[Federal Register Volume 86, Number 232 (Tuesday, December 7, 2021)]
[Notices]
[Pages 69337-69349]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-26452]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-93699; File No. SR-FINRA-2021-030]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Proposed Rule Change To Amend 
FINRA Rule 6730 To Require Members To Append Modifiers to Delayed 
Treasury Spot and Portfolio Trades When Reporting to TRACE

December 1, 2021.
    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 November 22, 2021, the Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission'') the proposed rule change as described in Items I, 
II, and III below, which Items have been prepared by FINRA. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing to amend FINRA Rule 6730 to require members to 
append modifiers to identify delayed Treasury spot and portfolio trades 
when reporting to FINRA's Trade Reporting and Compliance Engine 
(``TRACE'').
    The text of the proposed rule change is available on FINRA's 
website 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.

[[Page 69338]]

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

1. Purpose
    On February 10, 2020, the Commission's Fixed Income Market 
Structure Advisory Committee (``FIMSAC'') unanimously approved a 
recommendation from its Technology and Electronic Trading Subcommittee 
for FINRA to amend its TRACE \3\ reporting rules to provide additional 
information on two types of trades in corporate bond TRACE-Eligible 
Securities \4\ (``FIMSAC Recommendation'').\5\ Specifically, the FIMSAC 
recommended that FINRA amend its TRACE reporting rules to require 
members to: (1) Identify corporate bond trades where the price of the 
trade is based on a spread to a benchmark U.S. Treasury Security \6\ 
that was agreed upon earlier in the day (referred to as a ``delayed 
Treasury spot trade'') and report the time at which the spread was 
agreed upon; and (2) identify corporate bond trades that are part of a 
larger portfolio trade. Because the price reported to TRACE for these 
two types of trades may not reflect the market prices at the time the 
trades are reported and disseminated, the FIMSAC believed that 
reporting and disseminating this additional information would improve 
price transparency in the corporate bond market.\7\
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    \3\ TRACE is the FINRA-developed system that facilitates the 
mandatory reporting of over-the-counter transactions in eligible 
fixed income securities. See generally Rule 6700 Series.
    \4\ Rule 6710(a) generally defines a ``TRACE-Eligible Security'' 
as a debt security that is United States (``U.S.'') dollar-
denominated and is: (1) Issued by a U.S. or foreign private issuer, 
and, if a ``restricted security'' as defined in Securities Act Rule 
144(a)(3), sold pursuant to Securities Act Rule 144A; (2) issued or 
guaranteed by an Agency as defined in Rule 6710(k) or a Government-
Sponsored Enterprise as defined in Rule 6710(n); or (3) a U.S. 
Treasury Security as defined in Rule 6710(p). ``TRACE-Eligible 
Security'' does not include a debt security that is issued by a 
foreign sovereign or a Money Market Instrument as defined in Rule 
6710(o).
    \5\ See FIMSAC, Recommendation Regarding Additional TRACE 
Reporting Indicators for Corporate Bond Trades (February 10, 2020). 
https://www.sec.gov/spotlight/fixed-income-advisory-committee/fimsac-additional-trace-flags-recommendation.pdf.
    \6\ Rule 6710 defines a ``U.S. Treasury Security'' as ``a 
security, other than a savings bond, issued by the U.S. Department 
of the Treasury to fund the operations of the federal government or 
to retire such outstanding securities.'' The term ``U.S. Treasury 
Security'' also includes separate principal and interest components 
of a U.S. Treasury Security that has been separated pursuant to the 
Separate Trading of Registered Interest and Principal of Securities 
(STRIPS) program operated by the U.S. Department of Treasury. See 
Rule 6710(p).
    \7\ See FIMSAC Recommendation at 1. FINRA reminds members that, 
pursuant to Rule 3110, they must have policies and procedures in 
place that are reasonably designed to ensure compliance with the 
TRACE reporting rules, including the accurate reporting of 
applicable trade modifiers or indicators. Firms also must be able to 
demonstrate that a transaction meets the applicable conditions 
associated with a particular modifier or indicator.
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    On July 16, 2020, FINRA published Regulatory Notice 20-24 to 
solicit public comment on potential changes to its TRACE reporting 
rules in line with the FIMSAC's recommendations. FINRA also sought 
comment on whether any modifications to the scope of the FIMSAC's 
recommended approach might be appropriate.\8\ As discussed in greater 
detail below, FINRA received seven comments in response to Regulatory 
Notice 20-24. After further consideration, FINRA is proposing the 
FIMSAC-recommended changes to the TRACE reporting rules to append 
modifiers to identify both delayed Treasury spot trades and portfolio 
trades, with modifications to the portfolio trade provision to clarify 
and simplify its conditions (based on feedback received in response to 
Regulatory Notice 20-24), as further discussed below.
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    \8\ See FINRA Requests Comment on Proposed Changes to TRACE 
Reporting Relating to Delayed Treasury Spot and Portfolio Trades, 
Regulatory Notice 20-24 (July 2020).
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Delayed Treasury Spot Trades
    For purposes of the proposed amendment, a delayed Treasury spot 
trade is a transaction in a corporate bond that occurs on the basis of 
a spread to a benchmark U.S. Treasury Security, where the agreed upon 
spread is later converted to a dollar price by ``spotting'' the 
benchmark U.S. Treasury Security at a designated time. For example, 
parties may determine to trade a corporate bond based on an agreed 
spread to a specified U.S. Treasury Security at 10:00 a.m. (e.g., 150 
bps over the 10 Year Treasury yield), but the dollar price is 
determined later, e.g., at 3:00 p.m., when the parties ``spot'' the 
spread against the agreed benchmark U.S. Treasury Security yield (e.g., 
a reported dollar price of 97.5, expressed as a percentage of par 
value, calculated by applying the agreed spread of 150 bps to the 10 
Year Treasury yield at 3:00 p.m.). The TRACE reporting rules generally 
require members to report transactions in corporate bonds within 15 
minutes of the Time of Execution,\9\ which is the time when the parties 
agree to all of the terms of the transaction that are sufficient to 
calculate the dollar price of the trade.\10\ Therefore, in the above 
scenario, the delayed Treasury spot trade is reportable at 3:00 p.m., 
which is when the dollar price has been determined. Because the spread 
was negotiated earlier in the day, the dollar price reported at 3:00 
p.m. may be away from the current market price for the security.
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    \9\ See Rule 6730(a).
    \10\ See Rule 6710(d).
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    The FIMSAC believed that a specific modifier to identify delayed 
Treasury spot trades, along with disseminating the time at which the 
spread was agreed (e.g., 10:00 a.m.), would both alert market 
participants that the spread-based economics of the trade had been 
agreed upon earlier in the day as well as provide market participants 
with the ability to estimate the agreed-upon spread.\11\
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    \11\ See FIMSAC Recommendation at 2.
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    Consistent with the FIMSAC Recommendation, FINRA is proposing 
amendments to Rule 6730 to provide additional transparency into delayed 
Treasury spot trades. Specifically, FINRA is proposing to amend Rule 
6730: (1) Add new paragraph (d)(4)(H) to require that a member append a 
new modifier \12\ when reporting a delayed Treasury spot trade--i.e., a 
transaction in a corporate bond,\13\ the price of which is based on a 
spread to the yield of a U.S. Treasury Security and where the spread 
was agreed upon that day prior to the Time of Execution of the 
transaction; \14\ and (2) add new paragraph (c)(14) to require that the 
member report the time at which the spread for a delayed Treasury spot 
trade was agreed upon.\15\ Both the new delayed Treasury spot modifier 
and the time at which the spread was agreed would be disseminated 
through TRACE,

