81_FR_44194 81 FR 44065 - Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of a Proposed Rule Change To Increase Transparency for CMO Transactions

81 FR 44065 - Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of a Proposed Rule Change To Increase Transparency for CMO Transactions

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 81, Issue 129 (July 6, 2016)

Page Range44065-44073
FR Document2016-15918

Federal Register, Volume 81 Issue 129 (Wednesday, July 6, 2016)
[Federal Register Volume 81, Number 129 (Wednesday, July 6, 2016)]
[Notices]
[Pages 44065-44073]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2016-15918]


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SECURITIES AND EXCHANGE COMMISSION

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


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

June 29, 2016.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on June 27, 2016, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by FINRA. The Commission 
is publishing this notice to solicit comments on the proposed rule 
change from interested persons.
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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 to [sic] amend the FINRA Rule 6700 Series and 
the Trade Reporting and Compliance Engine (``TRACE'') dissemination 
protocols to provide for dissemination of transactions in an additional 
type of Securitized Products--specifically, collateralized mortgage 
obligations (``CMOs''). In addition, FINRA is proposing a corresponding 
change to Rule 6730 to reduce the reporting period for CMOs from end-
of-day to 60 minutes, and also to amend Rule 6730 to simplify the 
reporting requirements for transactions in CMOs executed prior to 
issuance. FINRA further proposes technical and conforming changes to 
the FINRA Rule 6700 Series and Rule 7730 in connection with the changes 
referenced above.
    The text of the proposed rule change is available on FINRA's Web 
site at http://www.finra.org, at the principal office of FINRA and at 
the Commission's Public Reference Room.

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

    In its filing with the Commission, FINRA included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. FINRA has prepared summaries, set forth in sections A, 
B, and C below, of the most significant aspects of such statements.

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

1. Purpose
    FINRA proposes to amend the Rule 6700 Series and the TRACE 
dissemination protocols to: (1) Provide for the dissemination of 
transactions in CMOs,\3\ an additional group of Securitized Products 
\4\ not yet subject to dissemination; (2) reduce the reporting 
timeframe for CMOs from end-of-day to 60 minutes; and (3) simplify the 
reporting requirements for pre-issuance CMO transactions. FINRA also 
proposes technical and conforming changes to the Rule 6700 Series and 
Rule 7730.
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    \3\ The term ``Collateralized Mortgage Obligation,'' or CMO, is 
defined in FINRA Rule 6710(dd) to mean a type of Securitized Product 
backed by Agency Pass-Through Mortgage-Backed Securities as defined 
in paragraph (v), mortgage loans, certificates backed by project 
loans or construction loans, other types of mortgage-backed 
securities or assets derivative of mortgage-backed securities, 
structured in multiple classes or tranches with each class or 
tranche entitled to receive distributions of principal and/or 
interest according to the requirements adopted for the specific 
class or tranche, and includes a real estate mortgage investment 
conduit (``REMIC'').
    \4\ The term ``Securitized Product'' is defined in Rule 6710(m) 
to mean a security collateralized by any type of financial asset, 
such as a loan, a lease, a mortgage, or a secured or unsecured 
receivable, and includes but is not limited to an asset-backed 
security as defined in Section 3(a)(79)(A) of the Exchange Act, a 
synthetic asset-backed security, and any residual tranche or 
interest of any security specified above, which tranche or interest 
is a debt security for purposes of paragraph (a) and the Rule 6700 
Series.
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Background
    FINRA requires members to report transactions in any security that 
meets the definition of ``TRACE-Eligible Security'' \5\ to TRACE. Most 
transactions

[[Page 44066]]

must be reported to TRACE within 15 minutes of the time of execution 
and are subsequently disseminated.
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    \5\ Rule 6710 generally defines a ``TRACE-Eligible Security'' 
as: (1) A debt security that is U.S. dollar-denominated and issued 
by a U.S. or foreign private issuer (and, if a ``restricted 
security'' as defined in Securities Act Rule 144(a)(3), sold 
pursuant to Securities Act Rule 144A); or (2) a debt security that 
is U.S. dollar-denominated and issued or guaranteed by an ``Agency'' 
as defined in Rule 6710(k) or a ``Government-Sponsored Enterprise'' 
as defined in Rule 6710(n).
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    Securitized Products were the last major group of fixed income 
securities to become subject to TRACE reporting. Initially, FINRA 
received reports of transactions in these products for regulatory audit 
trail purposes only and did not disseminate transaction data. FINRA 
used the transaction reports it received to study the liquidity and 
trading characteristics of various types of Securitized Products. Based 
on its study, FINRA then started a phased approach to disseminating 
transaction information for certain Securitized Products.
    For the first phase, on November 12, 2012, FINRA began 
disseminating transactions in Agency Pass-Through Mortgage-Backed 
Securities traded To Be Announced (``TBA'') (``MBS TBA'' transactions), 
which are the most liquid types of Securitized Products.\6\ Next, on 
July 22, 2013, FINRA began disseminating transactions in Agency Pass-
Through Mortgage-Backed Securities and SBA-Backed ABS (as defined in 
FINRA Rule 6710(bb)) traded in Specified Pool Transactions.\7\ On June 
30, 2014, FINRA began to disseminate information on transactions in 
TRACE-Eligible Securities effected as Rule 144A transactions, provided 
that such transactions were in securities that would be subject to 
dissemination if effected in non-Rule 144A transactions.\8\ And most 
recently, on June 1, 2015, FINRA began to disseminate transactions in 
Asset-Backed Securities.\9\ Today, the remaining types of Securitized 
Products not yet subject to dissemination are CMOs, commercial 
mortgage-backed securities (``CMBSs''), and collateralized debt 
obligations (``CDOs'').\10\ CMOs are the largest and most actively 
traded of these remaining Securitized Products types. In addition, CMOs 
typically have relatively smaller transaction sizes than those for 
CMBSs and CDOs.
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    \6\ See Securities Exchange Act Release No. 66829 (April 18, 
2012), 77 FR 24748 (April 25, 2012) (Order Approving File No. SR-
FINRA-2012-020); Regulatory Notice 12-26 (May 2012) and Regulatory 
Notice 12-48 (November 2012).
    \7\ See Securities Exchange Act Release No. 68084 (October 23, 
2012), 77 FR 65436 (October 26, 2012) (Order Approving File No. SR-
FINRA-2012-042) and Regulatory Notice 12-56 (December 2012).
    \8\ See Securities Exchange Act Release No. 70345 (September 6, 
2013), 78 FR 56251 (September 12, 2013) (Order Approving File No. 
SR-FINRA-2013-029) and Regulatory Notice 13-35 (October 2013).
    \9\ See Securities Exchange Act Release No. 71607 (February 24, 
2014), 79 FR 11481 (February 28, 2014) (Order Approving File No. SR-
FINRA-2013-046) and Regulatory Notice 14-34 (August 2014).
    \10\ A ``Collateralized Debt Obligation,'' or CDO, would be 
defined in proposed FINRA Rule 6710(ff) to mean a type of 
Securitized Product backed by fixed-income assets (such as bonds, 
receivables on loans, or other debt) or derivatives of these fixed-
income assets, structured in multiple classes or tranches with each 
class or tranche entitled to receive distributions of principal and/
or interest in accordance with the requirements adopted for the 
specific class or tranche. A CDO includes, but is not limited to, a 
collateralized loan obligation, or CLO, and a collateralized bond 
obligation, or CBO.
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Current Proposal
    FINRA is proposing to expand the dissemination of Securitized 
Products to include CMOs. Under the proposal, a CMO transaction will be 
subject either to dissemination immediately upon receipt of the TRACE 
transaction report, or to aggregate, periodic dissemination, depending 
on the size of the transaction and the number of transactions in the 
CMO security during a given period.
    Specifically, transactions in CMOs, including transactions effected 
pursuant to Securities Act Rule 144A, will be subject to aggregate, 
periodic dissemination on a weekly and monthly basis where the 
transaction value is $1 million or more (calculated based upon original 
principal balance) and where there have been five or more transactions 
of $1 million or more in the reporting period reported by at least two 
different market participant identifiers (``MPIDs'').\11\ For the 
smaller-size transactions--i.e., transactions valued under $1 million 
(calculated based upon original principal balance)--FINRA will 
disseminate trade-by-trade information immediately upon receipt by 
TRACE.\12\
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    \11\ For example, if five transactions occurred in a particular 
CMO security during each of the four weeks in a calendar month and 
were reported by at least two unique MPIDs, then four weekly reports 
would be disseminated; in addition, information on those 
transactions would be included in the aggregate monthly report for 
that calendar month. If five transactions occurred over the course 
of a calendar month, but did not occur during a single week, then a 
weekly report would not be available for that security (but the 
transaction information would be included in the monthly report 
provided the transactions were reported by at least two unique 
MPIDs). For purposes of determining if a CMO security has been 
reported by at least two different MPIDs, FINRA notes that it would 
consider an interdealer trade to be reported by one MPID--the sell 
side dealer--even though the trade is reported by both sides of the 
transaction.
    \12\ Also in connection with the proposed dissemination of 
information on CMO transactions, FINRA proposes to amend Rule 7730 
(fees for TRACE) to reflect the addition of CMOs to the applicable 
data sets. Disseminated periodic reports will become available as 
part of the Securitized Products Data Set and all CMO transactions--
even if not previously disseminated upon receipt or as part of a 
periodic report--will become part of the Historic Securitized 
Products Data Set in FINRA Rule 7730. Similarly, disseminated 
periodic reports for transactions in CMOs issued pursuant to Rule 
144A will become part of the Rule 144A Data Set, and all Rule 144A 
transactions in CMOs will become part of the Historic Rule 144A Data 
Set. The inclusion of this additional data in such data sets will 
not affect the fees currently in effect.
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    The proposal will provide for this approach to CMO dissemination by 
amending FINRA Rule 6750 (Dissemination of Transaction Information). 
Rule 6750 currently contains two operative paragraphs--paragraph (a), 
which provides generally for the dissemination of TRACE-Eligible 
Securities immediately upon receipt of a transaction report, and 
paragraph (b), which contains an exception to the general dissemination 
provision in paragraph (a) and which notes the security or transaction 
types that are not subject to dissemination. Currently, the remaining 
Securitized Products--CMOs, CMBSs, and CDOs, are found within paragraph 
(b) and are therefore not subject to dissemination.
    Under the proposal, current paragraph (b) will be replaced with a 
paragraph that provides specifically for the dissemination of larger-
size ($1 million or more) CMO transactions on a periodic, rather than 
immediate, basis, provided the transaction occurs in a CMO security 
that meets the minimum activity threshold described above (i.e., at 
least five transactions in the period reported by at least two 
different MPIDs). The exception paragraph, which sets forth the 
transaction types not subject to dissemination, will be new paragraph 
(c). It will be revised to note that the only Securitized Products not 
subject to dissemination are CMBSs, CDOs, and CMOs where the CMO 
transaction value is $1 million or more (calculated based upon original 
principal balance) and the transaction does not qualify for periodic 
dissemination. However, as noted above, all transactions in CMOs will 
become part of the historic data sets even if they were not subject to 
dissemination upon receipt or periodic dissemination.\13\
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    \13\ See supra note 12.
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    To facilitate the proposed dissemination of CMOs, the proposal will 
also amend Rule 6730(a)(3) to reduce the time period for reporting to 
TRACE transactions in CMOs to TRACE executed on or after issuance.\14\ 
Currently, these CMO transactions must be reported to TRACE no later 
than the close of the TRACE system on the date

