
[Federal Register Volume 81, Number 174 (Thursday, September 8, 2016)]
[Notices]
[Pages 62222-62225]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-21642]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-78759; File No. SR-FINRA-2016-024]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Order Granting Approval of Proposed Rule Change To 
Create an Academic Corporate Bond TRACE Data Product

September 2, 2016.

I. Introduction

    On June 28, 2016, the Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to amend FINRA Rule 7730 to create a new data 
product consisting of data on historic transactions in corporate bonds 
reported to the Trade Reporting and Compliance Engine (``TRACE'') that 
would be available to institutions of higher learning (the ``Academic 
Corporate Bond TRACE Data product''). The proposed rule change was 
published for comment in the Federal Register on July 7, 2016.\3\ The 
Commission received three comments in response to the proposal.\4\ On 
August 9, 2016, FINRA extended to September 2, 2016, the time period 
within which the Commission shall approve the proposed rule change, 
disapprove the proposed rule change, or institute proceedings to 
determine whether the proposed rule change

[[Page 62223]]

should be disapproved.\5\ FINRA responded to the comments on August 23, 
2016.\6\ This order grants approval of the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 78219 (July 1, 
2016), 81 FR 44359 (``Notice'').
    \4\ See letters to Brent J. Fields, Secretary, Commission, from 
Sean Davy, Managing Director, Capital Markets Division and Leslie M. 
Norwood, Managing Director and Associate General Counsel, Municipal 
Securities Division, SIFMA, dated July 27, 2016 (``SIFMA Letter''); 
Mike Nicholas, Chief Executive Officer, BDA, dated July 28, 2016 
(``BDA Letter''); and Kumar Venkataraman, Ph.D., James M. Collins 
Chair in Finance, Edwin L. Cox School of Business, Southern 
Methodist University, dated August 9, 2016 (``Venkataraman 
Letter'').
    \5\ See letter to Katherine England, Assistant Director, 
Division of Trading and Markets, Commission, from Racquel L. 
Russell, Associate General Counsel, Regulatory Policy and Oversight, 
FINRA, dated August 9, 2016.
    \6\ See letter to Brent J. Fields, Secretary, Commission, from 
Racquel L. Russell, Associate General Counsel, Regulatory Policy and 
Oversight, FINRA, dated August 23, 2016 (``FINRA Response Letter'').
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II. Description of the Proposed Rule Change

    FINRA has proposed to make available to institutions of higher 
learning a new Academic Corporate Bond TRACE Data product that would 
contain transaction-level data on historic transactions in corporate 
bonds and would include masked counterparty information. Currently, 
FINRA makes publicly available real-time data in TRACE-eligible 
securities and a Historic TRACE Data product that provides transaction-
level data, on an 18-month delayed basis, without any counterparty 
information.\7\
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    \7\ See FINRA Rule 7730(f)(4). See also Securities Exchange Act 
Release No. 61012 (November 16, 2009), 74 FR 61189 (November 23, 
2009) (Order Approving File No. SR-FINRA-2007-006).
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    In the Notice, FINRA stated that academic researchers cannot use 
the existing Historic TRACE Data product to track the behavior of an 
individual dealer or group of dealers due to the lack of any 
counterparty information. FINRA stated that this proposal responds to 
requests from academics for FINRA to make available an enhanced data 
product that includes counterparty identification.\8\ FINRA has 
represented that establishing a new TRACE data product with masked 
counterparty identifiers could allow academic researchers to track 
activity in a variety of ways, including by individual dealer or by 
groups of dealers, and could facilitate the ability of academic 
researchers to study the impact of various events on measures such as 
intermediation costs, dealer participation, and liquidity.\9\
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    \8\ See Notice, 81 FR at 44359.
    \9\ See id.
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    The proposal would amend FINRA Rule 7730 to create a new Academic 
Corporate Bond TRACE Data product consisting of historic transaction-
level data on all transactions in corporate bonds reported to TRACE, 
including Rule 144A transactions in corporate bonds but not including 
transactions that are List or Fixed Offering Price Transactions \10\ or 
Takedown Transactions.\11\ FINRA noted that the existing Historic TRACE 
Data product also does not include List or Fixed Offering Price 
Transactions or Takedown Transactions. Under the proposal, a 
transaction included in the Academic Corporate Bond TRACE Data product 
would be aged at least 36 months before being incorporated into the 
dataset. Each such transaction would not include any MPIDs, but would 
instead include a masked dealer identifier.\12\
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    \10\ FINRA Rule 6710(q) defines ``List or Fixed Offering Price 
Transaction'' as a primary market sale transaction sold on the first 
day of trading of a security, excluding a Securitized Product as 
defined in FINRA Rule 6710(m) other than an Asset-Backed Security as 
defined in FINRA Rule 6710(cc): (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.
    \11\ FINRA Rule 6710(r) defines ``Takedown Transaction'' as a 
primary market sale transaction sold on the first day of trading of 
a security, excluding a Securitized Product other than an Asset-
Backed Security: (i) By a sole underwriter or syndicate manager to a 
syndicate or selling group member at a discount from 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 or syndicate manager to a 
syndicate or selling group member at a discount from the published 
or stated fixed offering price.
    \12\ See proposed FINRA Rule 7730(g)(5).
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    The Academic Corporate Bond TRACE Data product would be available 
only to institutions of higher education.\13\ Any institution of higher 
education subscribing to the product would be required to agree: (1) 
Not to attempt to reverse-engineer the identity of any market 
participant; (2) not to redistribute the data; (3) to disclose each 
intended use of the data (including a description of each study being 
performed and the names of each individual who will have access to the 
data for the study); (4) to ensure that any data presented in work 
product be sufficiently aggregated to prevent reverse engineering of 
any dealer or transaction; and (5) to return or destroy the data if the 
agreement is terminated.\14\
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    \13\ See proposed FINRA Rule 7730(e).
    \14\ See Notice, 81 FR at 44359-60.
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    FINRA stated that it would announce the effective date of the 
proposed rule change in a Regulatory Notice to be published no later 
than 90 days following Commission approval, and that the effective date 
would be no later than 270 days following publication of that 
Regulatory Notice.\15\ In addition, FINRA stated that it plans to file 
a separate proposed rule change to address market data fees for the 
Academic Corporate Bond TRACE Data product before the effective date of 
this proposal.\16\
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    \15\ See id. at 44360.
    \16\ See id. at 44359, n.7.
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III. Summary of Comments and FINRA's Response