[[Page 69339]]

together with other information on the transaction, immediately upon 
receipt of the transaction report.\16\
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    \12\ As for other TRACE modifiers and indicators under Rule 
6730, the specific format for the new delayed Treasury spot trade 
modifier would be published in TRACE technical specifications.
    \13\ The FIMSAC Recommendation related to delayed Treasury spot 
trades was limited to corporate bond trades. See FIMSAC 
Recommendation at 1. Similarly, FINRA proposes to limit use of the 
new modifier to transactions in corporate bonds (i.e., CUSIPs that 
are disseminated as part of the TRACE Corporate Bond Data Set). A 
CUSIP, standing for the Committee on Uniform Security Identification 
Procedures, is a 9-character alphanumeric code that identifies a 
North American security for the purposes of facilitating clearing 
and settlement of trades. FINRA may in the future consider applying 
the delayed Treasury spot modifier and associated requirement to 
report the time at which the spread was agreed to other types of 
TRACE-Eligible Securities, such as Agency Debt Securities.
    \14\ FINRA is also proposing a non-substantive, stylistic change 
to the title of paragraph (d)(4) of Rule 6730, so that it refers to 
``Modifiers and Indicators'' rather than ``Modifiers; Indicators''.
    \15\ As a result of this addition, current paragraph (c)(14) of 
Rule 6730 would be renumbered as paragraph (c)(15).
    \16\ FINRA generally disseminates information on transactions in 
TRACE-Eligible Securities immediately upon receipt of the 
transaction report, except as otherwise provided in Rule 6750. See 
Rule 6750(a).
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    FINRA believes that, by specifically identifying delayed Treasury 
spot trades, the proposed rule change will enhance FINRA's regulatory 
audit trail data and improve price transparency for corporate bond 
market participants by identifying transactions whose prices may not be 
at the current market for the security.\17\ FINRA also believes that 
disseminating the time that the spread was agreed will further enhance 
price transparency by providing market participants with the ability to 
estimate the agreed-upon-spread.\18\
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    \17\ The FIMSAC considered several potential means of improving 
transparency around Treasury spot trades, including whether the 
terms (including the agreed spread and applicable Treasury 
benchmark) should be reported to TRACE within 15 minutes of the 
parties' agreement to all of the terms of the transaction other than 
the price of the Treasury. The FIMSAC noted that, while these 
alternatives would allow market participants to fully understand the 
spread-based economics of the trade at the time at which they are 
agreed, the recommended approach would be simpler and more cost-
effective to implement, assuming the need for reporting parties to 
enhance the initial TRACE report with the calculated dollar price of 
the trade when the delayed spot trade is ``spotted'' later in the 
day. See FIMSAC Recommendation at 2 n.3. Following implementation, 
FINRA will assess the reported data regarding delayed Treasury spot 
trades and continue to engage with industry participants regarding 
whether any future changes may be appropriate to further improve 
transparency.
    \18\ FINRA understands that the most common pricing benchmark 
used for delayed Treasury spot trades is the on-the-run U.S. 
Treasury Security with the maturity that corresponds to the maturity 
of the corporate bond being priced. For example, market participants 
would use the most recently issued 10-year U.S. Treasury Security as 
the benchmark to price a 10-year corporate bond.
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Portfolio Trades
    FINRA also is proposing a new modifier to identify portfolio 
trades.\19\ For purposes of the proposed amendment, a ``portfolio 
trade'' is a trade between only two parties for a basket of corporate 
bonds at a single aggregate price for the entire basket. For example, a 
market participant may seek to trade a portfolio consisting of 50 
corporate bonds. The parties may obtain mid-market prices for each of 
the 50 component bonds as a framework for the pricing, and, during the 
negotiation process, ultimately agree on a uniform spread, resulting in 
an aggregate dollar price for the entire portfolio. In such cases, 
members must report to TRACE a trade for each individual bond in the 
basket with an attributed dollar price for each bond. While, in many 
cases, the reported price for each corporate bond in a portfolio trade 
is in line with the security's current market price, in other cases--
based on, for example, the liquidity profile of a specific bond or 
other factors--the attributed price reported for an individual security 
may deviate from its current market price.
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    \19\ As noted below, the specific format and requirements for 
both the new delayed Treasury spot modifier and the new portfolio 
trade modifier would be published in TRACE technical specifications. 
Where a specific trade meets the criteria for both modifiers, such 
specifications may require the use of a third, single modifier 
indicating that both the delayed Treasury spot modifier and the 
portfolio trade modifier apply to the trade.
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    The FIMSAC believed it would be beneficial if market participants 
were able to identify with certainty which trades were part of a 
portfolio trade because of the possibility that the reported price may 
not be reflective of the independent market for the bond.\20\ The 
FIMSAC therefore recommended that FINRA amend its TRACE reporting rules 
to identify corporate bond trades: (i) Executed between only two 
parties; (ii) involving a basket of securities of at least 30 unique 
issuers; (iii) for a single agreed price for the entire basket; and 
(iv) executed on an all-or-none or most-or-none basis.\21\
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    \20\ The FIMSAC acknowledged that market participants currently 
may be able to surmise which TRACE reports are part of a portfolio 
trade, based on a common time of execution or the characteristics of 
the components. See FIMSAC Recommendation at 2.
    \21\ See FIMSAC Recommendation at 4.
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    In line with the FIMSAC's recommendation, FINRA is proposing to 
amend Rule 6730 to provide additional transparency into portfolio 
trades. Specifically, FINRA is proposing to add new paragraph (d)(4)(I) 
to Rule 6730 to require that a member append a new modifier \22\ if 
reporting a transaction in a corporate bond: \23\ (i) Executed between 
only two parties; (ii) involving a basket of corporate bonds of at 
least 10 unique issues; and (iii) for a single agreed price for the 
entire basket (``Portfolio Trade Definition''). The new portfolio trade 
modifier would be disseminated through TRACE, together with other 
information on the transaction, immediately upon receipt of the 
transaction report. Based on feedback from commenters, the scope of 
FINRA's proposed Portfolio Trade Definition differs from the FIMSAC 
recommended definition in two ways, as discussed further below.
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    \22\ As for other TRACE modifiers and indicators under Rule 
6730(d)(4), the specific format for the new portfolio trade modifier 
would be published in TRACE technical specifications.
    \23\ The FIMSAC Recommendation related to portfolio trades was 
limited to corporate bond trades. See FIMSAC Recommendation at 2. 
Similarly, FINRA proposes to limit use of the new modifier to 
transactions in corporate bonds (i.e., CUSIPs that are disseminated 
as part of the TRACE Corporate Bond Data Set). FINRA may in the 
future consider expanding the portfolio trade modifier to cover 
other types of TRACE-Eligible Securities, such as Agency Debt 
Securities.
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    Both the FIMSAC recommendation and the proposal would limit use of 
the portfolio trade modifier to instances where the trade is executed 
between only two parties at a single agreed price for the entire 
basket. However, instead of applying the portfolio modifier to 
transactions involving a basket of corporate bonds of 30 or more unique 
issuers (as recommended by the FIMSAC), FINRA is proposing to apply the 
portfolio trade modifier to transactions involving a basket of 
corporate bonds of at least 10 unique issues/securities (i.e., 
individual securities counted using security identifiers such as CUSIPs 
or TRACE symbols). As described in further detail below, FINRA received 
several comments on this aspect of the proposal. Commenters stated that 
basing the numerical threshold on the number of issuers represented in 
a portfolio rather than the number of securities would be challenging 
to implement and would raise interpretive issues, and therefore 
suggested instead basing the threshold on the number of unique 
corporate bond securities in the portfolio. Commenters believed that 
this alternative approach would effectively identify portfolio trades 
while avoiding challenges that would be associated with correctly 
identifying bonds associated with a particular issuer. Commenters also 
stated that basing the threshold on the number of unique issues would 
be simpler and more easily automatable for members to implement. FINRA 
agrees that using individual securities, rather than issuers, would 
provide a simpler and more effective way to identify portfolio trades 
for purposes of the new modifier. Therefore, FINRA is proposing to base 
the size threshold condition in prong (ii) of the Portfolio Trade 
Definition on the number of unique issues in the basket of corporate 
bonds.
    Second, the FIMSAC recommended setting the size threshold for 
portfolio trades at 30 unique issuers. As described in further detail 
below, FINRA also received comments on the appropriate basket size, 
with commenters expressing a range of views on the most appropriate 
threshold. After further consideration, FINRA is proposing to modify 
the size threshold in prong (ii) of the Portfolio Trade Definition by 
lowering the threshold from 30 to 10 unique securities. FINRA believes 
that lowering the threshold for