[[Page 44067]]

of execution.\15\ Under the proposal, paragraph (H) would be added to 
require that transactions in these CMOs must be reported to TRACE 
within 60 minutes of execution.\16\
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    \14\ As discussed in further detail below, reporting 
requirements for transactions in a CMO prior to that CMO's issuance 
are addressed separately in FINRA Rule 6730(a)(3)(C). FINRA notes 
that it will also make a technical, clarifying edit to Rule 
6730(a)(3) that is otherwise unrelated to this proposal; 
specifically, FINRA will delete language in Rule 6730(a)(3)(B) that 
describes the transitional reporting phase for Asset-Backed 
Securities, since the transitional phase is now complete.
    \15\ See FINRA Rule 6730(a)(3)(A). As part of this proposal, 
FINRA is proposing a technical, clarifying change to Rule 
6730(a)(3)(A). This paragraph currently is titled ``General 
Reporting Requirements'' for Securitized Products, but because only 
CDOs and CMBSs will remain subject to the paragraph after this 
proposal becomes effective, FINRA will rename this paragraph to make 
clear that applies specifically to CDOs and CMBSs.
    \16\ As with other TRACE-Eligible Securities that are subject to 
60-minute reporting, under proposed Rules 6730(a)(3)(H)(iii)-(iv), 
transactions in CMOs, CMBSs, and CDOs that are executed less than 60 
minutes before the TRACE system closes, or after, would need to be 
reported no later than 60 minutes after TRACE opens the following 
business day.
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    Finally, FINRA proposes to modify the reporting timeframe for pre-
issuance CMO transactions. FINRA is proposing to amend Rule 
6730(a)(3)(C) to provide that transactions in CMOs that are executed 
before the date of issuance of the security must be reported no later 
than the first settlement date of the security. Under the current rule, 
firms generally must report CMO transactions that are executed prior to 
issuance on the earlier of the business day that the security is 
assigned a CUSIP, or the date of issuance of the security. FINRA is 
aware that some firms, particularly small and mid-size firms, have had 
difficulty in determining with accuracy in a timely manner when the 
reporting obligation has been triggered, due to inconsistencies in 
communicating the relevant information between underwriters and trading 
parties. As a result, these firms do not always report trades in these 
instruments on the earlier of the two dates specified in the current 
rule. FINRA believes that, because new issuances in CMOs generally 
settle on the last business day of the month, the amended proposal 
would provide for a uniform reporting deadline that can be easily 
ascertained by all firms.
    If the Commission approves the proposed rule change, FINRA will 
announce the operative date of the proposed rule change in a Regulatory 
Notice to be published no later than 90 days following Commission 
approval. The operative date will be no later than 365 days following 
publication of the Regulatory Notice announcing Commission approval.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\17\ which requires, among 
other things, that FINRA rules must be designed to prevent fraudulent 
and manipulative acts and practices, to promote just and equitable 
principles of trade, and, in general, to protect investors and the 
public interest. As discussed throughout the filing, FINRA believes 
that the proposed rule change will promote greater transparency in the 
marketplace for CMOs. Based on dialogue with a variety of market 
participants, FINRA believes the information it proposes to disseminate 
would be valuable to assist in price discovery, determination of 
execution quality, and, in particular, valuation of securities 
positions. Furthermore, FINRA believes the proposal strikes an 
appropriate balance between promoting transparency and preserving 
anonymity, which may facilitate larger size trades and liquidity 
provision. Based on FINRA's ongoing study of the trading 
characteristics of Securitized Products, FINRA believes this proposal 
is an important next phase in dissemination that will position FINRA to 
evaluate whether and how to complete its expansion of dissemination to 
cover all Securitized Product types.
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    \17\ 15 U.S.C. 78o-3(b)(6).
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    FINRA further believes that the proposed change to 60-minute trade 
reporting will facilitate CMO dissemination by ensuring that FINRA is 
able to receive and disseminate CMO transaction information in a timely 
manner. Accordingly, FINRA believes this element of the filing will 
help promote transparency and enhance investor protection and the 
public interest.
    Finally, FINRA believes the proposed change to the reporting 
timeframe for pre-issuance CMOs will further just and equitable 
principles of trade by providing greater clarity and promoting 
compliance with applicable reporting rules.

B. Self-Regulatory Organization's Statement on Burden on Competition

    FINRA does not believe that the proposed rule change will result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act. FINRA has undertaken an 
economic impact assessment, as set forth below, to analyze the 
regulatory need for the proposed rule change, its potential economic 
impacts, including anticipated costs and benefits, and the alternatives 
FINRA considered in assessing how to best meet its regulatory 
objectives.
Need for the Rule
    As discussed above, FINRA believes this proposal is necessary and 
appropriate to further promote transparency in the markets for 
additional Securitized Products. FINRA believes the proposed 
dissemination of transaction information for CMOs would be valuable to 
assist in price discovery, determination of execution quality, and, in 
particular, valuation of securities positions. FINRA believes the 
proposed transition to 60-minute trade reporting for transactions in 
CMOs executed on or after issuance is necessary to facilitate 
meaningful dissemination of information for these securities. Finally, 
FINRA believes the proposed change to the reporting timeframe for 
transactions in pre-issuance CMOs is necessary to simplify the 
reporting process, given that some firms, small and medium size firms 
in particular, may have difficulty in determining with accuracy and in 
a timely manner when their reporting obligations have been triggered.
Economic Impacts
    FINRA believes that enhanced transparency in CMOs will benefit 
market participants, as discussed above, by contributing to more 
efficient pricing and better execution quality for market participants 
and clients. However, the proposed changes may impose direct and 
indirect costs on market participants; for example, the proposal might 
impose direct costs associated with more timely reporting of CMO 
transactions and indirect costs associated with the potential leakage 
of proprietary information. In the analysis below, we individually 
assess the impact on market participants of each proposed change--(1) 
dissemination of CMO transactions, (2) reducing the timeframe for 
reporting CMO transactions, and (3) simplifying the reporting 
requirements for pre-issuance CMO transactions.
(1) Dissemination of CMO Transactions
    The proposed dissemination of CMO transactions will enhance 
transparency, which should benefit market participants and clients via 
improved market quality. However, while enhanced transparency should 
provide benefits broadly to the marketplace, it may impose indirect 
costs on certain market participants, like those whose transaction 
information is subject to dissemination. FINRA is cognizant of the 
concern that the risk of information leakage could potentially harm 
market quality if it discourages liquidity provision. Accordingly, 
FINRA staff considered the potential for indirect costs associated with 
providing information publicly that might permit competitors to reverse 
engineer the disseminated data to produce private

[[Page 44068]]

information about trade participants, their trade positions and 
possibly their trading strategies.
    To investigate whether dissemination, as proposed, could 
potentially allow market participants to reverse-engineer the 
identities of broker-dealers or positions, FINRA staff examined the 
distribution of the number of MPIDs reporting transactions in each CMO 
CUSIP, over the time period spanning May 13, 2011 to August 14, 2015. 
Table 1 suggests that trading activity in CMOs, on a per-CUSIP basis, 
is quite concentrated, with 32,200 CUSIPs--33.3% of all CMO CUSIPs--in 
the sample traded by only one MPID over the sample period. These CUSIPs 
traded by only one MPID are referred to as ``concentrated'' CUSIPs. 
There were 64,449 remaining CUSIPs in the sample traded by two or more 
MPIDs, referred to as ``non-concentrated'' CUSIPs.\18\ CUSIPs are 
classified as concentrated and non-concentrated based on a threshold of 
one MPID, as it represents cases where the information about firm 
activity is most concentrated.
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    \18\ Concentrated CUSIPs have a Herfindahl-Hirschman Index (HHI) 
of one, while non-concentrated have an HHI that is less than one. 
Algebraically, HHI is calculated as follows: HHI = 
[Sigma]Ni = 1 si2 where si is the market share 
of firm i, and there are N total firms in a market. HHI is a 
succinct measure of market concentration, and it is widely used in 
analyses of monopoly power, antitrust litigation, and other 
prominent issues in industrial organization. The HHI of a market can 
range from 0 to 1 (some publications use 0 to 10,000, but the 
interpretation is the same after adjusting for scale), where HHI = 1 
represents a perfectly concentrated market (one firms controls the 
entire market) and HHI = 0 represents a perfectly competitive market 
(infinitely many firms have infinitesimally small market share).

      Table 1--The Number of Different MPIDs Trading in CMO CUSIPs
------------------------------------------------------------------------
                Number of MPIDs                    CUSIPs         %
------------------------------------------------------------------------
1.............................................       32,220         33.3
2.............................................       17,792         18.4
3.............................................       10,573         10.9
4.............................................        6,677          6.9
5.............................................        4,595          4.8
6.............................................        3,511          3.6
7.............................................        2,737          2.8
8.............................................        2,229          2.3
9.............................................        1,903          2.0
10............................................        1,590          1.6
11............................................        1,317          1.4
12............................................        1,128          1.2
13............................................          955          1.0
14............................................          869          0.9
15............................................          753          0.8
15+...........................................        7,820          8.1
                                               -------------------------
    Total.....................................       96,669          100
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    Table 2 reports trading activity (the number of transactions and 
trading volume) for the sample by concentrated versus non-concentrated 
CUSIPs. Trading activity in concentrated CUSIPs represents only 1.73% 
of transactions, but 15.75% of the trading volume. This suggests that 
concentrated CUSIPs have relatively larger trade sizes.

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

    Table 3 reports that the typical concentrated CUSIP trades only 
about one to two times over the entire sample period. For non-
concentrated CUSIPs reported by two or more MPIDs, the typical CMO 
trades 44.67 times over the sample period.\19\ In general, concentrated 
CUSIPs have on average about half of the trading volume of non-
concentrated CUSIPs.
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    \19\ On average, CMOs trade in 10.74 days out of 1,071 days in 
the sample period.

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

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

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

[[Page 44069]]

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

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

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

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

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

    This analysis suggests that information leakage may not be a 
significant issue based on the concentration of trading activity in 
certain CUSIPs. Tables 5 and 6 confirm that it would be difficult to 
ascertain significant information about a single MPID's trading 
strategy from both the real time and periodic dissemination of CMO 
trades, as less than 1% of trading in concentrated CUSIPs is expected 
to be disseminated. Moreover, there are no concentrated CUSIPs where 
the proposed rule would have led to dissemination of all trades by any 
individual MPID.\20\
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    \20\ 463 MPIDs would have all of their CMO trades disseminated 
immediately upon receipt; however, none of those trades are in 
concentrated CUSIPs.
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(2) Reducing the Timeframe for Reporting CMO Transactions
    The second proposed change, reducing the reporting timeframe for 
CMOs from end-of-day to 60 minutes is intended to facilitate timely 
dissemination of information for these securities. However, FINRA is 
aware that a narrower reporting window may impose direct costs on firms 
to the extent that the firms have to modify or upgrade their reporting 
systems to comply with the reduced time period for transactions in CMOs 
executed on or after issuance.
    In a sample of 2,476,666 transactions reported on the day of the 
execution, the average and median reporting time after execution are 
approximately 19 minutes and 33 seconds, respectively.\21\ 
Approximately 92% of CMO transactions are currently reported to TRACE 
within 60 minutes. Reports received 60 minutes or more after the 
transaction execution are significantly larger than those that are 
reported within 60 minutes.\22\
---------------------------------------------------------------------------

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

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

[[Page 44070]]

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

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

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

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

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

[[Page 44071]]

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

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

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

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

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

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

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

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

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

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

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

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

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

[[Page 44072]]

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

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

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

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

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

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-FINRA-2016-023 on the subject line.

