81 FR 44359 - Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of a Proposed Rule Change To Amend FINRA Rule 7730 (Trade Reporting and Compliance Engine (TRACE))
SECURITIES AND EXCHANGE COMMISSION Federal Register Volume 81, Issue 130 (July 7, 2016)
Federal Register Volume 81, Issue 130 (July 7, 2016)
| Page Range | 44359-44363 | |
| FR Document | 2016-16109 |
[Federal Register Volume 81, Number 130 (Thursday, July 7, 2016)] [Notices] [Pages 44359-44363] From the Federal Register Online [www.thefederalregister.org] [FR Doc No: 2016-16109] [[Page 44359]] ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Release No. 34-78219; File No. SR-FINRA-2016-024] Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of a Proposed Rule Change To Amend FINRA Rule 7730 (Trade Reporting and Compliance Engine (TRACE)) July 1, 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 28, 2016, Financial Industry Regulatory Authority, Inc. (``FINRA'') filed with the Securities and Exchange Commission (``SEC'' or ``Commission'') the proposed rule change as described in Items I, II, and III below, which Items have been prepared by FINRA. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. --------------------------------------------------------------------------- \1\ 15 U.S.C. 78s(b)(1). \2\ 17 CFR 240.19b-4.+ --------------------------------------------------------------------------- I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change FINRA is proposing to amend FINRA Rule 7730 to create a new Academic Corporate Bond TRACE Data product that would be available to institutions of higher education. 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 Rule 7730 sets forth the TRACE data products offered by FINRA. FINRA's data product offerings include both real-time as well as historic data for most TRACE-eligible securities. FINRA is proposing to create a new Academic Corporate Bond TRACE Data product, which would be made available solely to institutions of higher education and would include masked dealer identifiers. FINRA periodically receives requests from academics for access to TRACE data. FINRA's existing Historic TRACE Data product provides transaction-level data on an 18-month delayed basis for all transactions that have been reported to TRACE in the classes of TRACE- eligible securities that currently are disseminated.\3\ While Historic TRACE Data is used by academic researchers today, it does not include any identifying information regarding the dealer reporting each transaction. Thus, where a researcher wishes to track the behavior of an individual dealer or group of dealers--even anonymously--the existing Historic TRACE Data product would not allow for this type of observation. As a result, academics have requested that FINRA make available an enhanced version of Historic TRACE Data that would include dealer identification. --------------------------------------------------------------------------- \3\ FINRA adopted the Historic TRACE Data rule and related fees in 2010. See Securities Exchange Act Release No. 61012 (November 16, 2009), 74 FR 61189 (November 23, 2009) (Order Approving File No. SR- FINRA-2007-006). See also Regulatory Notice 10-14 (March 2010). \4\ Rule 6710(q) generally defines ``List or Fixed Offering Price Transaction'' as a primary market sale transaction sold on the first day of trading of a security excluding a Securitized Product other than an Asset-Backed Security as defined in Rule 6710(cc): (i) By a sole underwriter, syndicate manager, syndicate member or selling group member at the published or stated list or fixed offering price, or (ii) in the case of a primary market sale transaction effected pursuant to Securities Act Rule 144A, by an initial purchaser, syndicate manager, syndicate member or selling group member at the published or stated fixed offering price. --------------------------------------------------------------------------- In response to these requests from academics, the proposed rule change would create a new Academic Corporate Bond TRACE Data product that would include transaction-level data on corporate bonds (except a transaction that is a List or Fixed Offering Price Transaction \4\ or a Takedown Transaction \5\),\6\ including Rule 144A transactions in corporate bonds, with masked dealer identifiers. Masked dealer identifiers may be useful to academics in a variety of ways--for example, to enable researchers to track activity by individual dealers or group of dealers and observe their behaviors, and may facilitate the ability of academic researchers to study the impact of various events on measures such as intermediation costs, dealer participation and liquidity. Academic Corporate Bond TRACE Data would be made available only to academics (i.e., requests originating from an institution of higher education).\7\ --------------------------------------------------------------------------- \5\ Rule 6710(r) generally defines ``Takedown Transaction'' as a primary market sale transaction sold on the first day of trading of a security excluding a Securitized Product other than an Asset- Backed Security: (i) By a sole underwriter or syndicate manager to a syndicate or selling group member at a discount from the published or stated list or fixed offering price, or (ii) in the case of a primary market sale transaction effected pursuant to Securities Act Rule 144A, by an initial purchaser or syndicate manager to a syndicate or selling group member at a discount from the published or stated fixed offering price. \6\ The existing Historic TRACE Data also does not include List or Fixed Offering Price or Takedown Transactions. \7\ In addition, FINRA intends to establish a fee for the Academic Corporate Bond TRACE Data product prior to the effective date of the proposed rule change. The fee will be established pursuant to a separate rule filing. --------------------------------------------------------------------------- While