[[Page 69340]]

use of the portfolio trade modifier to 10 would provide greater 
informational benefits to market participants by capturing a greater 
number of transactions that satisfy the other conditions of the 
Portfolio Trade Definition.
    Consistent with the FIMSAC Recommendation, prong (iii) of the 
Portfolio Trade Definition would apply the new modifier to transactions 
entered into ``for a single agreed price'' for the entire basket. As 
described above, this prong represents the key characteristic of 
portfolio trades, i.e., that the transaction is entered into at an 
agreed aggregate price for the entire basket (as opposed to 
individually negotiated trades), which may result in the attributed 
price reported for individual securities in the basket being away from 
their current market price.
    FINRA notes that the FIMSAC also recommended that the Portfolio 
Trade Definition include a requirement that the basket be executed on 
an ``all-or-none or most-or-none basis.'' \24\ One commenter suggested 
deleting the reference to ``most-or-none'' in this proposed prong 
because a definition of ``most-or-none'' does not currently exist in 
current market practice and the concept is not well understood. After 
further consideration, FINRA believes that removing this prong in its 
entirety would reduce the proposal's complexity without reducing the 
new modifier's informational value. FINRA is therefore not proposing to 
include an ``all-or-none or most-or-none'' prong as part of the 
Portfolio Trade Definition. Therefore, if two parties agree on a price 
with respect to a basket of bonds, the component trades would be 
identified with the new portfolio trade modifier so long as the 
resulting basket trade includes the minimum of 10 unique issues at a 
single agreed price, regardless of the number of securities that 
originally were contemplated as part of the basket.
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    \24\ See FIMSAC Recommendation at 4.
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    If the Commission approves the proposed rule change, FINRA will 
announce the effective date(s) of the proposed rule change in a 
Regulatory Notice.\25\ FINRA will publish a Regulatory Notice 
announcing the effective date(s) of the proposed amendments pursuant to 
Rule 6730(d)(4)(H) and (I) no later than 90 days following Commission 
approval, and the effective date(s) will be no later than 365 days 
following publication of the Regulatory Notice. FINRA will publish a 
Regulatory Notice announcing the effective date of the proposed 
amendments pursuant to Rule 6730(c)(14) once determined.\26\
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    \25\ FINRA may implement the proposed modifier requirements 
(pursuant to proposed Rule 6730(d)(4)(H) and (I)) separately from 
the proposed requirement to report the time at which the spread was 
agreed (pursuant to proposed Rule 6730(c)(14)).
    \26\ FINRA is currently in the process of developing and 
implementing enhancements to its reporting systems, including TRACE. 
Because the proposed requirement to report the time at which the 
spread was agreed for a delayed Treasury spot trade under Rule 
6730(c) would require the addition of a new TRACE reporting field, 
FINRA intends to set the effective date for this requirement at a 
later date following completion of TRACE system changes.
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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,\27\ which requires, among 
other things, that FINRA rules must be designed to prevent fraudulent 
and manipulative acts and practices, to promote just and equitable 
principles of trade, and, in general, to protect investors and the 
public interest. FINRA believes that the proposed rule change to 
improve transparency for delayed Treasury spot and portfolio trades is 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, and, generally, to 
protect investors and the public.
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    \27\ 15 U.S.C. 78o-3(b)(6).
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    FINRA believes that the proposed rule change will improve 
transparency into pricing in the corporate bond market and enhance 
FINRA's regulatory audit trail data by specifically identifying delayed 
Treasury spot trades and portfolio trades, which are two types of 
trades where the price may not be reflective of the current market 
price at the time the trades are reported and disseminated. FINRA also 
believes that the proposed rule change will enable market participants 
and investors to better understand pricing for delayed Treasury spot 
trades by requiring members to report the time at which the spread was 
agreed, which will provide market participants with the ability to 
estimate the agreed-upon-spread for such trades.

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
Regulatory Objective
    As discussed above, delayed Treasury spot trades and portfolio 
trades may not be reflective of the current market price for the bonds 
and may be less informative for market participants that rely on TRACE 
for price discovery or other analyses. The proposed modifiers would 
specifically identify these types of trades and add the time at which 
the spread was agreed upon in disseminated data.
Economic Baseline

A. Delayed Treasury Spot Trades

    Because delayed Treasury spot trades are currently not identified 
in the TRACE data, the economic baseline first establishes the TRACE 
reported trades most likely to be associated with delayed Treasury spot 
trades. Using TRACE data from June 2020 to May 2021, FINRA examined the 
daily average concentration of corporate bond trades around 3:00 p.m., 
which FINRA understands to be the ``spotting'' time usually used by 
dealers for delayed Treasury spot trades. Figures F1-1 and F1-2 below 
compare the percentage of trades during the 3:00 p.m. to 3:14 p.m. time 
interval with: (1) The average percentage of trades for all 15-minute 
intervals before 3:00 p.m.; and (2) and the average percentage of 
trades for all 15-minute intervals after 3:14 p.m. Figures F1-1 and F1-
2 also provide these trade distributions based on the size of trades 
and for all trades combined. These data are likely to either overcount 
the number of delayed Treasury spot trades because some of the trades 
executed in the time interval are not delayed Treasury spot trades, or 
undercount because they exclude delayed Treasury spot trades executed 
at other times during the day. Nevertheless, FINRA believes this 
methodology will provide a reasonable baseline for the analysis.
    Figure F1-1 provides statistics for customer trades in investment 
grade bonds and Figure F1-2 provides statistics for inter-dealer trades 
in investment grade bonds. Figures F1-1 and F1-2 show that, across all 
trade sizes in investment grade bonds, volumes in the 3:00 p.m. trade 
interval are larger than both the pre-3:00 p.m. and the post-3:14 p.m. 
intervals. For investment grade customer trades, the 3:00 p.m. volumes 
are several times larger than both the pre-3:00 p.m. and the post-3:14 
p.m. intervals. Figures F1-3 and F1-4 provide similar information for 
trades in non-investment grade bonds. These figures show that the 
differences in trades across the time intervals are much less material 
in non-investment grade bond trades. Although trades during the 3:00 
p.m. to 3:14 p.m. time interval may not all be delayed spot trades, the 
jump in investment grade bond volume during

[[Page 69341]]

the period is consistent with FINRA's understanding of when delayed 
Treasury spot trades are priced and reported (regardless of when the 
spread was agreed upon).
BILLING CODE 4910-13-P
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B. Portfolio Trades