Paper Comments

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

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

[[Page 44073]]

filing also will be available for inspection and copying at the 
principal office of FINRA. All comments received will be posted without 
change; the Commission does not edit personal identifying information 
from submissions. You should submit only information that you wish to 
make available publicly. All submissions should refer to File Number 
SR-FINRA-2016-023, and should be submitted on or before July 27, 2016.
---------------------------------------------------------------------------

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

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



                                                                           Federal Register / Vol. 81, No. 129 / Wednesday, July 6, 2016 / Notices                                                            44065

                                             and Redemption Instruments will be                         For the Commission, by the Division of                   II. Self-Regulatory Organization’s
                                             valued in the same manner as those                       Investment Management, under delegated                     Statement of the Purpose of, and
                                             investment positions currently held by                   authority.                                                 Statutory Basis for, the Proposed Rule
                                             the Funds. Applicants also seek relief                   Robert W. Errett,                                          Change
                                             from the prohibitions on affiliated                      Deputy Secretary.
                                                                                                                                                                    In its filing with the Commission,
                                             transactions in section 17(a) to permit a                [FR Doc. 2016–15919 Filed 7–5–16; 8:45 am]                 FINRA included statements concerning
                                             Fund to sell its shares to and redeem its                BILLING CODE 8011–01–P                                     the purpose of and basis for the
                                             shares from a Fund of Funds, and to                                                                                 proposed rule change and discussed any
                                             engage in the accompanying in-kind                                                                                  comments it received on the proposed
                                             transactions with the Fund of Funds.3                    SECURITIES AND EXCHANGE                                    rule change. The text of these statements
                                             The purchase of Creation Units by a                      COMMISSION                                                 may be examined at the places specified
                                             Fund of Funds directly from a Fund will                                                                             in Item IV below. FINRA has prepared
                                             be accomplished in accordance with the                   [Release No. 34–78196; File No. SR–FINRA–                  summaries, set forth in sections A, B,
                                             policies of the Fund of Funds and will                   2016–023]                                                  and C below, of the most significant
                                             be based on the NAVs of the Funds.                                                                                  aspects of such statements.
                                                                                                      Self-Regulatory Organizations;
                                                9. Applicants also request relief to                  Financial Industry Regulatory                              A. Self-Regulatory Organization’s
                                             permit a Feeder Fund to acquire shares                   Authority, Inc.; Notice of Filing of a                     Statement of the Purpose of, and the
                                             of another registered investment                         Proposed Rule Change To Increase                           Statutory Basis for, the Proposed Rule
                                             company managed by the Adviser                           Transparency for CMO Transactions                          Change
                                             having substantially the same
                                             investment objectives as the Feeder                      June 29, 2016.                                             1. Purpose
                                             Fund (‘‘Master Fund’’) beyond the                           Pursuant to Section 19(b)(1) of the                        FINRA proposes to amend the Rule
                                             limitations in section 12(d)(1)(A) and                   Securities Exchange Act of 1934                            6700 Series and the TRACE
                                             permit the Master Fund, and any                          (‘‘Act’’) 1 and Rule 19b–4 thereunder,2                    dissemination protocols to: (1) Provide
                                             principal underwriter for the Master                     notice is hereby given that on June 27,                    for the dissemination of transactions in
                                             Fund, to sell shares of the Master Fund                  2016, Financial Industry Regulatory                        CMOs,3 an additional group of
                                             to the Feeder Fund beyond the                            Authority, Inc. (‘‘FINRA’’) filed with the                 Securitized Products 4 not yet subject to
                                             limitations in section 12(d)(1)(B).                      Securities and Exchange Commission                         dissemination; (2) reduce the reporting
                                                10. Section 6(c) of the Act permits the               (‘‘Commission’’) the proposed rule                         timeframe for CMOs from end-of-day to
                                             Commission to exempt any persons or                      change as described in Items I, II, and                    60 minutes; and (3) simplify the
                                             transactions from any provision of the                   III below, which Items have been                           reporting requirements for pre-issuance
                                             Act if such exemption is necessary or                    prepared by FINRA. The Commission is                       CMO transactions. FINRA also proposes
                                             appropriate in the public interest and                   publishing this notice to solicit                          technical and conforming changes to the
                                             consistent with the protection of                        comments on the proposed rule change                       Rule 6700 Series and Rule 7730.
                                             investors and the purposes fairly                        from interested persons.                                   Background
                                             intended by the policy and provisions of                 I. Self-Regulatory Organization’s                             FINRA requires members to report
                                             the Act. Section 12(d)(1)(J) of the Act                  Statement of the Terms of Substance of                     transactions in any security that meets
                                             provides that the Commission may                         the Proposed Rule Change                                   the definition of ‘‘TRACE-Eligible
                                             exempt any person, security, or
                                                                                                                                                                 Security’’ 5 to TRACE. Most transactions
                                             transaction, or any class or classes of                     FINRA is proposing to to [sic] amend
                                             persons, securities, or transactions, from               the FINRA Rule 6700 Series and the                            3 The term ‘‘Collateralized Mortgage Obligation,’’
                                             any provision of section 12(d)(1) if the                 Trade Reporting and Compliance Engine                      or CMO, is defined in FINRA Rule 6710(dd) to
                                             exemption is consistent with the public                  (‘‘TRACE’’) dissemination protocols to                     mean a type of Securitized Product backed by
                                             interest and the protection of investors.                provide for dissemination of                               Agency Pass-Through Mortgage-Backed Securities
                                                                                                                                                                 as defined in paragraph (v), mortgage loans,
                                             Section 17(b) of the Act authorizes the                  transactions in an additional type of                      certificates backed by project loans or construction
                                             Commission to grant an order                             Securitized Products—specifically,                         loans, other types of mortgage-backed securities or
                                             permitting a transaction otherwise                       collateralized mortgage obligations                        assets derivative of mortgage-backed securities,
                                             prohibited by section 17(a) if it finds                  (‘‘CMOs’’). In addition, FINRA is                          structured in multiple classes or tranches with each
                                                                                                                                                                 class or tranche entitled to receive distributions of
                                             that (a) the terms of the proposed                       proposing a corresponding change to                        principal and/or interest according to the
                                             transaction are fair and reasonable and                  Rule 6730 to reduce the reporting period                   requirements adopted for the specific class or
                                             do not involve overreaching on the part                  for CMOs from end-of-day to 60                             tranche, and includes a real estate mortgage
                                             of any person concerned; (b) the                         minutes, and also to amend Rule 6730                       investment conduit (‘‘REMIC’’).
                                                                                                                                                                    4 The term ‘‘Securitized Product’’ is defined in
                                             proposed transaction is consistent with                  to simplify the reporting requirements
                                                                                                                                                                 Rule 6710(m) to mean a security collateralized by
                                             the policies of each registered                          for transactions in CMOs executed prior                    any type of financial asset, such as a loan, a lease,
                                             investment company involved; and (c)                     to issuance. FINRA further proposes                        a mortgage, or a secured or unsecured receivable,
                                             the proposed transaction is consistent                   technical and conforming changes to the                    and includes but is not limited to an asset-backed
                                                                                                      FINRA Rule 6700 Series and Rule 7730                       security as defined in Section 3(a)(79)(A) of the
                                             with the general purposes of the Act.                                                                               Exchange Act, a synthetic asset-backed security,
                                                                                                      in connection with the changes                             and any residual tranche or interest of any security
                                                3 The requested relief would apply to direct sales    referenced above.                                          specified above, which tranche or interest is a debt
                                             of shares in Creation Units by a Fund to a Fund of          The text of the proposed rule change                    security for purposes of paragraph (a) and the Rule
                                             Funds and redemptions of those shares. Applicants,                                                                  6700 Series.
ehiers on DSK5VPTVN1PROD with NOTICES




                                             moreover, are not seeking relief from section 17(a)
                                                                                                      is available on FINRA’s Web site at                           5 Rule 6710 generally defines a ‘‘TRACE-Eligible

                                             for, and the requested relief will not apply to,         http://www.finra.org, at the principal                     Security’’ as: (1) A debt security that is U.S. dollar-
                                             transactions where a Fund could be deemed an             office of FINRA and at the                                 denominated and issued by a U.S. or foreign private
                                             Affiliated Person, or a Second-Tier Affiliate, of a      Commission’s Public Reference Room.                        issuer (and, if a ‘‘restricted security’’ as defined in
                                             Fund of Funds because an Adviser or an entity                                                                       Securities Act Rule 144(a)(3), sold pursuant to
                                             controlling, controlled by or under common control                                                                  Securities Act Rule 144A); or (2) a debt security that
                                                                                                           1 15   U.S.C. 78s(b)(1).
                                             with an Adviser provides investment advisory                                                                        is U.S. dollar-denominated and issued or
                                             services to that Fund of Funds.                               2 17   CFR 240.19b–4.                                                                              Continued




                                        VerDate Sep<11>2014   15:04 Jul 05, 2016   Jkt 238001   PO 00000     Frm 00080      Fmt 4703   Sfmt 4703   E:\FR\FM\06JYN1.SGM   06JYN1