FINRA understands that masked dealer identifiers may be very useful to academics in connection with their research activities, we also appreciate that firms may be concerned regarding the potential for reverse engineering. To address this issue, in addition to uniquely masking dealer identities for each academic institution, FINRA proposes to take mitigating steps, including to limit transactions included in the Academic Corporate Bond TRACE Data product to transactions that are at least 36 months old. In addition, FINRA would impose certain requirements on subscribers regarding the terms of use of the data. In the written agreement with subscribers to Academic Corporate Bond TRACE Data, among other things, FINRA will: (1) Explicitly require subscribers to agree that they will not attempt to reverse engineer the identity of any market participant; (2) prohibit the redistribution of data in the Academic Corporate Bond TRACE Data product; (3) require users to disclose each intended use of the data (including a description of each study being performed and the names of each individual who will have access to the data for the study); (4) require users to ensure that any data presented in work product be sufficiently aggregated so as [[Page 44360]] to prevent reverse engineering of any dealer or transaction; and (5) require that the data be returned or destroyed if the agreement is terminated. If the Commission approves the proposed rule change, FINRA will announce the effective date of the proposed rule change in a Regulatory Notice to be published no later than 90 days following Commission approval. The effective date will be no later than 270 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,\8\ 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. --------------------------------------------------------------------------- \8\ 15 U.S.C. 78o-3(b)(6). --------------------------------------------------------------------------- Pursuant to the proposal, FINRA will make available to institutions of higher education an enhanced historic TRACE data product that will include transaction-level data on corporate bonds on a 36-month delayed basis with masked identifying information regarding the dealer reporting each transaction. Academic Corporate Bond TRACE Data would be made available only to institutions of higher education. FINRA believes that the additional granularity provided by this new data product will enable researchers to track the behavior of individual dealers or group of dealers and observe their behaviors, and may facilitate the ability of academic researchers to study the impact of various events on measures such as intermediation costs, dealer participation and liquidity, thereby enhancing understanding of the market for corporate bonds and the behavior of its participants. Thus, FINRA believes that the proposed rule change is in the public interest and consistent with the Act. 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's existing Historic TRACE Data product provides transaction- level data on an 18-month delayed basis for all transactions that have been reported to TRACE in the classes of TRACE-eligible securities that currently are disseminated. As detailed above, FINRA is proposing to create a new Academic Corporate Bond TRACE Data product, which would be made available solely to institutions of higher education with a 36- month delay and would include masked dealer identifiers associated with individual reported transactions, which is not available in the existing Historic TRACE Data product. The proposed rule change would expand the benefits of FINRA's TRACE initiatives by providing additional transparency on corporate bond trading for academic research purposes. The analysis that can be conducted using masked dealer identifiers associated with individual reported transactions could incorporate estimates of anonymized dealer positions and hence potentially enhance the ability for researchers to analyze and understand dealer networks and liquidity provision in the corporate bond market. The proposal to create a new Academic Corporate Bond TRACE Data product would not impose any additional reporting requirements or costs on firms and, as a result, would have no direct impact on firms. However, FINRA considered the potential for indirect costs regarding possible information leakage due to the inclusion of masked dealer identifiers in the data. To investigate whether the dissemination of masked dealer identifiers pose a risk for reverse engineering of the data to reveal the identity of individual firms, FINRA analyzed 15,533,134 corporate bond secondary market trades (that occurred between February 6, 2012 and February 5, 2016) in 21,164 unique corporate bonds that were issued between February 6, 2012 and February 7, 2015.\9\ --------------------------------------------------------------------------- \9\ The analysis is conducted from the perspective of the sell- side in a transaction. Historic TRACE Data and the proposed Academic Corporate Bond TRACE Data product do not include List or Fixed Offering Price Transactions or Takedown Transactions. Therefore, these transactions are excluded from our sample. --------------------------------------------------------------------------- The analysis below attempts to answer the question of whether primary underwriter information can be reliably linked to the largest seller in a given CUSIP and potentially unmask the true identity of the firm.\10\ --------------------------------------------------------------------------- \10\ Primary underwriter information is not a data field in TRACE, but is publicly available from various academic and commercial databases at the CUSIP level. ``Largest seller'' is defined as the Market Participant Identifier (``MPID'') with the highest number of transactions over a given number of days. --------------------------------------------------------------------------- Figure 1a plots the number of distinct corporate bond CUSIPs that are traded within the first n days after issuance (n = 0, 1, 2 . . . 