    Evidence supports the hypothesis that portfolio trading has been 
increasing over time.\28\ An analysis by Morgan Stanley shows that $88 
billion in portfolio trades were executed from January 2019 through 
November 2019, compared to virtually none in 2017.\29\ The analysis 
also shows that portfolio trades with 140 bonds or more increased 
tenfold since 2018. According to a Financial Times article citing 
Greenwich Associates' survey of 67 bond traders, more than 50% of the 
traders have executed a portfolio trade in the past year.\30\
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    \28\ See infra notes 29 and 30.
    \29\ See Jennifer Surane & Matthew Leising, Bond Trade That's 
Gone from Zero to $88 Billion in Two Years, Bloomberg (Nov. 18, 
2019), https://www.bloomberg.com/news/articles/2019-11-18/the-bond-trade-that-s-gone-from-zero-to-88-billion-in-two-years.
    \30\ See Joe Rennison, Robert Armstrong & Robin Wigglesworth, 
The New Kings of the Bond Market, Financial Times (Jan. 22, 2020), 
https://www.ft.com/content/9d6e520e-3ba8-11ea-b232-000f4477fbca. 
Among those traders, 75% executed the portfolio trade with dealers 
while the remaining did so through other means such as an electronic 
trading platform.
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    FINRA computed the annual percentage of trades that can be 
classified as portfolio trades of increasing portfolio sizes from 2015 
to 2020 using TRACE data. For purposes of these calculations, a 
``portfolio trade'' is a trade of a basket of corporate bonds between 
only two parties at the same execution time.\31\ ``Portfolio size'' is 
defined as the number of unique CUSIPs contained in the basket. This 
analysis demonstrates that portfolio trades reported to TRACE grew 
significantly in the past six years. For example, Table 1 shows that 
the percentage of customer portfolio trades involving at least 10 
CUSIPs more than quadrupled from

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1.34% in 2015 to 5.64% in 2020. For portfolio trades involving at least 
30 CUSIPs, the percentage of trades increased from 0.29% in 2015 to 
3.60% in 2020. Inter-dealer portfolio trades grew at an even higher 
rate, albeit from a lower base level.
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    \31\ Using current TRACE data, FINRA can only approximate 
``portfolio trades'' as defined in the proposed rule change. 
Specifically, the analysis may include trades that are not executed 
at a single agreed price for the entire basket or that are not 
limited to two parties. As a result, the method used in this 
analysis may include as a ``portfolio trade'' some trades that would 
fall outside of the scope using the criteria set forth in the 
proposed rule change. However, FINRA believes that the method used 
in these calculations is reasonable for purposes of the analysis 
given the scope of information currently available in TRACE.
[GRAPHIC] [TIFF OMITTED] TN07DE21.002

BILLING CODE 4910-13-C
Economic Impact
1. Delayed Treasury Spot Trades
    A modifier identifying delayed Treasury spot trades would add 
valuable information to disseminated TRACE data by indicating that the 
reported price may not be at the current market. The new disseminated 
time field would benefit the market because market participants can use 
it to reasonably evaluate the spread at the time when the spread was 
agreed upon and compare it to other trades at or near the same time. 
Together, these additions will increase post-trade price transparency.
    Members would be required to make systems changes to accommodate 
the new modifier and time field. This would represent a fixed cost to 
FINRA members that report corporate bond transactions priced through a 
delayed Treasury spot process. The cost may be higher for members that 
house information regarding the time of spotting in a different 
platform or system that is not connected to its TRACE reporting 
system.\32\ FINRA expects that the ongoing variable cost of reporting 
the new modifier and populating the time field will be low for firms as 
costs currently are incurred for existing TRACE reporting.
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    \32\ See SIFMA Letter, infra note 37.
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2. Portfolio Trades
    A modifier identifying trades executed as part of a portfolio trade 
would allow market participants to identify with certainty which trades

[[Page 69344]]

occurred at attributed prices as part of a portfolio trade. With this 
information, market participants could better identify trade prices 
that may not reflect the market price for the individual bond. This 
modifier will improve post-trade price transparency. While some market 
participants may be capable of inferring portfolio trades from current 
disseminated data,\33\ the added modifier may particularly benefit 
smaller market participants, market observers and researchers who may 
not have systems in place to actively screen for portfolio trades using 
currently available data.
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    \33\ See SIFMA Letter, infra note 37.
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    FINRA members would incur costs associated with making system 
changes required to accommodate the new modifier. This would represent 
a fixed cost to FINRA members that execute and report portfolio trades. 
The variable cost of reporting the new modifier should be minimal to 
firms as costs are currently incurred for existing TRACE reporting. In 
addition, while market participants currently may infer that some 
trades may be portfolio trades, they cannot do so with certainty. The 
FIMSAC noted that there may be an increased theoretical risk that a 
market participant may identify the seller of a portfolio trade if 
these trades are identified in disseminated data.\34\ FINRA requested 
comments on the possibility of increased risk and members did not raise 
concerns regarding such risk.
---------------------------------------------------------------------------

    \34\ See FIMSAC Recommendation at 2.
---------------------------------------------------------------------------

3. Effects on Competition
    FINRA does not believe that the proposed modifiers will unduly 
burden competition. The costs for a firm to modify the reporting 
process for the proposed modifiers will be proportional to the fixed 
cost of the firm's reporting system, and thus be helped by similar 
factors. For example, firms with no activities in delayed Treasury spot 
trades or portfolio trades may not need to update their system; firms 
with limited activities may choose to manually input the new modifiers; 
and firms can also use third party reporting system vendors, which are 
intended to take advantage of lower costs due to economy of scale.
Alternatives Considered
    With respect to the proposed delayed Treasury spot provisions, 
FINRA considered requiring firms to report the available terms 
(including the agreed spread and applicable Treasury benchmark) of 
delayed Treasury spot trades within 15 minutes of the parties' 
agreement to the spread and benchmark. FIMSAC noted this alternative in 
its recommendation and stated that, while this construct would allow 
market participants to fully understand the spread-based economics of 
the trade at the point at which they are agreed, the proposed approach 
will be simpler and more cost-effective to implement and would avoid 
the need for reporting parties to enhance the initial TRACE report with 
the calculated dollar price of the trade when the delayed spot trade is 
``spotted'' later in the day.\35\ FINRA agrees and also believes that 
the proposed approach is beneficial in requiring reporting of the 
dollar price of the transaction once determined, which is then 
disseminated immediately upon receipt.
---------------------------------------------------------------------------

    \35\ See note 17 supra.
---------------------------------------------------------------------------

    With respect to the proposed portfolio modifier, FINRA considered 
other thresholds for the number of unique issues to qualify as a 
portfolio trade, such as 30 unique issues, similar to the FIMSAC 
recommendation to identify trades involving a basket of at least 30 
unique issuers (rather than issues), or as few as 2 unique issues, as 
suggested by some commenters. Lowering the threshold generally captures 
more portfolio trades and therefore provides greater informational 
benefits to market participants. It may also discourage traders from 
splitting up portfolio trades into smaller lists that do not meet the 
specified criteria to avoid identifying trades under the proposal. On 
the other hand, setting the threshold too low reduces the usefulness of 
the identifier. Portfolio trades are used to diversify individual bond 
risk and save on trading costs. Most of these benefits will diminish as 
the portfolio size becomes small. The deviation of individual bond 
price in a portfolio from market price will likely be less as the 
number of bonds in the portfolio decreases. The proposed threshold of 
10 strikes an appropriate balance between the trade-offs and is also 
recommended by some commenters.\36\
---------------------------------------------------------------------------

    \36\ See Jane Street Letter and SIFMA Letter, infra note 37.
---------------------------------------------------------------------------

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

    The proposed rule change was published for comment in Regulatory 
Notice 20-24 (July 2020). Seven comments were received in response to 
the Regulatory Notice.\37\ A copy of the Regulatory Notice is available 
on FINRA's website at http://www.finra.org. A list of the comment 
letters received in response to Regulatory Notice 20-24 is available on 
FINRA's website.\38\ Copies of the comment letters received in response 
to the Regulatory Notice are also available on FINRA's website. The 
comments are summarized below.
---------------------------------------------------------------------------