                                             44066                         Federal Register / Vol. 81, No. 129 / Wednesday, July 6, 2016 / Notices

                                             must be reported to TRACE within 15                      most actively traded of these remaining                    The proposal will provide for this
                                             minutes of the time of execution and are                 Securitized Products types. In addition,                approach to CMO dissemination by
                                             subsequently disseminated.                               CMOs typically have relatively smaller                  amending FINRA Rule 6750
                                                Securitized Products were the last                    transaction sizes than those for CMBSs                  (Dissemination of Transaction
                                             major group of fixed income securities                   and CDOs.                                               Information). Rule 6750 currently
                                             to become subject to TRACE reporting.                                                                            contains two operative paragraphs—
                                             Initially, FINRA received reports of                     Current Proposal                                        paragraph (a), which provides generally
                                             transactions in these products for                          FINRA is proposing to expand the                     for the dissemination of TRACE-Eligible
                                             regulatory audit trail purposes only and                 dissemination of Securitized Products to                Securities immediately upon receipt of
                                             did not disseminate transaction data.                    include CMOs. Under the proposal, a                     a transaction report, and paragraph (b),
                                             FINRA used the transaction reports it                    CMO transaction will be subject either                  which contains an exception to the
                                             received to study the liquidity and                      to dissemination immediately upon                       general dissemination provision in
                                             trading characteristics of various types                 receipt of the TRACE transaction report,                paragraph (a) and which notes the
                                             of Securitized Products. Based on its                    or to aggregate, periodic dissemination,                security or transaction types that are not
                                             study, FINRA then started a phased                       depending on the size of the transaction                subject to dissemination. Currently, the
                                             approach to disseminating transaction                    and the number of transactions in the                   remaining Securitized Products—CMOs,
                                             information for certain Securitized                      CMO security during a given period.                     CMBSs, and CDOs, are found within
                                             Products.                                                   Specifically, transactions in CMOs,                  paragraph (b) and are therefore not
                                                For the first phase, on November 12,                  including transactions effected pursuant                subject to dissemination.
                                             2012, FINRA began disseminating                          to Securities Act Rule 144A, will be                       Under the proposal, current paragraph
                                             transactions in Agency Pass-Through                      subject to aggregate, periodic                          (b) will be replaced with a paragraph
                                             Mortgage-Backed Securities traded To                     dissemination on a weekly and monthly                   that provides specifically for the
                                             Be Announced (‘‘TBA’’) (‘‘MBS TBA’’                      basis where the transaction value is $1                 dissemination of larger-size ($1 million
                                             transactions), which are the most liquid                 million or more (calculated based upon                  or more) CMO transactions on a
                                             types of Securitized Products.6 Next, on                 original principal balance) and where                   periodic, rather than immediate, basis,
                                             July 22, 2013, FINRA began                               there have been five or more                            provided the transaction occurs in a
                                             disseminating transactions in Agency                     transactions of $1 million or more in the               CMO security that meets the minimum
                                             Pass-Through Mortgage-Backed                             reporting period reported by at least two               activity threshold described above (i.e.,
                                             Securities and SBA-Backed ABS (as                        different market participant identifiers                at least five transactions in the period
                                             defined in FINRA Rule 6710(bb)) traded                   (‘‘MPIDs’’).11 For the smaller-size                     reported by at least two different
                                             in Specified Pool Transactions.7 On                      transactions—i.e., transactions valued                  MPIDs). The exception paragraph,
                                             June 30, 2014, FINRA began to                            under $1 million (calculated based upon                 which sets forth the transaction types
                                             disseminate information on transactions                  original principal balance)—FINRA will                  not subject to dissemination, will be
                                             in TRACE-Eligible Securities effected as                 disseminate trade-by-trade information                  new paragraph (c). It will be revised to
                                             Rule 144A transactions, provided that                    immediately upon receipt by TRACE.12                    note that the only Securitized Products
                                             such transactions were in securities that                                                                        not subject to dissemination are CMBSs,
                                             would be subject to dissemination if                     income assets, structured in multiple classes or        CDOs, and CMOs where the CMO
                                             effected in non-Rule 144A transactions.8                 tranches with each class or tranche entitled to         transaction value is $1 million or more
                                             And most recently, on June 1, 2015,                      receive distributions of principal and/or interest in   (calculated based upon original
                                                                                                      accordance with the requirements adopted for the
                                             FINRA began to disseminate                               specific class or tranche. A CDO includes, but is not   principal balance) and the transaction
                                             transactions in Asset-Backed                             limited to, a collateralized loan obligation, or CLO,   does not qualify for periodic
                                             Securities.9 Today, the remaining types                  and a collateralized bond obligation, or CBO.           dissemination. However, as noted
                                             of Securitized Products not yet subject                     11 For example, if five transactions occurred in a
                                                                                                                                                              above, all transactions in CMOs will
                                             to dissemination are CMOs, commercial                    particular CMO security during each of the four
                                                                                                      weeks in a calendar month and were reported by
                                                                                                                                                              become part of the historic data sets
                                             mortgage-backed securities (‘‘CMBSs’’),                  at least two unique MPIDs, then four weekly reports     even if they were not subject to
                                             and collateralized debt obligations                      would be disseminated; in addition, information on      dissemination upon receipt or periodic
                                             (‘‘CDOs’’).10 CMOs are the largest and                   those transactions would be included in the             dissemination.13
                                                                                                      aggregate monthly report for that calendar month.
                                                                                                      If five transactions occurred over the course of a
                                                                                                                                                                 To facilitate the proposed
                                             guaranteed by an ‘‘Agency’’ as defined in Rule                                                                   dissemination of CMOs, the proposal
                                                                                                      calendar month, but did not occur during a single
                                             6710(k) or a ‘‘Government-Sponsored Enterprise’’ as
                                             defined in Rule 6710(n).
                                                                                                      week, then a weekly report would not be available       will also amend Rule 6730(a)(3) to
                                                6 See Securities Exchange Act Release No. 66829
                                                                                                      for that security (but the transaction information      reduce the time period for reporting to
                                                                                                      would be included in the monthly report provided
                                             (April 18, 2012), 77 FR 24748 (April 25, 2012)           the transactions were reported by at least two
                                                                                                                                                              TRACE transactions in CMOs to TRACE
                                             (Order Approving File No. SR–FINRA–2012–020);            unique MPIDs). For purposes of determining if a         executed on or after issuance.14
                                             Regulatory Notice 12–26 (May 2012) and Regulatory        CMO security has been reported by at least two          Currently, these CMO transactions must
                                             Notice 12–48 (November 2012).                            different MPIDs, FINRA notes that it would
                                                7 See Securities Exchange Act Release No. 68084
                                                                                                                                                              be reported to TRACE no later than the
                                                                                                      consider an interdealer trade to be reported by one
                                             (October 23, 2012), 77 FR 65436 (October 26, 2012)       MPID—the sell side dealer—even though the trade
                                                                                                                                                              close of the TRACE system on the date
                                             (Order Approving File No. SR–FINRA–2012–042)             is reported by both sides of the transaction.
                                             and Regulatory Notice 12–56 (December 2012).                12 Also in connection with the proposed              become part of the Historic Rule 144A Data Set. The
                                                8 See Securities Exchange Act Release No. 70345                                                               inclusion of this additional data in such data sets
                                                                                                      dissemination of information on CMO transactions,
                                             (September 6, 2013), 78 FR 56251 (September 12,          FINRA proposes to amend Rule 7730 (fees for             will not affect the fees currently in effect.
                                             2013) (Order Approving File No. SR–FINRA–2013–           TRACE) to reflect the addition of CMOs to the             13 See supra note 12.
                                             029) and Regulatory Notice 13–35 (October 2013).         applicable data sets. Disseminated periodic reports       14 As discussed in further detail below, reporting
                                                9 See Securities Exchange Act Release No. 71607
                                                                                                      will become available as part of the Securitized        requirements for transactions in a CMO prior to that
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                                             (February 24, 2014), 79 FR 11481 (February 28,           Products Data Set and all CMO transactions—even         CMO’s issuance are addressed separately in FINRA
                                             2014) (Order Approving File No. SR–FINRA–2013–           if not previously disseminated upon receipt or as       Rule 6730(a)(3)(C). FINRA notes that it will also
                                             046) and Regulatory Notice 14–34 (August 2014).          part of a periodic report—will become part of the       make a technical, clarifying edit to Rule 6730(a)(3)
                                                10 A ‘‘Collateralized Debt Obligation,’’ or CDO,      Historic Securitized Products Data Set in FINRA         that is otherwise unrelated to this proposal;
                                             would be defined in proposed FINRA Rule 6710(ff)         Rule 7730. Similarly, disseminated periodic reports     specifically, FINRA will delete language in Rule
                                             to mean a type of Securitized Product backed by          for transactions in CMOs issued pursuant to Rule        6730(a)(3)(B) that describes the transitional
                                             fixed-income assets (such as bonds, receivables on       144A will become part of the Rule 144A Data Set,        reporting phase for Asset-Backed Securities, since
                                             loans, or other debt) or derivatives of these fixed-     and all Rule 144A transactions in CMOs will             the transitional phase is now complete.



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                                                                           Federal Register / Vol. 81, No. 129 / Wednesday, July 6, 2016 / Notices                                            44067

                                             of execution.15 Under the proposal,                      FINRA rules must be designed to                       transparency in the markets for
                                             paragraph (H) would be added to                          prevent fraudulent and manipulative                   additional Securitized Products. FINRA
                                             require that transactions in these CMOs                  acts and practices, to promote just and               believes the proposed dissemination of
                                             must be reported to TRACE within 60                      equitable principles of trade, and, in                transaction information for CMOs
                                             minutes of execution.16                                  general, to protect investors and the                 would be valuable to assist in price
                                                Finally, FINRA proposes to modify                     public interest. As discussed throughout              discovery, determination of execution
                                             the reporting timeframe for pre-issuance                 the filing, FINRA believes that the                   quality, and, in particular, valuation of
                                             CMO transactions. FINRA is proposing                     proposed rule change will promote                     securities positions. FINRA believes the
                                             to amend Rule 6730(a)(3)(C) to provide                   greater transparency in the marketplace               proposed transition to 60-minute trade
                                             that transactions in CMOs that are                       for CMOs. Based on dialogue with a                    reporting for transactions in CMOs
                                             executed before the date of issuance of                  variety of market participants, FINRA                 executed on or after issuance is
                                             the security must be reported no later                   believes the information it proposes to               necessary to facilitate meaningful
                                             than the first settlement date of the                    disseminate would be valuable to assist               dissemination of information for these
                                             security. Under the current rule, firms                  in price discovery, determination of                  securities. Finally, FINRA believes the
                                             generally must report CMO transactions                   execution quality, and, in particular,                proposed change to the reporting
                                             that are executed prior to issuance on                   valuation of securities positions.                    timeframe for transactions in pre-
                                             the earlier of the business day that the                 Furthermore, FINRA believes the                       issuance CMOs is necessary to simplify
                                             security is assigned a CUSIP, or the date                proposal strikes an appropriate balance               the reporting process, given that some
                                             of issuance of the security. FINRA is                    between promoting transparency and                    firms, small and medium size firms in
                                             aware that some firms, particularly                      preserving anonymity, which may                       particular, may have difficulty in
                                             small and mid-size firms, have had                       facilitate larger size trades and liquidity           determining with accuracy and in a
                                             difficulty in determining with accuracy                  provision. Based on FINRA’s ongoing                   timely manner when their reporting
                                             in a timely manner when the reporting                    study of the trading characteristics of               obligations have been triggered.
                                             obligation has been triggered, due to                    Securitized Products, FINRA believes
                                                                                                                                                            Economic Impacts
                                             inconsistencies in communicating the                     this proposal is an important next phase
                                             relevant information between                             in dissemination that will position                      FINRA believes that enhanced
                                             underwriters and trading parties. As a                   FINRA to evaluate whether and how to                  transparency in CMOs will benefit
                                             result, these firms do not always report                 complete its expansion of dissemination               market participants, as discussed above,
                                             trades in these instruments on the                       to cover all Securitized Product types.               by contributing to more efficient pricing
                                             earlier of the two dates specified in the                   FINRA further believes that the                    and better execution quality for market
                                             current rule. FINRA believes that,                       proposed change to 60-minute trade                    participants and clients. However, the
                                             because new issuances in CMOs                            reporting will facilitate CMO                         proposed changes may impose direct
                                             generally settle on the last business day                dissemination by ensuring that FINRA                  and indirect costs on market
                                             of the month, the amended proposal                       is able to receive and disseminate CMO                participants; for example, the proposal
                                             would provide for a uniform reporting                    transaction information in a timely                   might impose direct costs associated
                                             deadline that can be easily ascertained                  manner. Accordingly, FINRA believes                   with more timely reporting of CMO
                                             by all firms.                                            this element of the filing will help                  transactions and indirect costs
                                                If the Commission approves the                        promote transparency and enhance                      associated with the potential leakage of
                                             proposed rule change, FINRA will                         investor protection and the public                    proprietary information. In the analysis
                                             announce the operative date of the                       interest.                                             below, we individually assess the
                                             proposed rule change in a Regulatory                        Finally, FINRA believes the proposed               impact on market participants of each
                                             Notice to be published no later than 90                  change to the reporting timeframe for                 proposed change—(1) dissemination of
                                             days following Commission approval.                      pre-issuance CMOs will further just and               CMO transactions, (2) reducing the
                                             The operative date will be no later than                 equitable principles of trade by                      timeframe for reporting CMO
                                             365 days following publication of the                    providing greater clarity and promoting               transactions, and (3) simplifying the
                                             Regulatory Notice announcing                             compliance with applicable reporting                  reporting requirements for pre-issuance
                                             Commission approval.                                     rules.                                                CMO transactions.
                                             2. Statutory Basis                                       B. Self-Regulatory Organization’s                     (1) Dissemination of CMO Transactions
                                                FINRA believes that the proposed rule                 Statement on Burden on Competition                       The proposed dissemination of CMO
                                             change is consistent with the provisions                    FINRA does not believe that the                    transactions will enhance transparency,
                                             of Section 15A(b)(6) of the Act,17 which                 proposed rule change will result in any               which should benefit market
                                             requires, among other things, that                       burden on competition that is not                     participants and clients via improved
                                                                                                      necessary or appropriate in furtherance               market quality. However, while
                                                15 See FINRA Rule 6730(a)(3)(A). As part of this      of the purposes of the Act. FINRA has                 enhanced transparency should provide
                                             proposal, FINRA is proposing a technical, clarifying     undertaken an economic impact                         benefits broadly to the marketplace, it
                                             change to Rule 6730(a)(3)(A). This paragraph                                                                   may impose indirect costs on certain
                                             currently is titled ‘‘General Reporting
                                                                                                      assessment, as set forth below, to
                                             Requirements’’ for Securitized Products, but             analyze the regulatory need for the                   market participants, like those whose
                                             because only CDOs and CMBSs will remain subject          proposed rule change, its potential                   transaction information is subject to
                                             to the paragraph after this proposal becomes             economic impacts, including                           dissemination. FINRA is cognizant of
                                             effective, FINRA will rename this paragraph to                                                                 the concern that the risk of information
                                             make clear that applies specifically to CDOs and
                                                                                                      anticipated costs and benefits, and the
                                             CMBSs.                                                   alternatives FINRA considered in                      leakage could potentially harm market
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                                                16 As with other TRACE-Eligible Securities that       assessing how to best meet its regulatory             quality if it discourages liquidity
                                             are subject to 60-minute reporting, under proposed       objectives.                                           provision. Accordingly, FINRA staff
                                             Rules 6730(a)(3)(H)(iii)–(iv), transactions in CMOs,                                                           considered the potential for indirect
                                             CMBSs, and CDOs that are executed less than 60           Need for the Rule                                     costs associated with providing
                                             minutes before the TRACE system closes, or after,
                                             would need to be reported no later than 60 minutes         As discussed above, FINRA believes                  information publicly that might permit
                                             after TRACE opens the following business day.            this proposal is necessary and                        competitors to reverse engineer the
                                                17 15 U.S.C. 78o–3(b)(6).                             appropriate to further promote                        disseminated data to produce private