    The Commission received three comments on the proposed rule change 
\17\ and a response letter from FINRA.\18\ Two commenters generally 
supported the proposal. One of these commenters, an academic 
researcher, stated that, ``[t]o study the impact of banking regulation 
on bond dealers, it is necessary to obtain information on the identity 
of dealers associated with each transaction. The Historic TRACE data 
product does not contain this information.'' \19\ The commenter pointed 
to the masked dealer identifier information in the new proposed product 
as a significant advantage over the Historic TRACE Data product, and 
stated that he ``expect[s] that FINRA's new Academic data initiative 
will lead to an explosion in academic research on corporate bonds and 
provide new insights on the functioning of the bond market.'' \20\
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    \17\ See supra note 4.
    \18\ See supra note 6.
    \19\ Venkataraman Letter at 2.
    \20\ Id. at 3.
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    A second commenter, while generally supportive of the proposal, 
expressed the view that FINRA could make modifications to provide 
additional protections against the potential for reverse engineering 
the data without impeding its goals of promoting academic access and 
research.\21\ This commenter stated that the potential impact of 
reverse engineering could include deciphering a dealer's trading 
strategies and revealing confidential business information relating to 
specific client transactions.\22\
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    \21\ See SIFMA Letter at 2.
    \22\ See id. at 3.
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    A third commenter opposed the proposal, arguing that it would 
expose dealers and their customers to unnecessary risks.\23\ The 
commenter stated, for example, that ``[i]t is very likely that, as a 
consequence of this proposal, private and non-educational entities will 
end up possessing full trade history including dealer names for every 
trade released.'' \24\
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    \23\ See BDA Letter at 1.
    \24\ Id. at 2.
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    The two industry commenters offered differing views on aspects of 
the proposal that FINRA designed to reduce the risk of reverse 
engineering specific dealer identities. The second commenter thought 
that limiting the

[[Page 62224]]