30) and the percentage of CUSIPs where the largest seller in the secondary market also is the primary underwriter for that issue.\11\ 11,825 distinct corporate bond CUSIPs are traded in the secondary market on the day of issuance (n = 0) and the largest seller also is the primary underwriter for approximately 6% of those CUSIPs. Within the first 30 days of trading (n = 30), the number of CUSIPs traded increase to 15,595, and the percentage of CUSIPs where the largest seller also is the primary underwriter increases to 11%. Effectively, if one assigned the masked dealer identifier associated with the most sale transactions in the 30-day window to the primary underwriter, the assignment would be correct for about one in ten CUSIPs. --------------------------------------------------------------------------- \11\ For example, for n = 2, the measure would determine the number of unique CUSIPs where the underwriter had been the largest seller of the security for the previous three days. --------------------------------------------------------------------------- [[Page 44361]] [GRAPHIC] [TIFF OMITTED] TN07JY16.001 Figure 1a suggests that largest seller information in a specific corporate bond can accurately be linked to the primary underwriter, unmasking the identity of the trading firm for approximately 10% of the CUSIPs. Alternatively, a researcher could limit its sample to those CUSIPs that are traded in the secondary market by a single masked dealer identifier within the first n days of trading and assume that this seller is the primary underwriter. For example, in Figure 1b below, on the day of issuance (n = 0), there are 1,835 distinct corporate bonds that are traded by a single MPID, of which 222 (approximately 12%) are sold by the primary underwriter. If one looked at the first 30 days of secondary market trading (n = 30), there would be 2,138 distinct CUSIPs in our sample with a single MPID trading the issue and 17% of those MPIDs would be associated with the primary underwriter. [GRAPHIC] [TIFF OMITTED] TN07JY16.002 [[Page 44362]] Hence, these finding confirm that primary underwriter information alone is not sufficient to discover the true identity of the trading firm where the only other information used in the analysis is the information to be contained in the Academic Corporate Bond TRACE Data product. However, FINRA acknowledges the potential for reverse engineering of masked dealer identifiers to determine the true identities of individual firms, and has taken a number of measures, as discussed above, to reduce this risk and mitigate any potential impacts.\12\ FINRA believes that the potential additional research that may be facilitated by the availability of this new data product will enhance understanding of the market for TRACE-eligible securities and trending behavior and, therefore, should create a benefit for market participants. --------------------------------------------------------------------------- \12\ For example, other publicly-available information exists that may contribute to the potential for successful reverse engineering of dealer identities. One such dataset that can be obtained by academics is sold by the National Association of Insurance Commissioners (NAIC) and contains detailed information about insurance company bond transactions, including the CUSIP of the bond traded, the identities of insurance companies and the dealers between whom each trade is completed, the date of the transaction, the amount traded, and the price of the transaction. Please see description of the data in a recent paper by O'Hara et al. (2015) at http://papers.ssrn.com/sol3/Papers.cfm?abstract_id=2680480. --------------------------------------------------------------------------- FINRA may consider expanding TRACE data product offerings in the future to make transaction-level information with masked dealer identifiers available to academics for other types of TRACE-eligible securities. However, FINRA believes that starting with corporate bonds is an appropriate first step because most data requests received from academics have related to corporate bond data, and because corporate bonds generally are traded by a greater number of dealers and, therefore, do not present the same likelihood for accurate reverse engineering by academics. 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 15-26.\13\ FINRA received four comments in response to the Regulatory Notice.\14\ A copy of the Regulatory Notice is attached as Exhibit 2a. A list of the commenters and copies of the comment letters received in response to the Regulatory Notice are attached as Exhibits 2b and 2c, respectively. --------------------------------------------------------------------------- \13\ Regulatory Notice 15-26 (July 2015). \14\ See Letter from Michael Nicholas, Chief Executive Officer, Bond Dealers of America, to Marcia E. Asquith, Corporate Secretary, FINRA, dated August 24, 2015 (``BDA''), letter from Luis Palacios, Director of Research Services, The Wharton School, to Marcia E. Asquith, Corporate Secretary, FINRA, dated September 10, 2015 (``Wharton''), letter from David L. Cohen, Managing Director & Associate General Counsel, and Sean Davy, Managing Director, Securities Industry and Financial Markets Association, to Marcia E. Asquith, Corporate Secretary, FINRA, dated September 11, 2015 (``SIFMA''), and letter from Carrie Devorah, Founder, The Center for Copyrights Integrity, to Marcia E. Asquith, Corporate Secretary, FINRA, dated September 14, 2015 (``CCI''). --------------------------------------------------------------------------- SIFMA generally supports the proposal but recommends specific modifications to further guard against information leakage. Specifically, SIFMA's