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                                             44068                                  Federal Register / Vol. 81, No. 129 / Wednesday, July 6, 2016 / Notices

                                             information about trade participants,                                   TABLE 1—THE NUMBER OF DIFFERENT represents only 1.73% of transactions,
                                             their trade positions and possibly their                                  MPIDS TRADING IN CMO CUSIPS   but 15.75% of the trading volume. This
                                             trading strategies.                                                                                                                              suggests that concentrated CUSIPs have
                                                To investigate whether dissemination,                                     Number of                                                           relatively larger trade sizes.
                                                                                                                                                     CUSIPs                     %
                                             as proposed, could potentially allow                                          MPIDs
                                             market participants to reverse-engineer                                                                                                                TABLE 2—AGGREGATE TRADING
                                             the identities of broker-dealers or                                     1 ........................           32,220                    33.3
                                                                                                                     2 ........................           17,792                    18.4             ACTIVITY BY CONCENTRATION
                                             positions, FINRA staff examined the                                     3 ........................           10,573                    10.9
                                             distribution of the number of MPIDs                                     4 ........................            6,677                     6.9                                    Number of     Volume
                                             reporting transactions in each CMO                                      5 ........................            4,595                     4.8                                   transactions    ($bil.)
                                             CUSIP, over the time period spanning                                    6 ........................            3,511                     3.6
                                             May 13, 2011 to August 14, 2015. Table                                  7 ........................            2,737                     2.8      HHI = 1 .............              50,714      $1,692
                                             1 suggests that trading activity in CMOs,                               8 ........................            2,229                     2.3      HHI < 1 .............           2,879,089       9,049
                                             on a per-CUSIP basis, is quite                                          9 ........................            1,903                     2.0
                                             concentrated, with 32,200 CUSIPs—                                       10 ......................             1,590                     1.6             Total ...........        2,929,803      10,741
                                             33.3% of all CMO CUSIPs—in the                                          11 ......................             1,317                     1.4
                                                                                                                     12 ......................             1,128                     1.2
                                             sample traded by only one MPID over                                                                                  Table 3 reports that the typical
                                                                                                                     13 ......................               955                     1.0
                                             the sample period. These CUSIPs traded                                  14 ......................               869concentrated CUSIP trades only about
                                                                                                                                                                                     0.9
                                             by only one MPID are referred to as                                     15 ......................               753one to two times over the entire sample
                                                                                                                                                                                     0.8
                                             ‘‘concentrated’’ CUSIPs. There were                                     15+ ....................              7,820period. For non-concentrated CUSIPs
                                                                                                                                                                                     8.1
                                             64,449 remaining CUSIPs in the sample                                                                              reported by two or more MPIDs, the
                                             traded by two or more MPIDs, referred                                       Total ........... 96,669           100 typical CMO trades 44.67 times over the
                                             to as ‘‘non-concentrated’’ CUSIPs.18                                                                               sample period.19 In general,
                                             CUSIPs are classified as concentrated                                     Table 2 reports trading activity (the    concentrated CUSIPs have on average
                                             and non-concentrated based on a                                         number of transactions and trading         about half of the trading volume of non-
                                             threshold of one MPID, as it represents                                 volume) for the sample by concentrated concentrated CUSIPs.
                                             cases where the information about firm                                  versus non-concentrated CUSIPs.
                                             activity is most concentrated.                                          Trading activity in concentrated CUSIPs

                                                                                                          TABLE 3—AVERAGE TRADING ACTIVITY PER CUSIP
                                                                                                                                                                                                                               Mean       Median

                                             HHI = 1 ...............................................    Number of transactions/CUSIP ......................................................................                        1.57        1.00
                                                                                                        Transaction size ($mil.) ..................................................................................              $33.37      $10.60
                                                                                                        Volume ($mil.) .................................................................................................         $52.52      $19.00

                                             HHI < 1 ...............................................    Number of transactions/CUSIP ......................................................................                       44.67       10.00
                                                                                                        Transaction size ($mil.) ..................................................................................               $3.14       $0.03
                                                                                                        Volume ($mil.) .................................................................................................        $140.40      $41.85

                                             Overall ................................................   Number of transactions/CUSIP ......................................................................                       30.31        5.00
                                                                                                        Transaction size ($mil.) ..................................................................................               $3.67       $0.03
                                                                                                        Volume ($mil.) .................................................................................................        $111.11      $30.67



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

                                                                           TABLE 4—DISTRIBUTION OF TRANSACTIONS ABOVE AND BELOW PROPOSED THRESHOLD
                                                                                                                                                                  Number of                                                Volume
                                                                                                                                                                                               Percent                                    Percent
                                                                                                                                                                 transactions                                               ($bil.)

                                             HHI   =   1   Below Threshold ............................................................................                      10,526                    0.36                       $1.97        0.02
                                             HHI   =   1   At/Above Threshold .......................................................................                        40,188                    1.37                    1,690.13       15.74
                                             HHI   <   1   Below Threshold ............................................................................                   2,310,110                   78.85                      173.98        1.62
                                             HHI   <   1   At/Above Threshold .......................................................................                       568,979                   19.42                    8,874.67       82.63
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                                               18 Concentrated CUSIPs have a Herfindahl-                             used in analyses of monopoly power, antitrust                            HHI = 0 represents a perfectly competitive market
                                             Hirschman Index (HHI) of one, while non-                                litigation, and other prominent issues in industrial                     (infinitely many firms have infinitesimally small
                                             concentrated have an HHI that is less than one.                         organization. The HHI of a market can range from                         market share).
                                             Algebraically, HHI is calculated as follows: HHI =                      0 to 1 (some publications use 0 to 10,000, but the                          19 On average, CMOs trade in 10.74 days out of
                                             SNi = 1 si2 where si is the market share of firm i, and                 interpretation is the same after adjusting for scale),
                                             there are N total firms in a market. HHI is a succinct                  where HHI = 1 represents a perfectly concentrated                        1,071 days in the sample period.
                                             measure of market concentration, and it is widely                       market (one firms controls the entire market) and



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                                                                                      Federal Register / Vol. 81, No. 129 / Wednesday, July 6, 2016 / Notices                                                                        44069

                                                                TABLE 4—DISTRIBUTION OF TRANSACTIONS ABOVE AND BELOW PROPOSED THRESHOLD—Continued
                                                                                                                                                                       Number of                              Volume
                                                                                                                                                                                          Percent                                  Percent
                                                                                                                                                                      transactions                             ($bil.)

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



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

                                                    TABLE 5—AGGREGATE PERCENTAGE OF TRANSACTIONS BY TYPE AND DISSEMINATION WITH MINIMUM TWO MPID
                                                                                REQUIREMENT FOR PERIODIC REPORTS
                                                                                                                                                                                                              Volume
                                                                                                                                                                      Transactions           %                                       %
                                                                                                                                                                                                               ($bil.)

