
transactions that are part of larger trading strategies. First, the 
proposed rule change would require that members append a ``.B'' 
modifier to a trade report if the transaction being reported is part of 
a series of transactions where at least one of the transactions 
involves a futures contract (e.g., a ``basis'' trade). Second, the 
proposed rule change would require that members append an ``.S'' 
modifier to a trade report if the transaction being reported is part of 
a series of transactions where at least one of the transactions is 
executed at a pre-determined fixed price or would otherwise result in 
the transaction being executed away from the current market (e.g., a 
fixed price transaction in an ``on-the-run'' security as part of a 
transaction in an ``off-the-run'' security). These modifiers would 
allow FINRA to better understand and evaluate execution prices for 
specific transactions in U.S. Treasury Securities that may otherwise 
appear aberrant because they are significantly outside of the price 
range for that security at that time. Among other things, FINRA 
believes that these modifiers could reduce the number of false positive 
results that could be generated through automated surveillance patterns 
that include the price as part of the pattern.
(D) Other Amendments
    The proposed rule change amends Rule 6750 regarding the 
dissemination of transaction information reported to TRACE. As 
indicated by numerous commenters to the RFI, there is substantial 
disagreement as to the potential benefits of public dissemination of 
information on transactions in U.S. Treasury Securities. Many 
commenters expressed concerns about public dissemination of these 
transactions, and these concerns are heightened when some, but not all, 
market participants are reporting transactions. Consequently, at this 
time, FINRA is not proposing to disseminate information on transactions 
in U.S. Treasury Securities, and the proposed rule change amends Rule 
6750(b) to add transactions in U.S. Treasury Securities to the list of 
transactions for which information will not be disseminated.
    The proposed rule change also amends two fee provisions in the 
FINRA rules to reflect the fact that, initially, FINRA will not be 
charging transaction-level fees on transactions in U.S. Treasury 
Securities reported to TRACE. First, the proposed rule change amends 
Section 1(b)(2) of Schedule A to the FINRA By-Laws to exclude 
transactions in U.S. Treasury Securities from the Trading Activity Fee 
(``TAF''). Second,

[[Page 48469]]

the proposed rule change amends Rule 7730 to exclude transactions in 
U.S. Treasury Securities from the TRACE transaction reporting fees. 
However, because FINRA will incur costs to expand the TRACE system and 
to enhance its examination and surveillance efforts to monitor its 
members' trading activity in U.S. Treasury Securities, it is 
considering the appropriate long-term funding approach for the program 
and will analyze potential fee structures once it has more data 
relating to the size and volume of U.S. Treasury Security reporting.
    Finally, the proposed rule change amends Rule 0150 to add the FINRA 
Rule 6700 Series to the list of FINRA rules that apply to ``exempted 
securities,'' except municipal securities.
    If the Commission approves the proposed rule change, FINRA will 
announce the effective date of the proposed rule change in a Regulatory 
Notice to be published no later than 90 days following Commission 
approval. The effective date will be no later than 365 days following 
Commission approval.\25\ FINRA understands that providing sufficient 
lead-time between the publication of technical specification and the 
implementation date is critical to firms' ability to meet the announced 
implementation date; FINRA will work to publish technical 
specifications as soon as possible after SEC approval of the proposed 
rule change.
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    \25\ FINRA anticipates staggering the implementation dates so 
that the general reporting requirement is implemented before members 
are required to include the trade modifiers described above. 
Specific implementation dates will be announced in the Regulatory 
Notice.
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2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\26\ which requires, among 
other things, that FINRA rules must be designed to prevent fraudulent 
and manipulative acts and practices, to promote just and equitable 
principles of trade, and, in general, to protect investors and the 
public interest. Prior to 1993, Section 15A(f) of the Act imposed 
limitations on a registered security association's ability to adopt 
rules applicable to transactions in exempted securities; \27\ however, 
the Government Securities Act Amendments of 1993 (``GSAA'') eliminated 
these statutory limitations.\28\ FINRA also believes that the proposed 
rule change is consistent with the provisions of Section 15A(b)(9) of 
the Act,\29\ which requires that FINRA rules not impose any burden on 
competition that is not necessary or appropriate. FINRA believes that 
the proposed rule change creates an effective structure for FINRA 
members to report transactions in U.S. Treasury Securities so that 
transaction information is available to regulators. FINRA believes the 
proposed reporting requirements will significantly enhance its, and 
other regulators', ability to review transactions in U.S. Treasury 
Securities to identify trading activity that may violate applicable 
laws or regulations. FINRA believes that leveraging the existing TRACE 
structure and reporting model will reduce the burdens on firms to 
comply with the new reporting obligations, thus making the 
implementation more efficient.
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    \26\ 15 U.S.C. 78o-3(b)(6).
    \27\ Before 1986, Section 15A(f) of the Act provided that 
``[n]othing in this section shall be construed to apply with respect 
to any transaction by a broker or dealer in any exempted security.'' 
See 15 U.S.C. 78o-3 (historical notes). In 1986, the Government 
Securities Act of 1986 (``GSA'') established a federal system for 
the regulation of brokers and dealers who transact business in 
government securities and certain other exempted securities. See 
Government Securities Act of 1986, Public Law 99-571, 100 Stat. 3208 
(1986). The GSA, among other things, amended Section 15A(f) to 
provide that, ``[e]xcept as provided in paragraph (2) of this 
subsection, nothing in this section shall be construed to apply with 
respect to any transaction by a registered broker or dealer in any 
exempted security.'' See Government Securities Act of 1986, Public 
Law 99-571, 102(g)(1), 100 Stat. 3208 (1986). Paragraph (f)(2), 
which was added by the GSA, provided that a registered securities 
association could adopt and implement rules with respect to exempted 
securities to (1) enforce members' compliance with the relevant 
provisions of the Act and rules and regulations thereunder, (2) 
adequately discipline its members, (3) inspect members' books and 
records, and (4) prohibit fraudulent, misleading, deceptive and 
false advertising. Id.
    \28\ See Government Securities Act Amendments of 1993, Public 
Law 103-202, Sec.  106(b)(1), 107 Stat. 2344 (1993). See also NASD 
Notice to Members 96-66 (October 1996); Securities Exchange Act 
Release No. 37588 (August 20, 1996), 61 FR 44100 (August 27, 1996) 
(Order Approving File No. SR-NASD-95-39). Although the GSAA also 
included a provision explicitly prohibiting the SEC from adopting 
regular reporting requirements, the GSAA included no such 
prohibition on FINRA. See Government Securities Act Amendments of 
1993, Public Law 103-202, 103(a), 107 Stat. 2344 (1993).
    \29\ 15 U.S.C. 78o-3(b)(9).
---------------------------------------------------------------------------