    \37\ See Comment submission from Melinda Ramirez, Consultant, 
dated July 19, 2020 (stating only ``Thank you for the opportunity to 
invest.'' [sic]); letter from Gregory Babyak, Global Head of 
Regulatory Affairs, Bloomberg L.P., to Jennifer Piorko Mitchell, 
Office of the Corporate Secretary, FINRA, dated September 14, 2020 
(``Bloomberg Letter''); letter from Howard Meyerson, Managing 
Director, Financial Information Forum, to Jennifer Piorko Mitchell, 
Office of the Corporate Secretary, FINRA, dated September 14, 2020 
(``FIF Letter''); letter from Kathleen Callahan, FIX Operations 
Director, FIX Trading Community, to Jennifer Piorko Mitchell, Office 
of the Corporate Secretary, FINRA, dated September 14, 2020 (``FIX 
Letter''); letter from Matt Berger, Global Head of Fixed Income and 
Commodities, Jane Street Capital, LLC, to Jennifer Piorko Mitchell, 
Office of the Corporate Secretary, FINRA, dated September 14, 2020 
(``Jane Street Letter''); letter from Chris Killian, Managing 
Director, Securitization and Credit, SIFMA, to Jennifer Piorko 
Mitchell, Office of the Corporate Secretary, FINRA, dated September 
15, 2020 (``SIFMA Letter''); and letter from Michael Grogan, V.P. & 
Head of US Fixed Income Trading--Investment Grade, Dwayne Middleton, 
V.P. & Head of Fixed Income Trading, Brian Rubin, V.P. & Head of US 
Fixed Income Trading--Below Investment Grade and Jonathan Siegel, 
V.P. & Senior Legal Counsel--Legislative & Regulatory Affairs, T. 
Rowe Price, to Jennifer Piorko Mitchell, Office of the Corporate 
Secretary, FINRA, dated September 15, 2020 (``T. Rowe Price 
Letter'').
    \38\ See SR-FINRA-2021-030 (Form 19b-4, Exhibit 2b) (available 
on FINRA's website at http://www.finra.org).
---------------------------------------------------------------------------

Delayed Treasury Spot Trades
    Bloomberg, Jane Street and T. Rowe Price supported the proposal to 
require members to identify corporate bond trades where the price of 
the trade is based on a spread to a benchmark U.S. Treasury Security 
that was agreed upon earlier in the day and report the time at which 
the spread was agreed upon.\39\ Bloomberg stated that the proposal 
``adds an incredible amount of value, insight and transparency into 
TRACE data,'' including by making it possible for ``market participants 
to derive intraday credit spread moves in specific corporate bond 
issues and issuers.'' \40\ Jane Street noted that while market 
participants would initially incur costs to modify trading reporting 
procedures to provide this information, such costs are outweighed by 
the benefit of obtaining additional information about delayed Treasury 
spot trades.\41\ T. Rowe Price noted that the reported dollar price for 
delayed Treasury spot trades may not take into account market or 
issuer-specific developments that have occurred throughout the day, 
such that

[[Page 69345]]

the proposal would benefit investment advisers and other market 
participant by providing timely and definitive clarity on whether 
reported transactions are delayed Treasury spot trades, and further 
would support price formation.\42\ T. Rowe Price also noted benefits of 
the proposal to transaction cost analysis and the portfolio valuation 
process for institutional investors.\43\
---------------------------------------------------------------------------

    \39\ See Bloomberg Letter at 2; Janes Street Letter at 1-2; T. 
Rowe Price Letter at 1.
    \40\ See Bloomberg Letter at 2.
    \41\ See Jane Street Letter at 2.
    \42\ See T. Rowe Price Letter at 1-2.
    \43\ See T. Rowe Price Letter at 2.
---------------------------------------------------------------------------

    SIFMA expressed mixed views on the delayed Treasury spot trade 
proposal. SIFMA noted that its members ``both see benefits to this 
proposal but also have material questions including the overall benefit 
vs. cost balancing.'' \44\ SIFMA stated that a potential benefit of the 
proposal would be to provide a ``clearer picture, retrospectively, as 
to liquidity flows throughout the day.'' \45\ However, SIFMA noted that 
some of its members indicated that the technical implementation of this 
proposal is complex, particularly around the new time field.\46\ SIFMA 
also highlighted that the fixed-cost burden presented by the proposal 
would be more meaningful for smaller, non-primary dealers, which could 
lead such dealers to use manual processes for trade reporting or no 
longer engage in these type of trades.\47\
---------------------------------------------------------------------------

    \44\ See SIFMA Letter at 3.
    \45\ See SIFMA Letter at 4.
    \46\ See SIFMA Letter at 4.
    \47\ See SIFMA Letter at 4.
---------------------------------------------------------------------------

    FIF did not support the delayed Treasury spot proposal, noting that 
the proposal would require firms to implement significant system 
changes.\48\ FIF stated that its members advised that dealer systems do 
not currently store the time the original terms are agreed in a manner 
that would enable reporting to TRACE on a timely basis, such that 
implementation would require significant cost and work for firms to 
upgrade various systems.\49\ FIF instead proposed that FINRA consider 
mandating that the SpecialPriceIndicator tag, or another existing TRACE 
tag, be marked as instructed by FINRA to identify delayed Treasury spot 
trades.\50\ FIF stated that this alternative would signal to the market 
that the terms of the trade were not agreed based on current market 
conditions.\51\
---------------------------------------------------------------------------

    \48\ See FIF Letter at 2.
    \49\ See FIF Letter at 2.
    \50\ See FIF Letter at 2.
    \51\ See FIF Letter at 2.
---------------------------------------------------------------------------

    FINRA agrees with commenters that the proposal relating to delayed 
Treasury spot trades will provide significant benefits to market 
participants and investors by enhancing transparency into corporate 
bond pricing for these types of trades. FINRA acknowledges that 
implementing the proposal will require members to make systems changes 
to identify Treasury spot trades and append the modifiers, as well as 
to capture and report the time at which the spread was agreed. FINRA 
believes, however, that the ongoing transparency benefits of reporting 
and disseminating this additional information will outweigh the initial 
costs required to modify trade reporting systems to enable gathering 
and reporting this new information. FINRA does not believe that use of 
an existing TRACE modifier or indicator, such as the special price tag, 
would sufficiently differentiate delayed Treasury spot trades in 
disseminated TRACE data or its regulatory audit trail data, nor would 
use of such a tag provide information about the time that the spread 
was agreed such that market participants can estimate the agreed-upon 
spread for such trades.\52\
---------------------------------------------------------------------------

    \52\ The ``special price'' modifier must be appended when a 
transaction is executed at a price based on arm's length negotiation 
and done for investment, commercial or trading considerations, but 
does not reflect current market pricing. See FINRA Rule 
6730(d)(4)(A) and Notice to Members 05-77 (November 2005). Thus a 
member must first make a determination, on a trade-by-trade basis, 
that a price is off-market before it appends the special price 
modifier.
---------------------------------------------------------------------------

    SIFMA also responded to two specific requests for comment in 
Regulatory Notice 20-24 concerning the proposed Treasury spot modifier. 
First, FINRA asked whether it should consider requiring firms to report 
the spread, either at the time the spread is agreed or later in the 
day, and, if reported at the time the spread is agreed, whether the 
dollar price should also be reported later in the day. SIFMA responded 
that FINRA should have enough information from the proposed trade 
reports to derive an estimate of the spread without requiring reporting 
of this additional data.\53\ SIFMA also noted that, in any case, 
dealers should not have to submit two reports, or amend a previous 
report, for the same trade.\54\ As described above, FINRA is not 
modifying the proposal to require reporting of the spread or to require 
members to submit two reports for the same trade.\55\ Second, FINRA 
requested comment on its understanding that most common pricing 
benchmark used for delayed Treasury spot trades is the on-the-run U.S. 
Treasury Security with the maturity that corresponds to the maturity of 
the corporate bond being priced. SIFMA stated that its members share 
that understanding.\56\
---------------------------------------------------------------------------