                                             Immediate ........................................................................................................            2,320,636              79.21               176                 1.64
                                             Weekly .............................................................................................................            182,893               6.24             1,787                16.64
                                             Monthly ............................................................................................................             70,528               2.41               858                 7.99
                                             Not dis. .............................................................................................................          355,746              12.14             7,919                73.73

                                                   Total ..........................................................................................................        2,929,803             100.00            10,741              100.00



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

                                                             TABLE 6—AVERAGE TRADING ACTIVITY PER MPID BY DISSEMINATION FREQUENCY AND CONCENTRATION
                                                                                                                                                                                        (Number of MPIDs = 1,002)

                                                                                                                                                                             % of transactions                      % of volume

                                                                                                                                                                          HH = 1          HH < 1              HH = 1              HH < 1

                                             Immediate ........................................................................................................                 0.18              79.11               0.13               58.17
                                             Weekly .............................................................................................................               0.00               9.19               0.02               20.46
                                             Monthly ............................................................................................................               0.00               2.55               0.00                4.31
                                             Not dis. .............................................................................................................             0.36               8.61               0.85               16.05



                                               This analysis suggests that                                               (2) Reducing the Timeframe for                                  and 33 seconds, respectively.21
                                             information leakage may not be a                                            Reporting CMO Transactions                                      Approximately 92% of CMO
                                             significant issue based on the                                                                                                              transactions are currently reported to
                                             concentration of trading activity in                                           The second proposed change,                                  TRACE within 60 minutes. Reports
                                             certain CUSIPs. Tables 5 and 6 confirm                                      reducing the reporting timeframe for                            received 60 minutes or more after the
                                             that it would be difficult to ascertain                                     CMOs from end-of-day to 60 minutes is                           transaction execution are significantly
                                             significant information about a single                                      intended to facilitate timely                                   larger than those that are reported
                                             MPID’s trading strategy from both the                                       dissemination of information for these                          within 60 minutes.22
                                                                                                                         securities. However, FINRA is aware                                Of the 974 market participants that
                                             real time and periodic dissemination of
                                                                                                                         that a narrower reporting window may                            reported CMO trades during the sample
                                             CMO trades, as less than 1% of trading
                                                                                                                         impose direct costs on firms to the                             period, 417 reported all transactions
                                             in concentrated CUSIPs is expected to
                                             be disseminated. Moreover, there are no                                     extent that the firms have to modify or
                                                                                                                                                                                           21 The sample for the analysis of the reporting
                                             concentrated CUSIPs where the                                               upgrade their reporting systems to
                                                                                                                                                                                         timeframes excludes 453,137 ‘‘as of’’ trades that
                                             proposed rule would have led to                                             comply with the reduced time period                             were in the original sample, since such trades are
                                             dissemination of all trades by any                                          for transactions in CMOs executed on or                         reported at least a day after the transaction day and
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                                                                                                                         after issuance.                                                 are disseminated with a ‘‘late’’ flag and are subject
                                             individual MPID.20                                                                                                                          to a fine.
                                                                                                                            In a sample of 2,476,666 transactions                          22 Trades that are reported after 60 minutes have

                                                                                                                         reported on the day of the execution, the                       an average transaction size of approximately $9.76
                                                                                                                                                                                         million, whereas the same figure is approximately
                                               20 463 MPIDs would have all of their CMO trades                           average and median reporting time after                         $2.76 million for trades that are reported within 60
                                             disseminated immediately upon receipt; however,                             execution are approximately 19 minutes                          minutes. The difference of $7.00 million is
                                             none of those trades are in concentrated CUSIPs.                                                                                            statistically significant at the 1% level.



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                                             44070                         Federal Register / Vol. 81, No. 129 / Wednesday, July 6, 2016 / Notices

                                             within 60 minutes. Another 400 market                    disseminated immediately upon receipt                 FINRA has analyzed, the median
                                             participants reported at least 90%, but                  under the proposal, whereas, FINRA                    reporting time for CMO transactions is
                                             less than 100% of their CMO                              staff found that, under the same                      just under 20 minutes. Accordingly,
                                             transactions within 60 minutes of                        thresholds, only 29.51% and 37.92% of                 FINRA believes that a 15-minute
                                             execution. Finally, 157 market                           CDO and CMBS transactions would                       reporting requirement may impose
                                             participants reported less than 90% of                   have been disseminated, respectively,                 significantly greater costs than a 60-
                                             their transactions within 60 minutes; of                 upon receipt. This observation suggests               minute requirement. Notably, FINRA
                                             these, only six reported all of their                    that differences in average trade                     believes that the 60 minute requirement
                                             transactions more than 60 minutes after                  characteristics may lead to different                 is still expected to provide sufficiently
                                             execution, but each of the six reported                  outcomes for dissemination across                     timely transparency to the market.
                                             fewer than five trades during the sample                 security types. Therefore, FINRA                      FINRA also notes that the proposed 60-
                                             period.                                                  believes that proceeding with CMO                     minute requirement for CMOs mirrors
                                                This analysis suggests that many                      dissemination is a sensible next step,                the 60-minute requirement currently in
                                             market participants will require no                      and it will continue to analyze the                   place for another type of Securitized
                                             change in behavior to meet the proposed                  potential for enhanced transparency for               Product—agency pass-through
                                             rule, and, as such, should face no                       the remaining Securitized Product                     mortgage-backed securities traded to be
                                             material costs. A second group of                        types.                                                announced not good for delivery.
                                             market participants currently meet the                      FINRA staff also assessed whether the                 Finally, with respect to the reporting
                                             proposed reporting standards at least                    five-transaction requirement for                      process for pre-issuance CMOs, FINRA
                                             90% of the time, suggesting that their                   periodic dissemination of trades in                   considered requiring that transactions
                                             costs for compliance should also be low.                 weekly and monthly reports is                         be reported no later than two days prior
                                             The data indicate that there are a small                 reasonable and appropriate based on                   to the first settlement date. However,
                                             but material number of market                            trading frequency. The staff found that               FINRA understands that in many cases,
                                             participants that currently do not report                increasing the requirement from five to               particularly for private label securities,
                                             in a manner consistent with the                          ten transactions creates a significant                the characteristics of a new issue may
                                             proposed rule, but these firms engage in                 shift of transactions from aggregate,                 not be finalized until the first settlement
                                             small numbers of transactions in CMO                     periodic dissemination to no                          date of the securities. As a result, FINRA
                                             securities. The cost that these firms                    dissemination. If the threshold were                  is instead proposing that pre-issuance
                                             would be expected to incur as a result                   increased to a minimum of 20                          CMO transactions be reported by the
                                             of the shorter reporting timeframe                       transactions, then approximately 96% of               first settlement date.
                                             would depend on the extent of the                        trading volume would not be
                                             modification or upgrade to the reporting                 disseminated.                                         C. Self-Regulatory Organization’s
                                             systems to stay in compliance with the                      A higher minimum transaction                       Statement on Comments on the
                                             proposed rule.                                           number threshold may also result in                   Proposed Rule Change Received From
                                                                                                      aggregate, periodic dissemination for                 Members, Participants, or Others
                                             (3) Simplifying the Reporting                            transactions reported by far fewer
                                             Requirements for Pre-Issuance CMO                                                                                 The proposed rule change was
                                                                                                      market participants. For example, based               published for comment in Regulatory
                                             Transactions                                             on the sample data referenced above                   Notice 15–04 (February 2015). Five
                                                The final proposed change would                       and assuming a five-transaction                       comments were received in response to
                                             impact the reporting timeframe for pre-                  threshold for periodic dissemination, 14              the Regulatory Notice.23 A copy of the
                                             issuance CMO transactions and is                         MPIDs would have had all of their                     Regulatory Notice is attached as Exhibit
                                             expected to benefit firms, since it is                   transactions disseminated weekly and
                                                                                                                                                            2a. Copies of the comment letters
                                             intended to eliminate potential                          an additional three MPIDs would have
                                                                                                                                                            received in response to the Regulatory
                                             confusion about when the reporting                       had all of their transactions
                                                                                                                                                            Notice are attached as Exhibit 2c. The
                                             obligation has been triggered. The                       disseminated monthly. However, if the
                                                                                                                                                            comments are summarized below.
                                             proposed requirement that transactions                   minimum trade threshold were
                                                                                                                                                               As an initial step, prior to issuing
                                             in CMOs that are executed before the                     increased to ten, there would only be a
                                                                                                                                                            Regulatory Notice 15–04, FINRA staff
                                             issuance of the security must be                         single MPID whose transactions would
                                                                                                                                                            solicited industry input from several of
                                             reported no later than the first                         be consistently disseminated in weekly
                                                                                                                                                            its industry advisory committees. At
                                             settlement date provides firms with                      reports, and another single MPID whose
                                                                                                                                                            this stage, as in the Regulatory Notice,
                                             more time to report the transactions                     transactions would be consistently
                                                                                                                                                            FINRA was contemplating expanding
                                             than they have today.                                    disseminated via monthly reports.
                                                                                                         The analysis implies that increasing               dissemination to all remaining
                                             Alternatives Considered                                  the minimum transaction number                        Securitized Products, including CMOs,
                                               As discussed in detail below, FINRA                    threshold for periodic dissemination                  CMBSs, and CDOs. FINRA was also
                                             staff also considered the dissemination                  would dramatically reduce the amount                  considering reducing the reporting
                                             of CMBSs and CDOs in addition to                         of information that is disseminated. In               timeframe for these remaining
                                             CMOs. Likely due to differences in the                   addition, it may actually increase the                Securitized Products to 15 minutes. The
                                             customers that trade Securitized                         risk of reverse-engineering the identity              committees were generally supportive.
                                             Products, CMOs typically have                            or trading strategies of the single or few            To the extent the committees raised
                                             relatively smaller transactions sizes than               MPIDs whose trades would be subject to                concerns, they were focused primarily
                                             those for CMBSs and CDOs and thus                        dissemination under a higher minimum                    23 See Letters from Letters from the Financial
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                                             would be more likely disseminated                        transaction number threshold.                         Information Forum, dated April 7, 2015 (‘‘FIF
                                             under the thresholds applied in this                        Another alternative that FINRA                     Letter’’); Bond Dealers of America, dated April 9,
                                             rule. For example, Table 5 above                         considered was a 15-minute reporting                  2015 (‘‘BDA Letter’’); Association of Institutional
                                             demonstrates that 79.21% (0.36% +                        requirement for CMO transactions,                     INVESTORS, dated April 10, 2015 (‘‘INVESTORS
                                                                                                                                                            Letter’’); Bloomberg’s Valuation Service, dated
                                             78.85%) of CMO transactions would                        rather than the 60-minute requirement                 April 10, 2015 (‘‘BVAL Letter’’); and the Securities
                                             have been below the proposed                             that FINRA proposes in this filing. As                Industry and Financial Markets Association, dated
                                             threshold, and thus would have been                      noted above, based on sample data that                April 13, 2015 (‘‘SIFMA Letter’’).