suggestions include that TRACE data should be delayed a minimum of four years prior to being included in the academic data product; that transactions be grouped by dealer rather than masked on an individual basis (excluding information on List or Fixed Offering Price Transactions and Takedown Transactions); \15\ and that the subscription agreement include restrictions around who at an academic institution is authorized to access the data. BDA also raised concerns regarding information leakage, and believes that the proposal does not adequately balance the risk to dealers with the benefits of academic research. --------------------------------------------------------------------------- \15\ BDA also notes that the proposal does not state that the masked ID used will be changed periodically. To reduce the risk of dealer identification, BDA recommends that dealers be grouped by size in the Academic TRACE Data. --------------------------------------------------------------------------- FINRA has considered concerns regarding information leakage due to masked dealer identifiers and the specific comments received. In response to comments, FINRA has modified the proposal in two significant ways. First, FINRA has modified the proposal to extend the data delay period to 36 months rather than the 24-month delay proposed in Regulatory Notice 15-26. In addition, FINRA is limiting the data to be included in the scope of the current proposal to transactions in corporate bonds, including Rule 144A transactions in corporate bonds. In Regulatory Notice 15-26, FINRA proposed to include all of the data sets currently included in the Historic TRACE Data product.\16\ However, because most data requests from academics relate to corporate bonds, and because trading may be more concentrated among a smaller number of dealers for other types of TRACE-eligible securities, FINRA believes it is appropriate to initially adopt the Academic TRACE Data product to include transaction information on corporate bonds only, and may reconsider the scope of the product in the future. FINRA believes that these changes to the academic data product, along with the other measures included in the proposal, such as the restricted scope of distribution limited to institutions of higher education; the safeguards included in the data agreement; and the use of masked identifiers, are sufficient in preventing and mitigating any impact associated with information leakage. --------------------------------------------------------------------------- \16\ Historic TRACE Data is transaction-level data and includes the following data sets: The Historic Corporate Bond Data Set, the Historic Agency Data Set, the Historic Securitized Product Data Set and the Historic Rule 144A Data Set. --------------------------------------------------------------------------- BDA and SIFMA also suggest using groupings, rather than masked individual dealer IDs, in the academic data product. FINRA has considered this alternative and continues to believe that transaction- level information masked at the individual dealer level is appropriate. FINRA believes that groupings will reduce the utility of the data for academic researchers and prevent them from accurately undertaking studies that analyze dealer behavior, or that need to control for dealer-specific factors. However, FINRA notes that masked identifiers will be made unique per subscriber. FINRA believes that, while changing the masked identifier per data request as suggested by BDA would impede research by a single subscriber, assigning unique masked identifiers per subscriber may both help guard against coordinated efforts at attempting reverse engineering dealer identities as well as assist FINRA in identifying the source of conduct that violates the FINRA subscription agreement. FINRA may consider amending or discontinuing the Academic Corporate Bond TRACE Data product, as currently proposed, if future experience shows that anonymized dealer identifier are reverse engineered by academics. BDA states that prohibiting users from attempting to reverse engineer a dealer's identity will not extend to a reader of any study. However, FINRA notes that the user agreement also will require that any data presented in work product be sufficiently aggregated so as to prevent reverse engineering of any dealer or transaction, and believes that this measure would protect against reverse engineering by readers of published works. Wharton supports the proposed academic data product and states that the ``[a]cademic community's primary interest in having broker IDs is not related to the desire to determine the identities/names of underlying brokers, but most importantly to assess the role of brokers in bond market liquidity and [[Page 44363]] price discovery process.'' \17\ Wharton also states that it has received data with masked broker identities for years from data vendors and is unaware of any cases where this availability has led to successful reverse engineering and public disclosure of broker identities.\18\ --------------------------------------------------------------------------- \17\ See Wharton letter. \18\ Wharton provides in its letter examples of vendor data that has been available with masked broker IDs. Specifically, Wharton states that ``Thomson-Reuters IBES analyst forecast and recommendations database is a good example as it has been providing masked IDs for both brokerage houses as well as individual analysts since the early 80's. Another example is Ancerno (Abel-Noser) high- frequency database of institutional trades which academic researchers have used mainly for the reason that it contains a masked institution ID (e.g., Arif, Rephael and Lee, 2015; Choi and Sias, 2012).'' See Wharton letter. --------------------------------------------------------------------------- BDA and SIFMA raised concerns around the inclusion of primary market transaction information (for List or Fixed Offering Price Transactions and Takedown Transactions) in Academic TRACE Data. FINRA confirms that List or Fixed Offering Price Transactions and Takedown Transactions will not be included in the Academic Corporate Bond TRACE Data product.