    \53\ See SIFMA Letter at 4.
    \54\ See SIFMA Letter at 4-5.
    \55\ See note 17 supra.
    \56\ See SIFMA Letter at 5.
---------------------------------------------------------------------------

    FIX didn't express a substantive view on the proposed amendments 
but suggested that it can assist in developing standard solutions for 
reporting of the proposed new delayed Treasury spot trade modifier.\57\ 
For example, FIX noted that adding the capability for FINRA to capture 
the time that the spread was agreed would be a minimal extension to an 
existing concept in FIX, specifically the TrdRegTimestamps field.\58\ 
FINRA notes that it supports several technical standards for reporting 
of trade information to TRACE, including FIX, and that the specific 
format and requirements for the new delayed Treasury spot modifier and 
reporting field for the time the spread was agreed would be published 
in TRACE technical specifications. As noted above, where a specific 
trade meets the criteria for both modifiers, such specifications may 
require the use of a third, single modifier indicating that both the 
delayed Treasury spot modifier and the portfolio trade modifier apply 
to the trade.
---------------------------------------------------------------------------

    \57\ See FIX letter at 3.
    \58\ See FIX letter at 2.
---------------------------------------------------------------------------

Portfolio Trades
    T. Rowe Price supported the proposal to require members to identify 
corporate bond trades that are components of a larger portfolio trade, 
as defined in the FIMSAC Recommendation.\59\ T. Rowe Price noted that 
the prices reported to TRACE for transactions that are part of a 
portfolio trade may not be at the current market for the security and 
that the proposal would benefit investment advisers and other market 
participants by providing timely and definitive clarity on whether a 
transaction is part of a portfolio trade, and further would support 
price formation.\60\ T. Rowe Price also noted benefits of the proposal 
to transaction cost analysis and the portfolio valuation process for 
institutional investors.\61\
---------------------------------------------------------------------------

    \59\ See T. Rowe Price Letter at 1.
    \60\ See T. Rowe Price Letter at 1-2.
    \61\ See T. Rowe Price Letter at 2.
---------------------------------------------------------------------------

    FIF, Bloomberg and Jane Street generally supported the proposal but 
suggested certain modifications to the conditions for trades that would 
qualify for the proposed portfolio trade modifier under the FIMSAC 
Recommendation,\62\ while SIFMA expressed generally mixed views on the 
portfolio trade proposal.\63\
---------------------------------------------------------------------------

    \62\ See FIF Letter at 1-2; Bloomberg Letter at 3-4; Jane Street 
Letter at 2.
    \63\ See SIFMA Letter at 1-3.

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

[[Page 69346]]

    FIF and SIFMA recommended that prong (ii) of the Portfolio Trade 
Definition be changed to a threshold based on the number of unique 
issues or securities, rather than the number of unique issuers.\64\ FIF 
noted that shifting to a security basis for this prong would avoid 
challenges in identifying and processing which bonds are associated 
with a particular issuer and would result in more trades being reported 
as portfolio trades, which would provide greater transparency and 
enhance FINRA's audit trail.\65\ FIF also stated that basing the 
determination of a portfolio trade on the number of unique issuers 
would raise the question of whether bonds of affiliated issuers should 
be counted as one or multiple issuers, and highlighted in particular 
bonds issued by special purpose vehicle subsidiaries.\66\ SIFMA stated 
that while it understands that using the number of unique issuers is 
intended to scope in diversified portfolio trades, its members raised 
the concern that doing so would be more complicated to implement than 
basing the threshold on the number of securities in the portfolio.\67\ 
SIFMA noted several examples of potential complications that could 
arise by using unique issuers, such as determining how to treat 
affiliates and subsidiaries and how guarantees might affect the 
analysis.\68\ SIFMA stated that these issues would require market 
participants to generate large lists of bonds and determine how to 
attribute each bond to a unique issuer, which would not be easily 
automatable and would introduce the risk of errors and omissions in 
TRACE reporting.\69\ FINRA agrees with these commenters that using a 
threshold based on the number of individual securities, rather than 
issuers, to determine when to append the portfolio trade modifier would 
result in a clearer and easier to implement approach to identifying 
portfolio trades, and has modified the proposal accordingly.
---------------------------------------------------------------------------

    \64\ See FIF Letter at 2; SIFMA Letter at 2-3.
    \65\ See FIF Letter at 2-3.
    \66\ See FIF Letter at 3.
    \67\ See SIFMA Letter at 2-3.
    \68\ See SIFMA Letter at 3.
    \69\ See SIFMA Letter at 3.
---------------------------------------------------------------------------

    Jane Street, Bloomberg, FIF and SIFMA commented on the threshold 
number for appending the portfolio trade modifier, which the FIMSAC 
recommendation set at 30. FIF stated that a trade involving fewer than 
30 unique issuers should still be considered a portfolio trade if it 
meets the other conditions in the definition.\70\ Jane Street stated 
that 30 unique issuers is too high and recommended that a basket 
containing bonds from at least 10 unique issuers should be reported 
using the portfolio trade modifier, which would maximize the 
informational benefit of the new modifier since many portfolio trades 
contain bonds of between 10 and 30 unique issuers.\71\ SIFMA stated 
that some of its members believe that a lower number of securities 
would be more appropriate, such as 10, while other of its members are 
comfortable with the proposed 30 or an even higher number.\72\ 
Bloomberg recommended that TRACE should identify every situation where 
two or more securities are transacted at an agreed upon price where the 
price may not reflect the current market price for the bonds.\73\ As 
described above, FINRA has modified the proposal by lowering the 
threshold from 30 to 10. FINRA believes that lowering the threshold for 
portfolio trades that would be identified by the new modifier in this 
manner would provide greater informational benefits to market 
participants. However, FINRA believes that a lower threshold than 10 
issues, such as two or more securities, would be over-inclusive and 
reduce the usefulness of the modifier.
---------------------------------------------------------------------------

    \70\ See FIF Letter at 2.
    \71\ See Jane Street Letter at 2.
    \72\ See SIFMA Letter at 3.
    \73\ See Bloomberg Letter at 4.
---------------------------------------------------------------------------

    With respect to the proposed prong requiring that a portfolio trade 
must be executed on an all or none or most or none basis, Bloomberg 
noted that an ``all-or-none'' designation is ``an execution constraint 
that is well defined in all markets'' but that the concept of ``most-
or-none'' does not currently exist and would require further 
clarification around what number of constituents in the basket 
constitutes ``most.'' \74\ Bloomberg therefore recommended using a 
definition of a basket that focuses on executions, rather than order 
designations.\75\ As described above, FINRA agrees that this aspect of 
the initial proposal is not well-understood and believes that the 
Portfolio Trade Definition would be best implemented without an ``all-
or-none or most-or-none'' prong. Therefore, under the current 
formulation, if two parties enter into negotiations with respect to a 
basket of bonds, the component trades would be identified with the new 
portfolio trade modifier so long as the resulting basket trade meets 
the other conditions specified in the Portfolio Trade Definition.
---------------------------------------------------------------------------

    \74\ See Bloomberg Letter at 3-4.
    \75\ See Bloomberg Letter at 4.
---------------------------------------------------------------------------