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                                                                               Federal Register / Vol. 81, No. 129 / Wednesday, July 6, 2016 / Notices                                                      44071

                                             on what an appropriate threshold would                     Price Transaction.26 SIFMA similarly                      echoed the concern that disseminating
                                             be to determine whether transactions                       argued that only secondary trades in                      trades up to $1 million in value could
                                             are subject to immediate or periodic                       CMOs should be disseminated, to align                     impact market pricing and liquidity and
                                             dissemination. At the time FINRA                           dissemination for additional Securitized                  impact trading strategies.31
                                             raised this proposal with the                              Products with dissemination for                              Three of the commenters provided
                                             committees, it was proposing immediate                     corporate and agency debt and Asset-                      views on the proposed five transaction
                                             dissemination for transactions below a                     Backed Securities. SIFMA also                             threshold for the dissemination of
                                             threshold of $1 million in transaction                     expressed concerns about the ability to                   aggregate periodic reports for larger-size
                                             size, and aggregate periodic reporting                     reverse engineer transactions more                        transactions. INVESTORS and BVAL
                                             for transactions greater than $1 million,                  easily if last sale price and last sale date              did not believe that there should be any
                                             provided there were at least five trade                    information were included in the                          minimum number of transactions
                                             reports in the same security during the                    periodic reports.27                                       required per reporting period to qualify
                                             applicable reporting period. FINRA                            Four of the commenters disagreed                       for dissemination, and that such a
                                             committed to vetting these proposed                        with the $1 million real-time                             minimum would restrict the proposal’s
                                             thresholds more completely through the                     dissemination threshold that FINRA                        usefulness.32 In contrast, SIFMA argued
                                             Regulatory Notice comment process.                         proposed in the Regulatory Notice,                        that the five transaction minimum was
                                                FINRA then published Regulatory                         although they took opposing views as to                   too low, and believed that it should be
                                             Notice 15–04 in February 2015 and                          whether the threshold would result in                     raised from five to 20, because
                                             received five comments in response.                        too many or too few transactions being                    ‘‘[l]iquidity in the securitized products
                                             Like the industry advisory committees,                     subject to real-time dissemination.                       markets will be least impacted by price
                                             commenters focused primarily on the                        According to INVESTORS, $1 million is                     dissemination if only truly actively
                                             merits of disseminating transaction                        too low given that the market for                         traded CUSIPs are captured in the
                                             information for the remaining                              Securitized Products is primarily                         weekly and monthly reports.’’ 33
                                             Securitized Products, as well as the                       institutional, so INVESTORS                                  One commenter also addressed the
                                             thresholds proposed for immediate                          recommended a $5 million threshold                        proposed reduction of the reporting
                                             versus aggregate, periodic reporting.                      instead.28 Another commenter,                             timeframe to 15 minutes for transactions
                                             Some of the commenters also discussed                      Bloomberg’s Valuation Service                             in the remaining Securitized Products.
                                             the elements of the proposal that would                    (‘‘BVAL’’) also stated that the $1 million                BDA expressed concern that a reduced
                                             have reduced the reporting timeframe                       threshold is too low to provide relevant                  reporting timeframe could have a
                                             for the remaining Securities Products to                   pricing information to the market, since                  disproportionate impact on smaller
                                             15 minutes.                                                less than 1% of the market trades below                   dealers and may result in these products
                                                                                                        $1 million, and the trades that do occur                  being traded less by dealers and more by
                                                Two of the commenters took different
                                                                                                        below the threshold involve a different                   banking institutions that do not have to
                                             views on the merits of expanding
                                                                                                        buyer base and pricing model.29                           comply with TRACE reporting
                                             dissemination to include the remaining                        On the other hand, two of the                          requirements. BDA stated that
                                             Securitized Products. The Association                      commenters believed that the proposed                     additional Securitized Products
                                             of Institutional INVESTORS                                 $1 million threshold was too high.                        typically trade in ‘‘odd lot’’ sizes, where
                                             (‘‘INVESTORS’’) strongly favored                           SIFMA stated that the threshold should                    liquidity has traditionally been
                                             dissemination because ‘‘transparency                       be lowered from $1 million to $100,000                    provided by small to medium size
                                             will be extremely beneficial to all                        ‘‘to ensure only truly retail-sized                       dealers, who would face ‘‘significant
                                             market participants and greatly assist in                  transactions’’ are subject to real-time                   challenges’’ complying with a 15-
                                             price discovery and in decreasing price                    dissemination. According SIFMA,                           minute reporting requirement.34
                                             dispersion.’’ 24 In contrast, the                          setting the threshold at $1 million                          Finally, three of the commenters
                                             Securities Industry and Financial                          would include inter-dealer trades as                      addressed the element of the proposal
                                             Markets Association (‘‘SIFMA’’)                            well as retail, and disseminating                         that would simplify the reporting
                                             acknowledged that dissemination may                        information on both types of                              process for pre-issuance CMOs, which
                                             contribute to better price formation for                   transactions could be ‘‘misleading’’ to                   in the Regulatory Notice would have
                                             additional Securitized Products but                        retail investors. Additionally, SIFMA                     required reporting no later than two
                                             expressed its belief that dissemination                    expressed its belief that disseminating                   days prior to the first settlement date,
                                             may negatively impact market liquidity.                    larger-size trades could harm liquidity                   with varying levels of support. SIFMA
                                             In SIFMA’s view, liquidity should be                       in an already illiquid marketplace.30                     strongly supported the change as
                                             prioritized over enhancing price                           The Bond Dealers of America (‘‘BDA’’)                     proposed.35 BDA expressed support for
                                             discovery.25                                                                                                         the proposed change, but recommended
                                                With respect to the specific items of                      26 See FIF Letter at 2. The term ‘‘List or Fixed
                                                                                                                                                                  that the reporting deadline be moved
                                             transaction information FINRA                              Price Transaction’’ is defined in Rule 6710(q) to
                                                                                                                                                                  back further, to settlement minus one
                                             proposed in the Regulatory Notice to                       mean a primary market sale transaction sold on the
                                                                                                        first day of trading of a security, including an Asset-   day.36 FIF recommended greater
                                             disseminate, the Financial Information                     Backed Security as defined in paragraph (cc), but         relaxation of the reporting timeframe,
                                             Forum (‘‘FIF’’) argued that the                            excluding any other Securitized Product as defined        proposing a settlement date deadline,
                                             information disseminated for the                           in paragraph (m): (i) By a sole underwriter,
                                                                                                                                                                  rather than settlement minus two.
                                             remaining Securitized Products should                      syndicate manager, syndicate member or selling
                                                                                                        group member at the published or stated list or
                                             align with the information disseminated                    fixed offering price, or (ii) in the case of a primary      31 See   BDA Letter at 3.
                                             for Asset-Backed Securities. FIF                           market sale transaction effected pursuant to                32 See   INVESTORS Letter at 2–3 and BVAL Letter
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                                             specifically recommended suppressing                       Securities Act Rule 144A, by an initial purchaser,        at 1.
                                             the contra-party indicator and                             syndicate manager, syndicate member or selling              33 See SIFMA Letter at 2–3. This commenter
                                                                                                        group member at the published or stated fixed             further asked that the proposed aggregate periodic
                                             identifying transactions that meet the                     offering price.                                           reports not include last price and trade date, to
                                             definition of a List or Fixed Offering                        27 See SIFMA Letter at 3.                              minimize the potential for reverse engineering.
                                                                                                           28 See INVESTORS Letter at 2–3.                          34 See BDA Letter at 2–3.
                                               24 INVESTORS    Letter at 1.                                29 See BVAL Letter at 1.                                 35 See SIFMA Letter at 3.
                                               25 See   SIFMA Letter at 1–2.                               30 See SIFMA Letter at 2.                                36 See BDA Letter at 4.




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                                             44072                            Federal Register / Vol. 81, No. 129 / Wednesday, July 6, 2016 / Notices

                                             According to FIF, information for pre-                      aggregate periodic reporting will further             III. Date of Effectiveness of the
                                             issuance CMOs ‘‘is not consistently                         the interests of transparency while being             Proposed Rule Change and Timing for
                                             available two days prior to the first                       sensitive to the confidentiality of                   Commission Action
                                             settlement date.’’ 37                                       positions or trading strategies,                         Within 45 days of the date of
                                                FINRA carefully considered the                           particularly in securities that trade in a            publication of this notice in the Federal
                                             committee views and written comments.                       concentrated market made by just one                  Register or within such longer period (i)
                                             After analyzing this feedback, FINRA                        dealer.                                               as the Commission may designate up to
                                             believes it is appropriate to proceed
                                                                                                            Concerning the specific items of                   90 days of such date if it finds such
                                             with the proposal as described and
                                                                                                         transaction information that FINRA                    longer period to be appropriate and
                                             explained above in the filing, which has
                                                                                                         would disseminate for CMOs, FINRA                     publishes its reasons for so finding or
                                             been modified from what FINRA
                                                                                                         has modified the proposal in part to                  (ii) as to which the self-regulatory
                                             proposed in Regulatory Notice 15–04.
                                             Based on FINRA’s continued study of                         reflect the input it received from                    organization consents, the Commission
                                             the impact of dissemination on TRACE-                       commenters. Specifically, FINRA will                  will:
                                             Eligible Securities, and Securitized                        remove counterparty information from                     (A) By order approve or disapprove
                                             Products in particular, in addition to                      transactions that are disseminated and                such proposed rule change, or
                                             dialogue with a variety of market                           will also remove the data fields that it                 (B) institute proceedings to determine
                                             participants and the feedback received                      proposed in Regulatory Notice 15–04 for               whether the proposed rule change
                                             on Regulatory Notice 15–04, FINRA                           the periodic reports that would have                  should be disapproved.
                                             believes the proposed dissemination of                      conveyed last sale price, last sale date,             IV. Solicitation of Comments
                                             transaction information for CMOs                            customer buy, customer sell, and
                                                                                                                                                                 Interested persons are invited to
                                             would be valuable to assist in price                        interdealer prices. FINRA believes these
                                                                                                                                                               submit written data, views, and
                                             discovery, determination of execution                       modifications are appropriate to address
                                                                                                                                                               arguments concerning the foregoing,
                                             quality, and, in particular, valuation of                   commenters’ concerns about reverse
                                                                                                                                                               including whether the proposed rule
                                             securities positions. FINRA recognizes,                     engineering. FINRA has not modified
                                                                                                                                                               change is consistent with the Act.
                                             however, that CMOs generally are more                       the proposal, however, in response to                 Comments may be submitted by any of
                                             complex and less fungible than the                          commenters’ suggestion to suppress
                                             securities that are currently subject to                                                                          the following methods:
                                                                                                         new issue transactions in CMOs. The
                                             dissemination. As a result, FINRA                           definition of List or Fixed Price                     Electronic Comments
                                             believes it is important to calibrate its                   Transaction does not apply to CMOs.                     • Use the Commission’s Internet
                                             proposal to provide for tiered                              FINRA believes that redefining the term               comment form (http://www.sec.gov/
                                             dissemination of these products in a                        List or Fixed Price Transaction to                    rules/sro.shtml); or
                                             way that promotes transparency while                        include CMOs would result in a                          • Send an email to rule-comments@
                                             minimizing potential negative impacts                       significantly less effective proposal,                sec.gov. Please include File Number SR–
                                             on liquidity. Importantly, while FINRA                      according to input FINRA has received                 FINRA–2016–023 on the subject line.
                                             has decided not to expand                                   from various market participants.
                                             dissemination to CMBSs and CDOs at                                                                                Paper Comments
                                             this time, FINRA believes this proposal                        Concerning the reporting timeframe
                                                                                                         for transactions in CMOs executed on or                 • Send paper comments in triplicate
                                             is a careful step towards enhanced                                                                                to Brent J. Fields, Secretary, Securities
                                             transparency for these remaining                            after issuance, FINRA modified its
                                                                                                         proposal to allow for 60-minute                       and Exchange Commission, 100 F Street
                                             Securitized Product types, and that it
                                                                                                         reporting rather than 15-minute                       NE., Washington, DC 20549–1090.
                                             will allow FINRA and market
                                             participants to consider how best to                        reporting. FINRA believes this change is              All submissions should refer to File
                                             approach the final phase of                                 appropriate to minimize firms’ reporting              Number SR–FINRA–2016–023. This file
                                             dissemination expansion.                                    burdens while improving the timeliness                number should be included on the
                                                In an effort to further calibrate the                    in the receipt and dissemination of                   subject line if email is used. To help the
                                             proposal to provide additional                              CMO transaction information. FINRA                    Commission process and review your
                                             safeguards against the risk of reverse-                     notes that the proposed 60-minute                     comments more efficiently, please use
                                             engineering, FINRA modified the                             timeframe is the same as the reporting                only one method. The Commission will
                                             minimum security activity threshold                         requirement for other Securitized                     post all comments on the Commission’s
                                             first proposed in Regulatory Notice 15–                     Products, namely, agency pass-through                 Internet Web site (http://www.sec.gov/
                                             04 for periodic reporting. The                              mortgage-backed securities traded to be               rules/sro.shtml). Copies of the
                                             Regulatory Notice proposed to                               announced not for good delivery.                      submission, all subsequent
                                             disseminate larger-size transactions ($1                                                                          amendments, all written statements
                                             million or more) on an aggregate                               Finally, FINRA has modified its                    with respect to the proposed rule
                                             periodic basis provided there were five                     approach to simplifying the reporting                 change that are filed with the
                                             or more transactions in the security                        process for pre-issuance CMOs from                    Commission, and all written
                                             during the reporting period. In response                    what it proposed in its Regulatory                    communications relating to the
                                             to the feedback FINRA received, FINRA                       Notice. As noted above, FINRA                         proposed rule change between the
                                             is now proposing to disseminate                             understands that in many cases,                       Commission and any person, other than
                                             aggregate periodic reports for larger-size                  particularly for private label securities,            those that may be withheld from the
                                             transactions provided there are five or                     the characteristics of a new issue may                public in accordance with the
                                                                                                         not be finalized until the first settlement
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                                             more transactions in the security during                                                                          provisions of 5 U.S.C. 552, will be
                                             the reporting period, and further that                      date of the securities. As a result, FINRA            available for Web site viewing and
                                             the transactions must be reported by at                     is no longer proposing a reporting                    printing in the Commission’s Public
                                             least two different MPIDs. FINRA                            deadline two days prior to the first                  Reference Room, 100 F Street NE.,
                                             believes that this modified threshold for                   settlement date, but is instead proposing             Washington, DC 20549 on official
                                                                                                         that pre-issuance CMO transactions be                 business days between the hours of
                                               37 See   FIF Letter at 2.                                 reported by the first settlement date.                10:00 a.m. and 3:00 p.m. Copies of such