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.
Economic Impact Assessment
(a) Need for the Rule
    As discussed above, the official sector does not currently receive 
any regular reporting of Treasury cash market transactions following 
auction. There is no central database reflecting the trading activities 
in the market of Treasuries. Recent events such as the anomalous price 
behavior of October 15, 2014 have showcased the need for a thorough 
review of the market structure by the official sector. The data 
collected under the proposed rule change will enable FINRA to enhance 
monitoring and enforcement of best execution and other broker-dealer 
obligations regarding transactions in Treasuries. The data will also be 
necessary for the official sector to conduct comprehensive market 
surveillance for Treasuries. As summarized by the RFI: ``The need for 
more comprehensive official sector access to data, particularly with 
respect to U.S. Treasury cash market activity, is clear.'' \30\
---------------------------------------------------------------------------

    \30\ RFI Notice, supra note 9, at 3931.
---------------------------------------------------------------------------

(b) Economic Baseline
    The proposed rule change would impose reporting requirements on 
Treasury cash market participants that are FINRA members, extending 
with some modification the TRACE reporting requirements to transactions 
in U.S. Treasury Securities.\31\ The current Treasury cash market 
structure serves as an economic baseline to assess the potential 
impacts on FINRA members, non-FINRA members, trading venues and 
investors. In an effort to rely to the extent possible on empirical 
evidence, much of the description of current activities relies on 
public evidence, primarily collected by regulators for a period 
preceding and including the October 15, 2014 event. This information 
is, in some cases, more than two years old and may not reflect current 
practices. These data are supplemented by discussions with a wide range 
of market participants.
---------------------------------------------------------------------------

    \31\ TRACE currently covers corporate debt securities, agency 
debentures, asset- and mortgage-backed securities.
---------------------------------------------------------------------------

(i) Overview of Treasury Cash Market
    Broadly, the secondary markets for Treasuries can be categorized 
into two segments: Cash and futures. The Treasury cash market has been 
bifurcated between the inter-dealer market, in which dealers trade with 
one another, and the dealer-to-customer market, where customers may 
include asset managers, pension funds, insurance companies, and 
corporations.\32\ The daily trading volume in the U.S. Treasury cash 
market was estimated to be $510 billion for the first two weeks of 
April 2014 and $1,214 billion on October 15, 2014,

[[Page 48470]]

when trading volume reached a record high.\33\ The inter-dealer market 
accounted for approximately 45% of the trading volume for the first two 
weeks of April 2014 and 53% for October 15, 2014.\34\ Traders in the 
cash market seek to establish positions as an investment and an 
effective hedge for other positions. Trading in the cash market also 
reflects short term funding activities, in the form of repurchase 
agreements. Trading strategies may also include simultaneous trades of 
different cash Treasury securities or cash and futures in order to 
hedge interest rate risk or arbitrage away small pricing discrepancies.
---------------------------------------------------------------------------

    \32\ As discussed further below, firms in the inter-dealer 
market can be grouped into several broad categories: Bank dealer, 
non-bank dealer, hedge fund, asset manager, and PTFs. They may or 
may not be FINRA members. See JSR, supra note 5, at 12.
    \33\ See Federal Reserve Bank of New York, Michael Fleming, 
Frank Keane and Ernst Schaumburg, Primary Dealer Participation in 
the Secondary U.S. Treasury Market, Liberty Street Economics, 
February 12, 2016 (``Primary Dealer Participation'') available at 
http://libertystreeteconomics.newyorkfed.org/2016/02/primary-dealer-participation-in-the-secondary-us-treasury-market.html#.V4hpXvkrJD8.
    \34\ Id.
---------------------------------------------------------------------------

    The inter-dealer market is dominated by automated trading, 
sometimes in large volumes and at high speed. The primary locations for 
price discovery in the Treasury cash market are the electronic trading 
platforms BrokerTec and eSpeed, which utilize a central limit order 
book (``CLOB'') protocol.\35\ These platforms are operated by broker-
dealers or affiliates of broker-dealers that are registered with the 
SEC and are FINRA members. In the inter-dealer market, the majority of 
trading occurs in the most recently issued Treasuries, known as ``on-
the-run'' securities. While on-the-runs are the most actively traded 
Treasuries, likely accounting for more than half of total daily trading 
volumes, they make up less than 5% of outstanding marketable 
Treasuries.\36\
---------------------------------------------------------------------------

    \35\ RFI Notice, supra note 9, at 3929.
    \36\ Chris Cameron, James Clark and Gabriel Mann, Examining 
Liquidity in On-the-Run and Off-the-Run Treasury Securities, 
Treasury Notes (blog) (May 20, 2016), available at https://www.treasury.gov/connect/blog/Pages/Examining-Liquidity-in-On-the-Run-and-Off-the-Run-Treasury-Securities.aspx.
---------------------------------------------------------------------------