\19\ --------------------------------------------------------------------------- \19\ See supra note 6. --------------------------------------------------------------------------- BDA, CCI \20\ and SIFMA raised the issue of information leakage due to potential data security breaches. FINRA notes that the data usage agreement also will address security measures. For example, FINRA intends that the data agreement require the use of commercially reasonable measures to protect the data and that users administer reasonable security procedures where the data is used, accessed, processed, stored or transmitted to ensure that the data remains secure from unauthorized access. --------------------------------------------------------------------------- \20\ CCI raises issues regarding the security of customer information. FINRA notes that the Academic TRACE Data would consist of security-focused transaction information, not customer information. CCI also raises other issues that are not germane to the instant proposal and that, therefore, are not addressed herein. --------------------------------------------------------------------------- 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 CommentsUse the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or Send an email to [email protected]. Please include File Number SR-FINRA-2016-024 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-2016-024. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for Web site viewing and printing in the Commission's Public Reference Room, 100 F Street NE., Washington, DC 20549 on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of such filing also will be available for inspection and copying at the principal office of FINRA. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR-FINRA-2016-024, and should be submitted on or before July 28, 2016. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.\21\ --------------------------------------------------------------------------- \21\ 17 CFR 200.30-3(a)(12). --------------------------------------------------------------------------- Brent J. Fields, Secretary. [FR Doc. 2016-16109 Filed 7-6-16; 8:45 am] BILLING CODE 8011-01-P
![Federal Register / Vol. 81, No. 130 / Thursday, July 7, 2016 / Notices 44359
SECURITIES AND EXCHANGE both real-time as well as historic data Transaction 5),6 including Rule 144A
COMMISSION for most TRACE-eligible securities. transactions in corporate bonds, with
FINRA is proposing to create a new masked dealer identifiers. Masked
[Release No. 34–78219; File No. SR–FINRA–
2016–024] Academic Corporate Bond TRACE Data dealer identifiers may be useful to
product, which would be made academics in a variety of ways—for
Self-Regulatory Organizations; available solely to institutions of higher example, to enable researchers to track
Financial Industry Regulatory education and would include masked activity by individual dealers or group
Authority, Inc.; Notice of Filing of a dealer identifiers. of dealers and observe their behaviors,
Proposed Rule Change To Amend and may facilitate the ability of
FINRA periodically receives requests academic researchers to study the
FINRA Rule 7730 (Trade Reporting and
from academics for access to TRACE impact of various events on measures
Compliance Engine (TRACE))
data. FINRA’s existing Historic TRACE such as intermediation costs, dealer
July 1, 2016. Data product provides transaction-level participation and liquidity. Academic
Pursuant to Section 19(b)(1) of the data on an 18-month delayed basis for Corporate Bond TRACE Data would be
Securities Exchange Act of 1934 all transactions that have been reported made available only to academics (i.e.,
(‘‘Act’’) 1 and Rule 19b–4 thereunder,2 to TRACE in the classes of TRACE- requests originating from an institution
notice is hereby given that on June 28, eligible securities that currently are of higher education).7
2016, Financial Industry Regulatory disseminated.3 While Historic TRACE While FINRA understands that
Authority, Inc. (‘‘FINRA’’) filed with the Data is used by academic researchers masked dealer identifiers may be very
Securities and Exchange Commission today, it does not include any useful to academics in connection with
(‘‘SEC’’ or ‘‘Commission’’) the proposed identifying information regarding the their research activities, we also
rule change as described in Items I, II, dealer reporting each transaction. Thus, appreciate that firms may be concerned
and III below, which Items have been regarding the potential for reverse
where a researcher wishes to track the
prepared by FINRA. The Commission is engineering. To address this issue, in
behavior of an individual dealer or
publishing this notice to solicit addition to uniquely masking dealer
comments on the proposed rule change group of dealers—even anonymously—
identities for each academic institution,
from interested persons. the existing Historic TRACE Data FINRA proposes to take mitigating
product would not allow for this type of steps, including to limit transactions
I. Self-Regulatory Organization’s observation. As a result, academics have
Statement of the Terms of Substance of included in the Academic Corporate
requested that FINRA make available an Bond TRACE Data product to
the Proposed Rule Change enhanced version of Historic TRACE transactions that are at least 36 months
FINRA is proposing to amend FINRA Data that would include dealer old. In addition, FINRA would impose
Rule 7730 to create a new Academic identification. certain requirements on subscribers
Corporate Bond TRACE Data product In response to these requests from regarding the terms of use of the data.