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                                                                            Federal Register / Vol. 81, No. 129 / Wednesday, July 6, 2016 / Notices                                                       44073

                                             filing also will be available for                           The text of the proposed rule change                    To ease concerns that these new
                                             inspection and copying at the principal                  is available at the Exchange’s Web site                  order-handling procedures could be
                                             office of FINRA. All comments received                   at www.batstrading.com, at the                           abused solely for the purpose of
                                             will be posted without change; the                       principal office of the Exchange, and at                 obtaining executions at one-half
                                             Commission does not edit personal                        the Commission’s Public Reference                        minimum price variations—although
                                             identifying information from                             Room.                                                    there was no evidence to suggest this
                                             submissions. You should submit only                                                                               might occur—the Exchange included
                                                                                                      II. Self-Regulatory Organization’s
                                             information that you wish to make                                                                                 Interpretation and Policy .01 to Rule
                                                                                                      Statement of the Purpose of, and
                                             available publicly. All submissions                                                                               11.13 stating:
                                                                                                      Statutory Basis for, the Proposed Rule
                                             should refer to File Number SR–FINRA–                    Change                                                      The Exchange will consider it inconsistent
                                             2016–023, and should be submitted on                                                                              with just and equitable principles of trade to
                                             or before July 27, 2016.                                    In its filing with the Commission, the                engage in a pattern or practice of using Non-
                                                                                                      Exchange included statements                             Displayed Orders or orders subject to price
                                               For the Commission, by the Division of                 concerning the purpose of and basis for                  sliding solely for the purpose of executing
                                             Trading and Markets, pursuant to delegated
                                                                                                      the proposed rule change and discussed                   such orders at one-half minimum price
                                             authority.38                                                                                                      variation from the locking price. Evidence of
                                                                                                      any comments it received on the
                                             Robert W. Errett,                                                                                                 such behavior may include, but is not limited
                                                                                                      proposed rule change. The text of these
                                             Deputy Secretary.                                                                                                 to, a User’s pattern of entering orders at a
                                                                                                      statements may be examined at the
                                             [FR Doc. 2016–15918 Filed 7–5–16; 8:45 am]                                                                        price that would lock or be ranked at the
                                                                                                      places specified in Item IV below. The                   price of a displayed quotation and cancelling
                                             BILLING CODE 8011–01–P                                   Exchange has prepared summaries, set                     orders when they no longer lock the
                                                                                                      forth in sections A, B, and C below, of                  displayed quotation.
                                                                                                      the most significant parts of such
                                             SECURITIES AND EXCHANGE                                                                                           The Exchange also stated in the 2011
                                                                                                      statements.
                                             COMMISSION                                                                                                        Proposal that it would conduct
                                                                                                      A. Self-Regulatory Organization’s                        surveillance to monitor for such
                                             [Release No. 34–78194; File No. SR–                      Statement of the Purpose of, and the                     potential abuse.6
                                             BatsBYX–2016–16]                                         Statutory Basis for, the Proposed Rule                     The Commission approved the 2011
                                                                                                      Change                                                   Proposal,7 and the Exchange has
                                             Self-Regulatory Organizations; Bats                                                                               conducted nearly five years of
                                             BYX Exchange, Inc.; Notice of Filing                     1. Purpose
                                                                                                                                                               surveillance as it promised in the 2011
                                             and Immediate Effectiveness of a                         Introduction                                             Proposal. After this lengthy period of
                                             Proposed Rule Change To Remove                             In 2011, the Exchange identified an                    surveillance, the Exchange has
                                             Interpretation and Policy .01 From Rule                  inefficiency in its handling of certain                  determined that there is no evidence
                                             11.13, Order Execution and Routing                       non-displayed orders resting on the                      that market participants attempt to use
                                             June 29, 2016.                                           Exchange at a price equal to the                         the Exchange’s order handling
                                                                                                      Exchange’s best displayed orders on the                  procedures in Rule 11.13 solely to
                                                Pursuant to section 19(b)(1) of the
                                                                                                      opposite side of the market (‘‘Locking                   obtain executions at one-half minimum
                                             Securities Exchange Act of 1934 (the
                                                                                                      Price’’) (the non-displayed orders at the                price variations. Further, the Exchange
                                             ‘‘Act’’),1 and Rule 19b–4 thereunder,2
                                                                                                      Locking Price, ‘‘Non-Displayed                           has found no way in which a market
                                             notice is hereby given that on June 23,                                                                           participant could abuse these order
                                             2016, Bats BYX Exchange, Inc. (the                       Orders’’). Similarly, the Exchange
                                                                                                      identified an inefficiency in its handling               handling procedures. It is the
                                             ‘‘Exchange’’ or ‘‘BYX’’) filed with the                                                                           Exchange’s position, therefore, that
                                                                                                      of certain displayed orders that were
                                             Securities and Exchange Commission                                                                                Interpretation and Policy .01 and its
                                                                                                      ranked at the Locking Price and
                                             (‘‘Commission’’) the proposed rule                                                                                corollary surveillance is now
                                                                                                      displayed at a permissible price one
                                             change as described in Items I and II                                                                             unnecessary. The Exchange proposes to
                                                                                                      minimum price variation away from the
                                             below, which Items have been prepared                                                                             remove the unnecessary Interpretation
                                                                                                      Locking Price (such orders ‘‘Resting
                                             by the Exchange. The Exchange has                                                                                 and Policy and to discontinue the
                                                                                                      Order Subject to NMS Price Sliding’’).
                                             designated this proposal as a ‘‘non-                                                                              corollary surveillance.
                                                                                                      In order to avoid an apparent issue
                                             controversial’’ proposed rule change
                                                                                                      under its then-existing priority rule, the               Background
                                             pursuant to section 19(b)(3)(A) of the
                                                                                                      Exchange was rejecting incoming orders
                                             Act 3 and Rule 19b–4(f)(6) thereunder,4                                                                             Prior to the implementation of the
                                                                                                      that were otherwise marketable against
                                             which renders it effective upon filing                                                                            2011 Proposal, consistent with the
                                                                                                      the Non-Displayed Orders or the Resting
                                             with the Commission. The Commission                                                                               Exchange’s rule regarding priority of
                                                                                                      Orders Subject to NMS Price Sliding. In
                                             is publishing this notice to solicit                                                                              orders, Rule 11.12, in order to avoid an
                                                                                                      order to optimize available liquidity for
                                             comments on the proposed rule change                                                                              apparent priority issue under the
                                                                                                      incoming orders and to provide price
                                             from interested persons.                                                                                          Exchange’s rules Non-Displayed Orders
                                                                                                      improvement for market participants,
                                             I. Self-Regulatory Organization’s                        the Exchange proposed in May of 2011                     and Resting Orders Subject to NMS
                                             Statement of the Terms of Substance of                   to execute a resting Non-Displayed                       Price Sliding were not executed by the
                                             the Proposed Rule Change                                 Order or Resting Order Subject to NMS                    Exchange pursuant to Rule 11.13 when
                                                                                                      Price Sliding at one-half minimum price                  such orders would be executed at a
                                               The Exchange filed a proposal to                                                                                Locking Price. Specifically, if incoming
                                             remove Interpretation & Policy .01 from                  variation less than the Locking Price in
                                             Exchange Rule 11.13, as further                          the case of a bid and one-half minimum
                                                                                                                                                               to pay, and for offers the lowest price at which the
ehiers on DSK5VPTVN1PROD with NOTICES




                                             described below.                                         price variation more than the Locking                    User is willing to sell.
                                                                                                      Price in the case of an offer.5                             6 See 2011 Proposal, supra note 5, at 28829.
                                                                                                                                                                  7 See Securities Exchange Act Release No. 64753
                                               38 17 CFR 200.30–3(a)(12).                               5 See Securities Exchange Act Release No. 64476        (June 27, 2011), 76 FR 38714 (July 1, 2011) (SR–
                                               1 15 U.S.C. 78s(b)(1).                                 (May 12, 2011), 76 FR 28826 (May 18, 2011) (SR–          BYX–2011–009) (Order Approving a Proposed Rule
                                               2 17 CFR 240.19b–4.
                                                                                                      BYX–2011–009) (‘‘2011 Proposal’’). The reference to      Change To Amend BYX Rule 11.9, Entitled ‘‘Orders
                                               3 15 U.S.C. 78s(b)(3)(A).
                                                                                                      the most ‘‘aggressive’’ price, as used in that filing,   and Modifiers’’ and BYX Rule 11.13, Entitled
                                               4 17 CFR 240.19b–4(f)(6).                              means for bids the highest price the User is willing     ‘‘Order Execution’’) (‘‘2011 Approval’’).



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Document Created: 2016-07-06 07:56:03
Document Modified: 2016-07-06 07:56:03
CategoryRegulatory Information
CollectionFederal Register
sudoc ClassAE 2.7:
GS 4.107:
AE 2.106:
PublisherOffice of the Federal Register, National Archives and Records Administration
SectionNotices
FR Citation81 FR 44065 

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