    SIFMA also commented more broadly on the portfolio trade proposal. 
SIFMA stated that its members see two aspects to the portfolio trade 
proposal: (1) The identification of portfolio trades vs. other kinds of 
trades and (2) the identification of potentially off-market trades.\76\ 
With respect to the first aspect, SIFMA noted that, while the proposal 
would make it easier to identify portfolio trades, some of its members 
believe it is already fairly easy to identify portfolio trades today 
without the specific modifier.\77\ However, SIFMA also noted that other 
of its members believe that the proposal would benefit smaller market 
participants, market observers and researchers, who may not have 
systems in place to actively screen for portfolio trades using 
currently available data.\78\ SIFMA noted that some of its members have 
concerns about the potential impact on liquidity resulting from 
disclosure of trading strategies, while other members did not believe 
that this is a material concern. With respect to the second aspect, 
SIFMA stated that some of its members have questioned the 
appropriateness of a flag that does not provide definitive information 
regarding whether the price is off-market, since a price in a portfolio 
trade may or may not be off-market.\79\ SIFMA noted that dealers are 
already expected to review each line item in a portfolio trade to 
determine if it is off-market and, if so, append the existing special 
price indicator in TRACE reports. SIFMA stated that one potential 
benefit of the proposal could be to reduce compliance burdens if the 
new portfolio trade modifier replaces the special price indicator for 
components of portfolio trades.\80\ On a related point, SIFMA asked 
FINRA to confirm that the portfolio trade modifier would be taken into 
account in fair pricing reviews.\81\ SIFMA also stated dealers should 
not face an undue burden to explain why a price on a trade identified 
as a portfolio trade was off-market.\82\ FINRA confirms that the 
portfolio trade modifier would be taken into account in FINRA's reviews 
of members' trading activities, including fair pricing reviews, along 
with any other indicators or modifiers that may be appended to 
individual trades (such as the special price indicator, where 
applicable). However, the new portfolio trade modifier would

[[Page 69347]]

not replace any other applicable indicators or modifiers, including the 
special price indicator, where applicable. FINRA continues to believe 
that, on balance, identification of portfolio trades through the 
proposed portfolio trade modifier would improve market transparency and 
provide greater certainty to market participants and investors 
regarding such trades.
---------------------------------------------------------------------------

    \76\ See SIFMA Letter at 1.
    \77\ See SIFMA Letter at 2. SIFMA also expressed concern that 
the proposal shifts TRACE away from being a price transparency tool 
into a tool that provides trading strategy details. See id.
    \78\ See SIFMA Letter at 2.
    \79\ See SIFMA Letter at 2.
    \80\ See SIFMA Letter at 2.
    \81\ See SIFMA Letter at 2.
    \82\ See SIFMA Letter at 2.
---------------------------------------------------------------------------

    Bloomberg also commented more generally on the portfolio trade 
proposal. Bloomberg stated that it has significant reservations about 
the portfolio trade proposal because there would be significant 
incentives for liquidity seekers to avoid sending baskets that meet 
criteria.\83\ Specifically, Bloomberg noted that dissemination of 
individual components of portfolio trades as unrelated transactions in 
TRACE data, as it is today, protects liquidity seekers, while appending 
the proposed modifier could lead to significant information leakage 
such that market participants would understand both why and how the 
trade was executed.\84\ Bloomberg expressed concern that the modifier 
would therefore be problematic because it would alert the market that a 
change in portfolio strategy had occurred, for example by allowing 
participants to reverse engineer a particular institution's views on a 
particular issue, which could dampen liquidity. Bloomberg stated that 
these concerns would reduce the transparency benefits sought by the 
proposal because liquidity seekers and providers may simply split up 
their baskets into smaller lists that do not meet the proposed criteria 
for the portfolio trade modifier.\85\ Bloomberg also suggested that 
transparency could be enhanced by instead identifying every situation 
where two or more securities are transacted at an agreed upon price 
where the price may not reflect the current market price for the bonds, 
drawing an analogy to reporting modifiers used for equities in the 
public data feeds to indicate transactions with special circumstances 
that impact price.\86\ As discussed above, FINRA believes that, on 
balance, identification of portfolio trades through the new proposed 
portfolio trade modifier would improve market transparency and provide 
greater certainty to market participants and investors regarding such 
trades. With respect to Bloomberg's suggestion to identify any 
portfolio trades involving two or more securities, as discussed above 
FINRA believes such a low threshold would be over-inclusive and would 
reduce the usefulness of the modifier, while a threshold of 10 
securities as proposed would benefit market participants by providing 
greater transparency into pricing in the corporate bond market, while 
avoiding capturing transactions that are not portfolio trades, as that 
term is commonly understood in the market. In addition, as discussed 
above, FINRA believes lowering the threshold to 10 unique issues (from 
the threshold of 30 set forth in the FIMSAC Recommendation) may 
discourage traders from splitting up portfolio trades into smaller 
lists that do not meet the specified criteria for the proposed modifier 
to avoid identifying the trade under the proposal.
---------------------------------------------------------------------------

    \83\ See Bloomberg Letter at 3.
    \84\ See Bloomberg Letter at 3.
    \85\ See Bloomberg Letter at 3.
    \86\ See Bloomberg Letter at 4.
---------------------------------------------------------------------------

    FIF requested guidance on application of the portfolio trade 
proposal in certain scenarios. Specifically, FIF stated that its 
members request guidance on whether non-TRACE-Eligible Securities 
should be counted toward the portfolio basket size threshold where a 
portfolio trade involves some bonds that are TRACE-Eligible Securities 
and other bonds that are not TRACE-Eligible Securities.\87\ FINRA 
confirms that a security that is a non-TRACE Eligible Security, as well 
as a security other than a corporate bond that is a TRACE Eligible 
Security, should not be counted toward the portfolio basket size 
threshold. FIF also asked for guidance on the definition of a ``single 
agreed price'' in the context of a portfolio trade.\88\ FINRA is 
clarifying that a portfolio trade would be considered to be executed 
for a ``single agreed price'' for the entire basket where the overall 
price for the basket has been negotiated or agreed on an aggregate 
basis, including where the parties used a pricing list or pricing 
service as the starting point for negotiations but the final price was 
determined by applying a uniform spread to all securities in the 
basket. However, where the parties simply aggregate individual prices 
obtained from a pricing list or service without further negotiation, 
this would not be considered within the scope of the proposed portfolio 
trade modifier.\89\ FIF further asked whether a portfolio trade 
involving a delayed spotting process would qualify as a portfolio 
trade.\90\ FINRA notes that, where a trade meets the conditions for 
applying multiple modifiers, all applicable modifiers should be 
appended unless otherwise provided for in the TRACE technical 
specifications. Thus, in the scenario presented by FIF, the trade may 
qualify for the delayed Treasury spot modifier if the trades are based 
on a spread to the yield of a U.S. Treasury Security and the spread was 
agreed upon that day prior to the Time of Execution of the transaction. 
If the trade also involved at least 10 unique securities and was 
transacted for a single agreed price for the entire basket and the 
other conditions of the Portfolio Trade Definition have been met, the 
trade must also be appended with the portfolio trade modifier. The 
specific format and requirements for the new modifiers would be 
published in TRACE technical specifications, which may require the use 
of a third, single modifier indicating that both the delayed Treasury 
spot modifier and the portfolio trade modifier apply to the trade. As 
noted below, FINRA will work with members to provide further 
interpretive guidance, where needed.
---------------------------------------------------------------------------

    \87\ See FIF Letter at 3.
    \88\ See FIF Letter at 3.
    \89\ For example, consistent with the FIMSAC's recommendation, 
the ``single agreed price'' prong would ``exclude normal multi-
dealer list trades that originate as either an electronic OWIC or a 
BWIC as such protocols result in a competitively negotiated price 
for each security in the list.'' See FIMSAC Recommendation at 3 n.5.
    \90\ See FIF Letter at 3. Specifically, FIF asked whether the 
following scenario would constitute a portfolio trade: (i) A third-
party publishes reference prices for a universe of bonds at a set 
time each day at 3 p.m.; (ii) at 10 a.m. two firms agree to trade a 
basket of securities that represents a subset of this universe based 
upon the as-of-yet unpublished 3 p.m. reference price; and (iii) at 
3:30 p.m. the two firms review the prices published at 3 p.m. for 
the basket constituents and come to consensus on the final price, 
which is an aggregate of the constituent prices. FIF further asked 
whether the existence of any offset to the price (e.g., the 3pm 
reference price plus a fixed markup) would change whether the basket 
in this scenario would be considered a portfolio trade.
---------------------------------------------------------------------------