scope of the data product to transactions in corporate bonds, including 
Rule 144A transactions but excluding information on List or Fixed 
Offering Price Transactions or Takedown Transactions, would mitigate 
the risk of reverse engineering.\25\ The second commenter also 
acknowledged that the proposal's aging period of 36 months (expanded 
from 24 months in an earlier iteration) would help reduce the risk of 
reverse engineering, but thought that an aging period of no less than 
48 months would be more appropriate.\26\ The third commenter supported 
the exclusion of List or Fixed Offering Price Transactions from the 
scope of the proposal and acknowledged that expanding the aging period 
and masking dealer identities would make reverse engineering more 
difficult, but expressed the view that these measures were not 
sufficient to reduce the risk of reverse engineering to an acceptable 
level.\27\
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    \25\ See SIFMA Letter at 2.
    \26\ See id.
    \27\ See BDA Letter at 1-2.
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    In addition, the two industry commenters suggested that FINRA make 
the transaction data available according to groupings of comparable 
dealers, instead of on an individual dealer level, arguing that masked 
dealer identifiers might not effectively protect their identities.\28\ 
The academic commenter, who supported the proposal without 
modification, objected to this suggestion of the other commenters and 
argued that providing the data by pre-set groupings could stifle 
academic research. This commenter explained that individual dealer-
level data would allow academic researchers to maintain needed 
flexibility to construct samples of dealers in a manner best suited to 
their specific research question.\29\
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    \28\ See SIFMA Letter at 3 (suggesting that FINRA aggregate 
dealers by the peer group criteria used in FINRA report cards); BDA 
Letter at 2-3 (suggesting that FINRA aggregate dealers by size).
    \29\ See Venkataraman Letter at 3. For example, the commenter 
noted that academic researchers may wish to aggregate dealers into 
groups based on whether or not they are active market makers with 
high market share, whether they specialize in high yield bonds or 
investment grade bonds, or whether they increase liquidity provision 
or withdraw participation when volatility is high. See id.
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    The two industry commenters also offered suggestions regarding 
strengthening and enforcing the proposed user agreements. The second 
commenter urged FINRA to develop ``robust operational frameworks around 
the execution and ongoing oversight of user agreements . . . [in order 
to] further mitigate concerns of reverse engineering and information 
leakage.'' \30\ The third commenter stated that, although the proposed 
user agreements are designed to prevent redistribution of the data, 
federal and state Freedom of Information Act (``FOIA'') laws could 
defeat such intention if the transaction data is held by a public 
university and classified as a public record.\31\ This commenter also 
raised concerns about data security, suggesting that the data could be 
subject to hacking or data theft during transmission or when held by an 
institution of higher education.\32\
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    \30\ SIFMA Letter at 4.
    \31\ See BDA Letter at 2.
    \32\ See id.
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    In its response to these comments, FINRA stated that it ``continues 
to believe that the instant proposal strikes the appropriate balance 
between addressing risks regarding potential reverse engineering with 
facilitating the ability of academic researchers to study the market 
for corporate bonds.'' \33\ FINRA explained that it made significant 
changes to an earlier iteration of the proposal, including limiting the 
scope of the proposed data product to corporate bonds. In FINRA's view, 
transaction data on corporate bonds does not present a high risk of 
accurate reverse engineering because generally these bonds are traded 
by a greater number of dealers.\34\ FINRA also noted that it raised the 
minimum age of included transactions from 24 months to 36 months. FINRA 
expressed its belief that the ``totality of the measures'' included in 
this proposal adequately address the commenters' concerns.\35\ FINRA 
also stated that the user agreements will include provisions geared 
towards data security and designed to limit the risk of public 
disclosure due to federal or state FOIA requests. FINRA noted that it 
will utilize its existing processes to oversee user agreements. FINRA 
further explained that it will monitor use of the Academic Corporate 
Bond TRACE Data product and may consider amending or discontinuing the 
product if it finds that academics are reverse engineering the 
data.\36\
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    \33\ FINRA Response Letter at 2.
    \34\ See id. FINRA also noted that any reverse engineering of 
market participant identities would be in direct contravention of 
explicit prohibitions in the user agreements. See id.
    \35\ See id.
    \36\ See id. at 2-3 and n. 4.
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    Finally, although one commenter suggested expanding the user group 
for Academic Corporate Bond TRACE Data to other non-profit 
organizations engaged in research activities,\37\ FINRA responded that 
``in light of the sensitivities'' surrounding making transaction-level 
data available, even with masked dealer identifiers, ``FINRA believes 
it is appropriate to restrict the availability of Academic Corporate 
Bond TRACE Data to institutions of higher education at this time.'' 
\38\
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    \37\ See SIFMA Letter at 4-5.
    \38\ FINRA Response Letter at 3. FINRA noted that non-academic 
institutions may still subscribe to Historic TRACE Data, which 
includes transaction-level data without dealer-level information. 
See id.
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IV. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities 
association.\39\ In particular, the Commission finds that the proposed 
rule change is consistent with Section 15A(b)(6) of the Act,\40\ which 
requires, among other things, that FINRA's rules be designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, and, in general, to protect investors 
and the public interest.
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    \39\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \40\ 15 U.S.C. 78o-3(b)(6).
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    The Commission believes that establishing the Academic Corporate 
Bond TRACE Data product in the manner described in the proposal is 
reasonable and consistent with the Act. The Commission does not believe 
that the commenters have raised any issue that would preclude approval 
of the proposal at this time. The proposal appears reasonably designed 
to minimize the possibility that the product might reveal the 
identities or trading strategies of particular market participants. 
FINRA has limited the scope of the data product to include only 
transactions in corporate bonds, will mask counterparty identities, is 
requiring transaction data to be aged 36 months prior to inclusion, and 
will require subscribers to execute a user agreement imposing 
restrictions on use of the data. The required user agreements appear 
reasonably designed to limit information leakage while providing 
institutions of higher education a potentially important new tool to 
analyze concerns about bond market liquidity.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\41\ that the proposed rule change (SR-FINRA-2016-024) be, and 
hereby is, approved.
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    \41\ 15 U.S.C. 78s(b)(2).


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    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\42\
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    \42\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2016-21642 Filed 9-7-16; 8:45 am]
 BILLING CODE 8011-01-P