    The dealer-to-customer market has less visibility to regulators and 
many market participants. In contrast to the inter-dealer market, a 
significant portion of trading in the dealer-to-customer market occurs 
on platforms that facilitate the matching of buy and sell orders 
primarily through request for quote (``RFQ'') systems. These platforms 
are increasingly electronic, but are generally not conducive to high 
frequency trading strategies.\37\ The major RFQ platforms for 
Treasuries are TradeWeb and Bloomberg.\38\ Much of the dealer-to-
customer activity still takes place over the phone (voice). An ad hoc 
survey of trading activity of the largest dealers, estimated to 
represent more than half of overall dealer-to-customer activity, 
revealed that voice trading remains an important protocol for executing 
customer trades.\39\ An estimated 62% of this dealer-to-customer 
trading volume still takes place over the phone on normal trading days, 
with the remaining 38% occurring via RFQ systems.\40\ The dealer-to-
customer market serves an important role in liquidity provision for 
older, ``off-the-run'' issues and other less liquid securities. For 
example, the average daily trading volume on TradeWeb and Bloomberg was 
estimated to be $22 billion for on-the-runs and $25 billion for off-
the-runs during April 2-17, 2014.\41\
---------------------------------------------------------------------------

    \37\ RFI Notice, supra note 9, at 3928.
    \38\ See Federal Reserve Bank of New York, Ernst Schaumburg, A 
Preliminary Look at Dealer-to-Customer Markets on October 15, 2014, 
presented at the conference of the Evolving Structure of the U.S. 
Treasury Market (October 20-21, 2015) (``Preliminary Look'') 
available at https://www.newyorkfed.org/medialibrary/media/newsevents/events/markets/2015/October-15-Dealer-to-Customer-Analysis.pdf.
    \39\ See Primary Dealer Participation, supra note 33.
    \40\ See Primary Dealer Participation, supra note 33.
    \41\ See Preliminary Look, supra note 38.
---------------------------------------------------------------------------

(ii) Treasury Cash Market Participants
    As reported by the JSR, participants of the inter-dealer market can 
be grouped into several broad categories based on their business model 
and corporate structure: Bank-dealer, non-bank dealer, hedge fund, 
asset manager, and PTFs.\42\ PTFs are increasingly prevalent and now 
account for the majority of trading and standing quotes in the order 
book of the inter-dealer cash market.\43\ By contrast, bank-dealers 
still account for a majority of secondary cash market trading overall 
(when including dealer-to-customer trading), but they constitute well 
under half of the trading and quoting activity in the inter-dealer cash 
market.\44\ For example, in the inter-dealer market on October 15, 
2014, PTFs accounted for more than 50% of the total trading volume 
across various maturities in the cash market, while bank-dealers 
accounted for roughly 30 to 40% of volume in the cash market.\45\
---------------------------------------------------------------------------

    \42\ See JSR, supra note 5, at 12. When referring to findings 
from the JSR or other source material citing to the JSR, this filing 
relies on the entity definitions in the JSR. In its description of 
market participants, the JSR does not attempt to separate FINRA-
member broker-dealers from other participants. Bank-dealers include 
FINRA members, their affiliates and dealers supervised by federal or 
state banking regulators. Elsewhere, this filing refers to FINRA-
member broker dealers as firms, FINRA members or broker-dealers and 
other dealers as bank-regulated dealers.
    \43\ See James Clark and Gabriel Mann, A Deeper Look at 
Liquidity Conditions in the Treasury Market, Treasury Notes (blog) 
(May 6, 2016), available at https://www.treasury.gov/connect/blog/Pages/A-Deeper-Look-at-Liquidity-Conditions-in-the-Treasury-Market.aspx.
    \44\ Id. The article cites the JSR and does not attempt to 
separate FINRA members from dealers supervised by federal or state 
banking regulators.
    \45\ See JSR, supra note 5, at 21.
---------------------------------------------------------------------------

    When asked, market participants offer a wide range of estimates of 
the percentage of cash market activities conducted by FINRA members in 
the Treasury market. These estimates range from 25%-65% of the dollar 
volume, with most participants indicating that broker-dealers remain 
particularly active in on-the-run trading.
    While bank-dealers may account for a minority share of trading 
volume in the inter-dealer market, they trade significant volume 
directly with their customers. The Federal Reserve Bank of New York 
designated 23 primary dealers to serve as trading counterparties in its 
implementation of monetary policy.\46\ These primary dealers are 
included in the bank-dealer category of the JSR. Data reported to the 
Federal Reserve Bank of New York by the primary dealers show that over 
the first three quarters of 2015, average daily activity of these 
dealers in the dealer-to-customer market was $292 billion.\47\ Out of 
the 23 primary dealers, 21 are broker-dealer FINRA members and would be 
subject to the proposed reporting requirements. FINRA understands that 
bank holding companies that also include a broker-dealer affiliate 
typically conduct the majority of the trading through the broker-
dealer. The bank-regulated dealer's activities are typically limited to 
investment for its own portfolios or for hedging purposes. In addition, 
the broker-dealer affiliate may enter repurchase agreement transactions 
with the bank-regulated dealer, and the bank-regulated dealer then 
reverses the Treasuries out to its customers.
---------------------------------------------------------------------------

    \46\ See Federal Reserve Bank of New York, Primary Dealers List, 
available at https://www.newyorkfed.org/markets/pridealers_current.html.
    \47\ See Primary Dealer Participation, supra note 33.
---------------------------------------------------------------------------