    FIX suggested that it can assist in developing standard solutions 
for reporting the proposed new portfolio trade modifier.\91\ For 
example, FIX noted that the TrdType and TrdSubType fields could be used 
to identify portfolio trades.\92\ FINRA notes that it supports several 
technical standards for reporting of trade information to TRACE, 
including FIX, and that the specific format and requirements for the 
new portfolio trade modifier would be published in TRACE technical 
specifications.
---------------------------------------------------------------------------

    \91\ See FIX letter at 3.
    \92\ See FIX letter at 2.
---------------------------------------------------------------------------

Implementation Period
    FIF, Bloomberg and SIFMA commented on the implementation period 
that would be necessary with respect to both the delayed Treasury spot 
and portfolio trade aspects of the proposal. FIF requested that the 
implementation timeline for the changes

[[Page 69348]]

commence upon the publication of updated technical specifications and 
the issuance of FAQs by FINRA, given the significant technical work 
that will be required to implement the proposal and various issues 
where the industry will require interpretive guidance from FINRA.\93\ 
SIFMA stated that a significant amount of lead time would be needed 
before the implementation date for the delayed Treasury spot trade 
proposal, ``on the order of 18 months or more.'' \94\ Bloomberg noted 
the ``significant change in workflow'' that would be required to 
implement the delayed Treasury spot proposal, particularly with respect 
to recording and reporting the time that the spread was agreed.\95\ 
Bloomberg also noted that consumers of TRACE data will need 
specifications in advance to make changes to systems to ingest the 
updated data feed and interpret the data.\96\ Bloomberg therefore 
recommended that FINRA provide the industry with ``plenty of time'' to 
accommodate the changes and that FINRA should conduct outreach with 
members to determine an appropriate amount of lead time following 
FINRA's release of FAQs and TRACE messaging specifications needed to 
code, test and implement the necessary changes.\97\ Bloomberg also 
noted similar implementation issues and made the same recommendation 
with respect to the portfolio trade aspect of the proposal.\98\
---------------------------------------------------------------------------

    \93\ See FIF Letter at 3.
    \94\ See SIFMA Letter at 4.
    \95\ See Bloomberg Letter at 2-3.
    \96\ See Bloomberg Letter at 3.
    \97\ See Bloomberg Letter at 3.
    \98\ See Bloomberg Letter at 5.
---------------------------------------------------------------------------

    FINRA acknowledges that members reporting to TRACE require an 
appropriate amount of time to implement the systems and other changes 
necessary to report the additional information required under the 
proposed rule change. As noted above, if the Commission approves the 
proposed rule change, FINRA will announce the effective date(s) of the 
proposed rule change in a Regulatory Notice.\99\ FINRA will publish a 
Regulatory Notice announcing the effective date(s) of the proposed 
amendments pursuant to Rule 6730(d)(4)(H) and (I) no later than 90 days 
following Commission approval, and the effective date(s) will be no 
later than 365 days following publication of the Regulatory Notice. 
FINRA will publish a Regulatory Notice announcing the effective date of 
the proposed amendments pursuant to Rule 6730(c)(14) once 
determined.\100\ As is generally the case for TRACE rule changes, FINRA 
will endeavor to publish updated technical specifications as far as 
possible in advance of the effective date(s) and will work with members 
to provide interpretive guidance, where needed.
---------------------------------------------------------------------------

    \99\ See supra note 25.
    \100\ See supra note 26.
---------------------------------------------------------------------------

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

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

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. In particular, the Commission 
requests comment on whether the proposal should be expanded to require 
FINRA members to report, with respect to delayed Treasury spot trades, 
the actual yield spread (``spread'') between the corporate bond and the 
U.S. Treasury Security that is agreed between the counterparties; and 
(2) the CUSIP number (or another identifier) of the specific U.S. 
Treasury Security that serves as the basis for the spread calculation. 
Presently, with respect to Treasury spot trades, FINRA is proposing to 
require only that a member append a new modifier when reporting a 
delayed Treasury spot trade and the time at which the spread for the 
delayed Treasury spot trade was agreed upon.
    FINRA discussed earlier in this notice that the FIMSAC considered 
these additional options but ultimately did not recommend them. FINRA 
also discussed the SIFMA comment to its Regulatory Notice preceding 
this filing, where SIFMA stated that market observers ``should have 
enough information from the proposed trade reports to derive an 
estimate of the spread without requiring reporting of this additional 
data.'' FINRA also stated that it requested comment on its 
understanding that most common pricing benchmark used for delayed 
Treasury spot trades is the on-the-run U.S. Treasury Security with the 
maturity that corresponds to the maturity of the corporate bond being 
priced; SIFMA stated that its members share that understanding. 
Therefore, FINRA has not proposed to require these additional two data 
elements but stated above that it ``will assess the reported data 
regarding delayed Treasury spot trades and continue to engage with 
industry participants regarding whether any future changes may be 
appropriate to further improve transparency.'' In light of this 
background, commenters are invited to provide views on the following:
    1. How easy or difficult would it be for market observers to 
``derive an estimate of the spread'' having only the time that the 
spread was agreed between the counterparties to the delayed Treasury 
spot trade? How confident are market observers that their estimates are 
accurate? Would reporting and public dissemination of the actual spread 
for each specific delayed Treasury spot trade and the benchmark CUSIP 
used for the spread be preferable?
    2. Do FINRA members who engage in delayed Treasury spot trades keep 
a record of the agreed upon spread and the benchmark CUSIP for a 
specific trade in any internal systems? Could FINRA members who engage 
in delayed Treasury spot trades capture the agreed upon spread and the 
benchmark CUSIP used for the spread on a specific trade in the same 
location as the time the spread was agreed to that FINRA is proposing 
to be reported in this proposal? Whatever the case, please describe the 
burdens that would be associated with reporting the actual spread and 
the CUSIP number (or other identifier) of the benchmark U.S. Treasury 
Security.
    3. The current proposal, if approved by the Commission, would 
require members to add a new modifier to a delayed Treasury spot trade 
and to report the time at which the spread for the delayed Treasury 
spot trade was agreed upon. Affected reporting members would have to 
make systems changes to report these additional data elements for all 
delayed Treasury spot trades. What would be the incremental burden of 
the systems changes necessary to report two additional data elements--
the agreed upon spread and the CUSIP or other identifier of the 
benchmark U.S. Treasury Security--at same time? What would be the costs 
of adding these two additional data elements in the future, as part of 
a separate systems upgrade, relative to

[[Page 69349]]

implementing all four data elements as part of the same upgrade?
    4. How confident are market observers that they share the same 
understanding as the counterparties to a delayed Treasury spot trade of 
the specific U.S. Treasury Security used as the benchmark? Are there 
delayed Treasury spot trades where the time to maturity for the 
corporate bond does not correspond exactly to any U.S. Treasury 
Security so there is ambiguity as to what U.S. Treasury Security would 
serve as the benchmark? Is there a clear market convention for 
benchmarking off-the-run corporate securities for which the maturities 
fall between two on-the-run Treasury securities (for example, 4-year 
maturities, 6-year maturities, etc.)?
    5. Do you believe it would be appropriate for FINRA to disseminate 
its assumption of the U.S. Treasury Security used as the benchmark for 
a delayed Treasury spot trade, even if FINRA does not require it to be 
reported by members? Why or why not? 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 [email protected]. Please include 
File Number SR-FINRA-2021-030 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-FINRA-2021-030. 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 website (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 website 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. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-FINRA-2021-030 and should be submitted 
on or before December 28, 2021.
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    \101\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\101\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2021-26452 Filed 12-6-21; 8:45 am]
BILLING CODE 8011-01-P