that would be available to institutions of In the written agreement with
academics, the proposed rule change
higher education. subscribers to Academic Corporate
The text of the proposed rule change would create a new Academic Corporate
Bond TRACE Data product that would Bond TRACE Data, among other things,
is available on FINRA’s Web site at FINRA will: (1) Explicitly require
http://www.finra.org, at the principal include transaction-level data on
subscribers to agree that they will not
office of FINRA and at the corporate bonds (except a transaction
attempt to reverse engineer the identity
Commission’s Public Reference Room. that is a List or Fixed Offering Price
of any market participant; (2) prohibit
Transaction 4 or a Takedown the redistribution of data in the
II. Self-Regulatory Organization’s
Statement of the Purpose of, and Academic Corporate Bond TRACE Data
Statutory Basis for, the Proposed Rule product; (3) require users to disclose
Change each intended use of the data (including
a description of each study being
In its filing with the Commission, performed and the names of each
FINRA included statements concerning individual who will have access to the
the purpose of and basis for the data for the study); (4) require users to
proposed rule change and discussed any ensure that any data presented in work
comments it received on the proposed product be sufficiently aggregated so as
rule change. The text of these statements
may be examined at the places specified 5 Rule 6710(r) generally defines ‘‘Takedown
3 FINRAadopted the Historic TRACE Data rule
in Item IV below. FINRA has prepared Transaction’’ as a primary market sale transaction
summaries, set forth in sections A, B, and related fees in 2010. See Securities Exchange sold on the first day of trading of a security
Act Release No. 61012 (November 16, 2009), 74 FR excluding a Securitized Product other than an
and C below, of the most significant Asset-Backed Security: (i) By a sole underwriter or
61189 (November 23, 2009) (Order Approving File
aspects of such statements. No. SR–FINRA–2007–006). See also Regulatory syndicate manager to a syndicate or selling group
Notice 10–14 (March 2010). member at a discount from the published or stated
A. Self-Regulatory Organization’s list or fixed offering price, or (ii) in the case of a
4 Rule 6710(q) generally defines ‘‘List or Fixed
Statement of the Purpose of, and the primary market sale transaction effected pursuant to
Offering Price Transaction’’ as a primary market Securities Act Rule 144A, by an initial purchaser
Statutory Basis for, the Proposed Rule
sale transaction sold on the first day of trading of or syndicate manager to a syndicate or selling group
Change a security excluding a Securitized Product other member at a discount from the published or stated
srobinson on DSK5SPTVN1PROD with NOTICES
1. Purpose than an Asset-Backed Security as defined in Rule fixed offering price.
6 The existing Historic TRACE Data also does not
6710(cc): (i) By a sole underwriter, syndicate
FINRA Rule 7730 sets forth the manager, syndicate member or selling group include List or Fixed Offering Price or Takedown
TRACE data products offered by FINRA. member at the published or stated list or fixed Transactions.
7 In addition, FINRA intends to establish a fee for
FINRA’s data product offerings include offering price, or (ii) in the case of a primary market
the Academic Corporate Bond TRACE Data product
sale transaction effected pursuant to Securities Act
prior to the effective date of the proposed rule
1 15 U.S.C. 78s(b)(1). Rule 144A, by an initial purchaser, syndicate change. The fee will be established pursuant to a
2 17 CFR 240.19b–4. manager, syndicate member or selling group separate rule filing.
member at the published or stated fixed offering
price.