    To assess the potential impact of the proposed rule change, it may 
also be useful to examine the proportion of government securities 
brokers (``GSBs'') or government securities dealers (``GSDs'') that 
would be subject to the proposed reporting requirements. GSBs and GSDs 
are designations used by FINRA and bank regulators for regulated 
entities acting as brokers or dealers in the government securities 
markets. Approximately 1,260 FINRA members identified themselves as 
GSBs or GSDs

[[Page 48471]]

on Form BD.\48\ FINRA understands that there are at least 23 non-FINRA 
members that registered as GSDs with their respective federal banking 
regulators. These entities are regulated by the Office of the 
Comptroller of the Currency (19 firms), the Federal Reserve (three 
firms), or the Federal Deposit Insurance Corporation (one firm).
---------------------------------------------------------------------------

    \48\ General-purpose broker-dealers that conduct a government 
securities business must note this activity on their Form BD if it 
accounts for at least 1% of annual revenue from the securities or 
investment advisory business. It is possible that some broker-
dealers trade government securities in small sizes without self-
identifying as GSBs or GSDs.
---------------------------------------------------------------------------

(c) Economic Impacts
(i) Benefits
    The primary benefits from the proposed rule change arise from 
better monitoring of the Treasuries markets and participants by 
regulators. As discussed above, the primary locations for price 
discovery in the Treasury cash market are FINRA members, and 
transactions on those platforms would be subject to the proposed 
reporting requirements. Therefore, the proposed data collection is 
expected to capture a significant portion of transactions in the inter-
dealer Treasury cash market. Further, since 21 of the 23 primary 
dealers are FINRA members, the data collection will shed light on the 
less transparent dealer-to-customer market and the trading of less 
liquid off-the-run securities. The data will improve the official 
sector's general monitoring and surveillance capabilities, including 
those designed to detect disruptive trading practices or risks to 
market stability. The proposed rule change will assist in the analysis 
of specific market events or trends, and provide regulators with the 
data to better evaluate how policy decisions may be expected to impact 
the market. Collectively, these should strengthen the Treasury cash 
market microstructure, reduce manipulative activities, and enhance 
investor protection. Moreover, the proposed data collection will permit 
FINRA to better monitor for compliance with its own rules. FINRA 
believes that using the existing TRACE reporting infrastructure is an 
efficient and cost effective mechanism to collect the data.
(ii) Potential Direct Costs
    FINRA understands that the proposed rule change is associated with 
potential direct and indirect costs. Direct costs would be born 
primarily by FINRA-member firms with new reporting obligations or the 
clearing firms or other service providers who would report on their 
behalf.
    The technical and operational costs associated with reporting 
Treasury cash market transactions are likely to vary across firms. For 
FINRA-member firms that are already reporting to TRACE, the costs 
associated with reporting U.S. Treasury Security transactions may be 
more limited. Within FINRA members that would be required to report 
Treasury cash market transactions, some are already reporting 
transactions in TRACE-Eligible Securities. These firms may be able to 
use or otherwise leverage the TRACE infrastructure and the associated 
compliance framework for U.S. Treasury Securities and reduce costs 
associated with the proposed rule change. For example, out of the FINRA 
members that identified themselves as GSBs or GSDs on Form BD, more 
than 70% had TRACE reporting activities between June 2015 and May 2016. 
Based on conversations with market participants, some current TRACE 
reporters will have much higher volume of reported transactions.
    Based on the review of TRACE reporting for the year June 2015 
through May 2016, FINRA identified 338 FINRA-member firms registered as 
GSBs or GSDs with no reported TRACE transactions. FINRA does not have 
any data to measure the extent of these firms' activities in the 
Treasury market today. For these firms that are active in the Treasury 
cash market but currently not subject to TRACE reporting requirements, 
the costs may be more significant as the firms will need to develop new 
reporting systems or enter into agreements with third parties to report 
and to develop and maintain regulatory compliance programs with respect 
to the new reporting requirements.
    The larger inter-dealer platforms have indicated to FINRA that the 
operational challenges with collecting and delivering trade reporting 
may be material but not unduly large. A potential challenge for some 
platforms may be to update and maintain counterparty identification 
systems to meet the reporting requirements.
    For introducing firms, FINRA understands that clearing firms and 
service providers will be able to offer regulatory reporting in U.S. 
Treasury Securities as they do currently for TRACE-Eligible Securities. 
Introducing firms may need to enhance their systems to provide the 
additional information necessary to complete a trade report. FINRA 
understands that these firms will also incur additional service costs, 
typically based on the trade volume reported on their behalf.
    The new modifiers may introduce additional complexity to the 
proposed reporting, as traders at FINRA-member firms must apply the 
modifiers correctly and consistently to ensure meaningful data 
collection. Larger firms indicated that Treasuries are typically traded 
across many desks within the firm and this increases compliance costs 
because the new modifiers need to be identified by individual traders, 
as they are uniquely situated to know whether a specific trade is 
associated with a cross-instrument strategy that would require the 
modifier. Some firms also suggested that it may be difficult for a 
trader to know at the time of a trade whether it is part of a cross-
instrument strategy, thus increasing complexity and their regulatory 
risk. Moreover, some firms indicated to FINRA that the costs associated 
with the expansion of current systems to accommodate the proposed new 
trade indicator and modifiers may be substantial. FINRA notes that it 
plans to phase in the modifiers to simplify the immediate 
implementation of the proposed rule change and provide firms additional 
time to make the necessary changes to implement the new modifiers.
    Based on conversations with market participants, another potential 
challenge for some firms is to update their systems to meet the 
requirement that the yield reported by a member for a When-Issued 
Transaction must include any mark-up or mark-down. FINRA understands 
that there may be differences in current practices as to whether mark-
ups and mark-downs are captured at the time of a When-Issued 
Transaction. Those firms that do not currently capture this information 
will incur additional costs in meeting this condition of the proposed 
rule.
    Finally, all FINRA-member firms subject to the proposed rule change 
would need to establish policies and procedures and monitor ongoing 
reporting activities to ensure compliance with the reporting 
requirements.
    The proposed rule change does not contemplate any direct 
assessments to firms reporting U.S. Treasury Security transactions to 
TRACE, as is required for other TRACE reportable events. But FINRA 
notes that it may seek to collect transaction or other forms of fees 
from reporting firms in the future, subject to a separate rule filing 
with the SEC.
(iii) Potential Indirect Costs
    FINRA has identified several sources of potential indirect costs. 
Although the data collection is expected to capture a significant 
portion of the Treasury cash market, not all participants in this 
market are FINRA members, and this fact may impact the proposed rule

[[Page 48472]]

change in different ways. First, the official sector may not be able to 
obtain a complete picture of Treasury cash market activities, thereby 
potentially limiting the benefits of the proposed rule change. 
Specifically, the proposed rule change only requires that FINRA-member 
firms be identified uniquely in the trade report. Thus, regulators 
would not be able to assign trading activity directly or uniquely to 
other market participants or reasonably estimate positions in 
government securities to those firms. This impediment may be mitigated 
by the authorities of regulators, particularly bank regulators, to 
monitor the activities of market participants under their immediate 
jurisdictions. But, FINRA notes that some PTFs and hedge funds do not 
have a primary prudential regulator, although regulators can gather 
identity and trading information of PTFs and hedge funds directly from 
the market participants under their jurisdiction.
    Second, the proposed reporting requirements may create competitive 
disadvantage for FINRA members. This disadvantage may arise in several 
related contexts. First, the proposed rule change would impose 
operational and compliance costs avoided by some competitors. Second, 
regulators will have a greater ability to monitor the Treasury cash 
market activity of those firms uniquely identified in TRACE reporting. 
These firms' Treasury trading may face higher regulatory scrutiny than 
firms not so identified or lacking a primary prudential regulator. 
These firms may incur greater costs in responding to regulators' 
inquiries and other compliance-related activities. Firms reporting to 
TRACE might also find that dealers that are not required to report 
their transactions in U.S. Treasury Securities may try to leverage the 
lack of reporting as a competitive advantage with customers. Customers 
may migrate their business from FINRA-member firms to other dealers if 
they believe there is value to avoiding surveillance. Further, even 
FINRA-member firms may seek to migrate their government securities 
business to affiliates that are not FINRA members if they determine 
there is a net benefit to do so.
    However, as noted above, the Treasury Dept. stated that it would 
develop a plan for collecting similar data from non-FINRA members 
active in the Treasury cash market. In addition, FINRA understands from 
market participants that these competitive impacts are likely small. 
For instance, market participants do not generally believe that 
regulatory reporting, by itself, would lead non-reporters to shift 
inter-dealer trading out of the large inter-dealer platforms in order 
to avoid reporting. The access to deep liquidity and the ability to 
transact when desired are deemed to be more valuable than the gain from 
anonymity.
    The proposed rule change may also have other indirect impacts on 
the Treasury cash market. If the reporting costs are significant, they 
potentially may raise barriers to entry and reduce participation of 
FINRA members in the Treasury cash market. The depth of the ``on the 
run'' Treasury market, in particular, suggests that dealers face low 
margins in these securities, and any material additional regulatory 
costs may be a more significant impediment where the firm does not have 
extensive activity in Treasuries or can mutualize the regulatory costs 
through a third party provider. Moreover, depending on the 
competitiveness of the Treasury cash market, some FINRA-member firms 
may transfer the costs to customers and thereby increase transaction 
costs.
(d) Alternatives Considered
    FINRA evaluated various options around implementing reporting as 
proposed. FINRA reviewed its existing reporting facilities as well as 
alternative options such as periodic batch-reporting and file 
submissions.
    Given the intended coverage, FINRA determined that TRACE provided 
the most efficient and cost effective way of implementing the 
requirement for several reasons. First, the reporting structure that 
has been developed and implemented for other fixed income securities 
can be extended to U.S. Treasury Securities with minor modifications. 
Second, the infrastructure supporting TRACE is already in use by a 
significant portion of FINRA members affected by the proposal such that 
these members have connectivity established and currently report to the 
facility. In addition to the transaction reporting infrastructure 
itself, FINRA as well as member firms have developed supporting 
processes around the TRACE facility that can be leveraged, such as 
monitoring tools, compliance processes, and alerts.
    Among other alternatives, FINRA considered other existing FINRA 
trade reporting facilities, including the OTC Reporting Facility and 
the Alternative Display Facility, that support transaction reporting 
for equity securities and concluded these facilities were not suitable 
for reporting of transactions in U.S. Treasury Securities and that 
TRACE, with its existing reporting protocols and framework, was 
preferable. FINRA also considered developing an alternative processes 
of collecting the information (such as batch file submissions); 
however, such a process would require creation and maintenance of an 
additional, parallel infrastructure by all affected firms as well as 
FINRA, providing for a costlier implementation and ongoing support. 
Some firms may find it more cost effective to report trades singularly 
throughout the day, while others may prefer providing trade reports at 
fixed intervals, allowing firms sufficient time to ensure the accuracy 
of the transaction information prior to submitting the information to 
FINRA. FINRA notes that much of the benefits of batch-reporting can be 
achieved by providing an end-of-day reporting timeframe.
    The existing TRACE reporting framework requires that if there are 
two FINRA members executing a trade (one as the buyer and one as the 
seller), both FINRA members must report. Several commenters to the RFI 
advocated for one-sided reporting rather than two-sided reporting. 
FINRA determined that maintaining the two-sided reporting framework is 
preferable and will allow FINRA to compare the information reported by 
each party to identify discrepancies or potential non-reporting by one 
party. Moreover, accommodating one-sided reporting would necessitate 
significant changes to the existing TRACE infrastructure that could 
affect all TRACE reporting firms and significantly reduce the benefits 
to using an existing system described above. In addition, FINRA 
believes the burdens to firms of two-sided reporting can be reduced 
because TRACE allows for one participant to report on behalf of 
another, provided the two parties have proper agreements in place to 
allow the party to report on the other party's behalf. Any such 
arrangements are voluntary, and each participant (including ATSs) can 
determine if they would like to provide this service to its trading 
partners or subscribers.