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![44362 Federal Register / Vol. 81, No. 130 / Thursday, July 7, 2016 / Notices
Hence, these finding confirm that Notice is attached as Exhibit 2a. A list Academic TRACE Data product to
primary underwriter information alone of the commenters and copies of the include transaction information on
is not sufficient to discover the true comment letters received in response to corporate bonds only, and may
identity of the trading firm where the the Regulatory Notice are attached as reconsider the scope of the product in
only other information used in the Exhibits 2b and 2c, respectively. the future. FINRA believes that these
analysis is the information to be SIFMA generally supports the changes to the academic data product,
contained in the Academic Corporate proposal but recommends specific along with the other measures included
Bond TRACE Data product. modifications to further guard against in the proposal, such as the restricted
However, FINRA acknowledges the information leakage. Specifically, scope of distribution limited to
potential for reverse engineering of SIFMA’s suggestions include that institutions of higher education; the
masked dealer identifiers to determine TRACE data should be delayed a safeguards included in the data
the true identities of individual firms, minimum of four years prior to being agreement; and the use of masked
and has taken a number of measures, as included in the academic data product; identifiers, are sufficient in preventing
discussed above, to reduce this risk and that transactions be grouped by dealer and mitigating any impact associated
mitigate any potential impacts.12 FINRA rather than masked on an individual with information leakage.
believes that the potential additional basis (excluding information on List or BDA and SIFMA also suggest using
research that may be facilitated by the Fixed Offering Price Transactions and groupings, rather than masked
availability of this new data product Takedown Transactions); 15 and that the individual dealer IDs, in the academic
will enhance understanding of the subscription agreement include data product. FINRA has considered
market for TRACE-eligible securities restrictions around who at an academic this alternative and continues to believe
and trending behavior and, therefore, institution is authorized to access the that transaction-level information
should create a benefit for market data. BDA also raised concerns masked at the individual dealer level is
participants. regarding information leakage, and appropriate. FINRA believes that
FINRA may consider expanding believes that the proposal does not groupings will reduce the utility of the
TRACE data product offerings in the adequately balance the risk to dealers data for academic researchers and
future to make transaction-level with the benefits of academic research. prevent them from accurately
information with masked dealer FINRA has considered concerns undertaking studies that analyze dealer
identifiers available to academics for regarding information leakage due to behavior, or that need to control for
other types of TRACE-eligible securities. masked dealer identifiers and the dealer-specific factors. However, FINRA
However, FINRA believes that starting specific comments received. In response notes that masked identifiers will be
with corporate bonds is an appropriate to comments, FINRA has modified the made unique per subscriber. FINRA
first step because most data requests proposal in two significant ways. First, believes that, while changing the
received from academics have related to FINRA has modified the proposal to masked identifier per data request as
corporate bond data, and because extend the data delay period to 36 suggested by BDA would impede
corporate bonds generally are traded by months rather than the 24-month delay research by a single subscriber,
a greater number of dealers and, proposed in Regulatory Notice 15–26. In assigning unique masked identifiers per
therefore, do not present the same addition, FINRA is limiting the data to subscriber may both help guard against
likelihood for accurate reverse be included in the scope of the current coordinated efforts at attempting reverse
engineering by academics. proposal to transactions in corporate engineering dealer identities as well as
bonds, including Rule 144A assist FINRA in identifying the source of
C. Self-Regulatory Organization’s
transactions in corporate bonds. In conduct that violates the FINRA
Statement on Comments on the
Regulatory Notice 15–26, FINRA subscription agreement. FINRA may
Proposed Rule Change Received From
proposed to include all of the data sets consider amending or discontinuing the
Members, Participants, or Others
currently included in the Historic Academic Corporate Bond TRACE Data
The proposed rule change was TRACE Data product.16 However, product, as currently proposed, if future
published for comment in Regulatory because most data requests from experience shows that anonymized
Notice 15–26.13 FINRA received four academics relate to corporate bonds, dealer identifier are reverse engineered
comments in response to the Regulatory and because trading may be more by academics.