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

    Written comments on the proposed rule change were neither solicited 
nor received; however, the Treasury Dept. received numerous comments in 
response to the RFI addressing reporting requirements for transactions 
in Treasuries. Fifty-two comments were submitted. Approximately 30 
letters addressed reporting to the official sector or public 
dissemination.\49\
---------------------------------------------------------------------------

    \49\ The RFI Notice and all of the comment letters submitted in 
response to the RFI Notice are available at https://www.regulations.gov/ document?D=TREAS-DO-2015-0013-0001. The 
following comment letters are specifically cited below: Letters to 
David R. Pearl, Office of the Executive Secretary, Treasury Dept., 
from Citadel LLC (April 22, 2016) (``Citadel''); Direct Match (April 
22, 2016) (``Direct Match''); Federal Reserve Bank of Chicago (May 
5, 2016) (``FRB Chicago''); FIA Principal Traders Group (April 22, 
2016) (``FIA PTG''); ICAP plc (April 22, 2016) (``ICAP''); 
Investment Company Institute (April 8, 2016) (``ICI''); KCG 
Holdings, Inc. (April 28, 2016) (``KCG''); Andrei Kirilenko, 
Director, Centre for Global Finance and Technology, Imperial College 
Business School (April 22, 2016) (``Kirilenko''); Managed Funds 
Association (April 22, 2016) (``MFA''); MarketAxess Holdings, Inc. 
and Xtracker Ltd. (April 21, 2016) (``MarketAxess''); Modern Markets 
Initiative (April 22, 2016) (``MMI''); Morgan Stanley & Co. (April 
22, 2016) (``Morgan Stanley''); Nasdaq, Inc. (April 22, 2016) 
(``Nasdaq''); Prudential Fixed Income (April 21, 2016) 
(``Prudential''); RBS Securities Inc. (April 22, 2016) (``RBS 
Securities''); SIFMA, Asset Management Group (April 22, 2016) 
(``SIFMA AMG''); SIFMA and American Bankers Association (April 22, 
2016) (``SIFMA/ABA''); Tradeweb Markets LLC (April 22, 2016) 
(``Tradeweb''); Rakesh Tripathy (March 22, 2016) (``Tripathy''); 
Virtu Financial, Inc. (March 18, 2016) (``Virtu''); Wells Fargo & 
Company (April 21, 2016) (``Wells Fargo'').

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

[[Page 48473]]

    As noted above, Section III of the RFI emphasized the need for more 
comprehensive official sector access to transaction data for Treasuries 
and requested comment on the types of data that should be made 
available to the official sector regarding the Treasury cash securities 
market and on numerous practical considerations associated with 
gathering that data. The RFI noted that ``[t]he need for more 
comprehensive official sector access to data, particularly with respect 
to U.S. Treasury cash market activity, is clear.'' \50\ Section III 
solicited views on ways to collect, aggregate, and monitor data but 
also included questions on additional infrastructure that would be 
necessary for market participants to begin reporting data, especially 
given the diversity of trading venues in the Treasury markets and the 
fact that trading activity in these markets ``often extends beyond 
individual regulator boundaries.'' \51\ Section III included questions 
concerning the scope of potential transaction reporting obligations and 
market participant obligations, numerous specific questions on the 
mechanics of trade reporting, and questions as to whether additional 
data (e.g., orders, quotes) should be reported.\52\
---------------------------------------------------------------------------

    \50\ See RFI Notice, supra note 9, at 3931.
    \51\ See RFI Notice, supra note 9, at 3931-32.
    \52\ See RFI Notice, supra note 9, at 3932-33.
---------------------------------------------------------------------------

    Approximately 26 commenters expressed some level of support for 
official sector reporting. As the Treasury Dept. noted, ``[t]he 
responses to the RFI expressed broad support for more comprehensive 
reporting to regulators, including nearly unanimous support for 
reporting additional information on Treasury cash market activity.'' 
\53\
---------------------------------------------------------------------------

    \53\ Treasury Press Release, supra note 12.
---------------------------------------------------------------------------

    Several commenters to the RFI provided views on specific reporting 
requirements. Industry participants expressed the view that a single-
side reporting obligation was preferable to having multiple 
counterparties or venues report the same transaction; \54\ however, one 
commenter suggested using a two-sided reporting structure.\55\ Those 
commenters expressing support for single-side reporting often also 
suggested that trades conducted on a trading platform be reported by 
the trading platform rather than the counterparties; \56\ however, this 
view was not unanimous.\57\ MFA suggested that requiring all Treasury 
cash market participants to report ``would be extremely costly and 
burdensome for managers/funds . . . and could deter some market 
participants from trading in the Treasury cash markets.'' \58\
---------------------------------------------------------------------------

    \54\ See Citadel, at 11 (suggesting that ``single-sided 
reporting (i.e., where each transaction is only reported by one 
party) has proven successful in reducing complexity and data 
discrepancies under the CFTC's reporting regime for swaps''); MFA, 
at 5 (``On a practical level, it would also be much easier, more 
efficient and cost-effective to implement a single-sided reporting 
regime that requires trading platforms and intermediaries to report 
transactions.''); RBS Securities, at 7 (``RBS notes that based on 
experience in other regulatory frameworks, bilateral reporting 
substantially increases the required technology and controls for 
compliance, with minimal additional benefit to the regulator or 
public.''); SIFMA AMG, at 4 (arguing that a ```one-sided' approach 
is more operationally efficient and reduces the risk of trade 
reporting errors''). See also FIA PTG, at 23; Prudential, at 14; 
Tradeweb, at 5.
    \55\ See Kirilenko, at 1.
    \56\ See FIA PTG, at 23 (``Wherever possible, the official 
sector should use information provided by trading venues and 
depositories to support its information gathering.''); MFA, at 4 
(stating their view that ``reporting should be by trading platforms, 
dealers and market makers/principal trading firms'' because these 
entities ``are in the best position to efficiently provide 
streamlined data to regulators'').
    \57\ See MarketAxess, at 3 (``We would recommend placing the 
reporting responsibility on the counterparties to the trade rather 
than on the venue . . . so that firms have a single process, 
regardless of how and where the trade is executed.'').
    \58\ MFA, at 5.
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    As noted above, the proposed rule change follows the current TRACE 
reporting structure requiring that any Party to the Transaction that is 
a FINRA Member report the transaction to TRACE; therefore, if two or 
more FINRA members are Parties to the Transaction, each member will 
have an independent obligation to report the transaction to TRACE. 
FINRA believes that this reporting structure helps to ensure the 
accuracy of reported transactions and, as a result, significantly 
enhances the quality of the audit trail. Although requiring multiple 
reports for some transactions may increase the overall number of 
errors, it also provides FINRA with a means to validate reports that 
does not exist if a single party reports the transaction. FINRA 
believes that the overall benefits to the audit trail of requiring 
multiple reports outweigh the costs, particularly since FINRA is 
proposing to initially exempt reports in U.S. Treasury Securities from 
the TRACE trade reporting fees.
    There was widespread support among the commenters to extend 
reporting obligations to all Treasury securities rather than a defined 
subset.\59\ The suggested timing of submitting trade reports varied 
between those generally urging real-time reporting,\60\ delayed 
reporting,\61\ or a combination thereof depending upon the type of 
security.\62\ As one commenter noted, the timing of trade report 
submission is also influenced by the purpose: Reporting solely for 
regulatory purposes does not require the immediacy that would be 
necessary if post-trade market transparency were also a goal.\63\
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    \59\ See Citadel, at 10; FIA PTG, at 3; ICAP, at 6; MMI, at 10; 
Nasdaq, at 6; Prudential, at 13; Tripathy, at 5; Wells Fargo, at 5.
    \60\ See Citadel, at 10-11; Tradeweb, at 5 (``Such reporting 
should occur as frequently as real-time, although the implementation 
and phasing of any reporting requirement should be carefully 
evaluated with respect to the cost and the technical build 
required.'').
    \61\ See FIA PTG, at 30 (recognizing that, while real-time 
reporting may be an end goal, ``a reasonable standard would target 
the end-of-trading-day as a starting point for reporting 
objectives''); MarketAxess, at 3 (``T+1 reporting is sufficient to 
ensure that regulators have a timely picture of market activity and 
that firms have sufficient time to deliver the required level of 
accuracy.''); Prudential, at 16.
    \62\ See Morgan Stanley, at 3 (``Timing requirements should vary 
based on transaction type, e.g., illiquid investments should have a 
longer time to report.'') Virtu, at 2 (suggesting real-time 
reporting for ``electronically matched on-the-run trades,'' five-
minute reporting for manual trades, fifteen-minute reporting for 
``trades in excess of a specified volume threshold in on-the-run 
Treasuries,'' and ``an extended reporting window'' for off-the-run 
Treasuries). Those in favor of real-time reporting--and generally 
real-time public dissemination--recognized the need for some 
exceptions. Citadel, for example, suggested exceptions of 15 to 30 
minutes for block transactions and less liquid off-the-run 
securities. See Citadel, at 11.
    \63\ See MarketAxess, at 2.
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    As discussed above, FINRA is proposing to impose reporting 
obligations on all Treasuries with the exception of savings bonds, 
which are not generally traded in the secondary market; thus, the 
proposed reporting requirements would apply to all marketable 
Treasuries and all transactions in those securities with the exceptions 
of purchases in the initial auction, repurchase transactions, and 
reverse repurchase transactions.

[[Page 48474]]

Because FINRA is not currently proposing to disseminate any trade-level 
information to the public regarding transactions in U.S. Treasury 
Securities, the proposed rule change generally imposes a same-day 
reporting requirement as opposed to a more immediate requirement, such 
as 15 minutes. FINRA believes an end-of-day or next-day timing 
requirement strikes an appropriate balance between ensuring timely 
access by regulators to the transaction data without imposing 
unnecessary requirements on reporting firms. Permitting end-of-day or 
next-day reporting will also provide members with additional time to 
submit their filings and, if necessary, make any corrections to their 
trade reports before submission. This flexibility will provide members 
with more choices in how to comply with the reporting requirements, and 
FINRA believes this flexibility should reduce the burdens on firms in 
complying with the new reporting requirements and improve the accuracy 
of trade reports, particularly given the high volumes in which U.S. 
Treasury Securities are traded.
    Relatively few commenters provided views on specific elements that 
should be reported to the official sector. In addition to the general 
transaction information necessary for effective transaction reporting 
(e.g., security, side, size, price, time), some commenters suggested 
including:
     Trading venue; \64\
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    \64\ See Citadel, at 11; Direct Match, at 11; Morgan Stanley, at 
3; Tradeweb, at 5.
---------------------------------------------------------------------------

     settlement date; \65\
---------------------------------------------------------------------------

    \65\ See Morgan Stanley, at 2. MarketAxess noted that settlement 
date is not a current field for MiFID transaction reporting in 
Europe but noted that a settlement date ``beyond the standard 
settlement cycle may impact the agreed price, so there may be value 
in collecting that information, depending on the ultimate purpose of 
the reporting regime.'' MarketAxess, at 4; see also FIA PTG, at 27 
(noting that non-standard settlement dates may have reporting 
value).
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     category of counterparty; \66\
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    \66\ See Morgan Stanley, at 3.
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     type of trading protocol; \67\
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    \67\ See Citadel, at 11 (suggesting examples of ``voice, 
electronic RFQ, or CLOB [central limit order book]'').
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     whether the transaction was cleared; \68\ and
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    \68\ See Citadel, at 11.
---------------------------------------------------------------------------

     whether the trade was part of a package transaction.\69\
---------------------------------------------------------------------------

    \69\ See Citadel, at 11. Citadel noted that common package 
transactions involving Treasuries include spread overs (an interest 
rate swap and a Treasury), curves (two Treasuries of different 
maturities), butterflies (three Treasuries of different maturities), 
and exchange for physicals (a future and a Treasury). Citadel also 
suggested that ``to distinguish between different types of packages, 
data should also be collected on how many legs are associated with 
the specific package transaction and the instruments involved.''
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    As discussed above, the proposed rule change largely extends to 
transactions in U.S. Treasury Securities the existing TRACE reporting 
fields, which include settlement date, category of counterparties, and 
in some cases the trading venue (e.g., alternative trading system 
(``ATS'') identifiers if the ATS does not also report the transaction). 
As noted, FINRA is proposing two new modifiers to capture information 
on transactions that are part of larger trading strategies. FINRA 
believes that, initially, the new fields and modifiers it is proposing 
are sufficient for surveillance and review of transaction activity; 
however, FINRA will monitor the information once reporting begins to 
determine whether additional transaction information may be needed to 
enhance the audit trail and its surveillance program.
    Multiple commenters suggested that any reporting requirement should 
span across all market participants, and some commenters specifically 
noted the importance of regulatory cooperation, as a benefit for both 
regulators and for reporting firms.\70\ FRB Chicago noted the current 
lack of regulation for the Treasury market and called for coordinated 
efforts to ``harmonize the processes observed in the U.S. Treasury 
markets around trading, clearing and reporting requirements.'' \71\ 
SIFMA noted that reporting requirements ``must meet the desire to 
provide the official sector with a comprehensive and expedient view of 
the markets'' while also recognizing the burdens that reporting 
requirements could impose.\72\ Similarly, MMI noted that the 
requirements must ``cast an all-encompassing net'' so that regulators 
have a comprehensive view of market activity and suggested that 
regulators ``must have a complete picture of order, indicative pricing, 
RFQ responses and trade data across all instruments (cash and futures) 
all sectors (on-the-run and off-the-run) all methods (electronic and 
voice) and all platforms (IDBs, D2C Venues, etc.).'' \73\ Direct Match 
noted that lack of consistency could create regulatory arbitrage 
opportunities that could result in market changes.\74\
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    \70\ See Direct Match, at 10; FRB Chicago, at 5; ICI, at 4-5; 
KCG, at 3; MFA, at 4; MMI, at 10; SIFMA AMG, at 3-4; SIFMA/ABA, at 
10. ICI explicitly noted the benefits to both regulators and 
reporters:
     Regulatory coordination will enhance the ability of Treasury, 
as well as other regulators, to conduct more comprehensive analysis 
and surveillance of trading in the Treasury markets by obtaining a 
broader view of these integrated markets, and increase regulators' 
ability to obtain higher quality and more consistent data. A 
coordinated rulemaking effort will help minimize compliance costs 
for market participants, to the extent they can utilize existing 
reporting infrastructures and requirements to meet any new reporting 
obligations that Treasury may impose. ICI, at 5.
    \71\ FRB Chicago, at 5.
    \72\ SIFMA/ABA, at 10.
    \73\ MMI, at 10. See also SIFMA AMG, at 4 (``[M]andating, 
establishing, and implementing an official sector reporting regime 
requires coordination across markets and jurisdictions.'')
    \74\ See Direct Match, at 10 (``[I]n a market as fragmented and 
as lightly-regulated as the one for Treasuries, the potential for 
adverse second order effects is substantial: In the event that 
regulations disadvantage a particular market segment, it is very 
easy for trading to move to another, or to create a new one.'').
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    As noted above, after reviewing the comments, the Treasury Dept. 
and the SEC requested that FINRA consider a proposal to require its 
members to report Treasury cash market transactions to a centralized 
repository. FINRA has filed the proposed rule change in response to 
that request. Although the proposed rule change would apply only to 
FINRA members, the Treasury Dept. noted that it ``will continue working 
with other agencies and authorities to develop a plan for collecting 
similar data from institutions who actively trade U.S. Treasury 
securities but are not FINRA members.'' \75\
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    \75\ Treasury Press Release, supra note 12.
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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 shall: 
(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 No. SR-FINRA-2016-027 on the subject line.

[[Page 48475]]

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 No. SR-FINRA-2016-027. 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 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 No. SR-FINRA-2016-027, and should be 
submitted on or before August 15, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\76\
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    \76\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-17446 Filed 7-22-16; 8:45 am]
 BILLING CODE 8011-01-P