Notice.14 A copy of the Regulatory concentrated among a smaller number BDA states that prohibiting users from
of dealers for other types of TRACE- attempting to reverse engineer a dealer’s
12 For example, other publicly-available
eligible securities, FINRA believes it is identity will not extend to a reader of
information exists that may contribute to the
potential for successful reverse engineering of appropriate to initially adopt the any study. However, FINRA notes that
dealer identities. One such dataset that can be the user agreement also will require that
obtained by academics is sold by the National (‘‘Wharton’’), letter from David L. Cohen, Managing
Association of Insurance Commissioners (NAIC) Director & Associate General Counsel, and Sean
any data presented in work product be
and contains detailed information about insurance Davy, Managing Director, Securities Industry and sufficiently aggregated so as to prevent
company bond transactions, including the CUSIP of Financial Markets Association, to Marcia E. reverse engineering of any dealer or
the bond traded, the identities of insurance Asquith, Corporate Secretary, FINRA, dated transaction, and believes that this
companies and the dealers between whom each September 11, 2015 (‘‘SIFMA’’), and letter from
trade is completed, the date of the transaction, the Carrie Devorah, Founder, The Center for Copyrights
measure would protect against reverse
amount traded, and the price of the transaction. Integrity, to Marcia E. Asquith, Corporate Secretary, engineering by readers of published
Please see description of the data in a recent paper FINRA, dated September 14, 2015 (‘‘CCI’’). works.
by O’Hara et al. (2015) at http://papers.ssrn.com/ 15 BDA also notes that the proposal does not state
Wharton supports the proposed
srobinson on DSK5SPTVN1PROD with NOTICES
sol3/Papers.cfm?abstract_id=2680480. that the masked ID used will be changed
13 Regulatory Notice 15–26 (July 2015).
academic data product and states that
periodically. To reduce the risk of dealer
14 See Letter from Michael Nicholas, Chief identification, BDA recommends that dealers be the ‘‘[a]cademic community’s primary
Executive Officer, Bond Dealers of America, to grouped by size in the Academic TRACE Data. interest in having broker IDs is not
Marcia E. Asquith, Corporate Secretary, FINRA, 16 Historic TRACE Data is transaction-level data related to the desire to determine the
dated August 24, 2015 (‘‘BDA’’), letter from Luis and includes the following data sets: The Historic identities/names of underlying brokers,
Palacios, Director of Research Services, The Corporate Bond Data Set, the Historic Agency Data
Wharton School, to Marcia E. Asquith, Corporate Set, the Historic Securitized Product Data Set and
but most importantly to assess the role
Secretary, FINRA, dated September 10, 2015 the Historic Rule 144A Data Set. of brokers in bond market liquidity and
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![Federal Register / Vol. 81, No. 130 / Thursday, July 7, 2016 / Notices 44363
price discovery process.’’ 17 Wharton (B) institute proceedings to determine For the Commission, by the Division of
also states that it has received data with whether the proposed rule change Trading and Markets, pursuant to delegated
masked broker identities for years from should be disapproved. authority.21
data vendors and is unaware of any Brent J. Fields,
cases where this availability has led to IV. Solicitation of Comments Secretary.
successful reverse engineering and Interested persons are invited to [FR Doc. 2016–16109 Filed 7–6–16; 8:45 am]
public disclosure of broker identities.18 submit written data, views, and BILLING CODE 8011–01–P
BDA and SIFMA raised concerns arguments concerning the foregoing,
around the inclusion of primary market including whether the proposed rule
transaction information (for List or SECURITIES AND EXCHANGE
change is consistent with the Act.
Fixed Offering Price Transactions and COMMISSION
Comments may be submitted by any of
Takedown Transactions) in Academic the following methods: [Release No. 34–78198; File No. SR–
TRACE Data. FINRA confirms that List NYSEMKT–2016–52]
or Fixed Offering Price Transactions and Electronic Comments
Takedown Transactions will not be Self-Regulatory Organizations; NYSE
included in the Academic Corporate • Use the Commission’s Internet MKT LLC; Notice of Filing of Proposed
Bond TRACE Data product.19 comment form (http://www.sec.gov/ Rule Change Amending Rules 340,
rules/sro.shtml); or 341, and 359 To Extend the Time
BDA, CCI 20 and SIFMA raised the
issue of information leakage due to • Send an email to rule-comments@ Within Which a Member or Member
sec.gov. Please include File Number SR– Organization or an ATP Holder Must
potential data security breaches. FINRA
FINRA–2016–024 on the subject line. File a Uniform Termination Notice for
notes that the data usage agreement also
Securities Industry Registration
will address security measures. For Paper Comments
example, FINRA intends that the data June 30, 2016.
agreement require the use of • Send paper comments in triplicate Pursuant to Section 19(b)(1) 1 of the
commercially reasonable measures to to Brent J. Fields, Secretary, Securities Securities Exchange Act of 1934 (the
protect the data and that users and Exchange Commission, 100 F Street ‘‘Act’’) 2 and Rule 19b–4 thereunder,3
administer reasonable security NE., Washington, DC 20549–1090. notice is hereby given that, on June 16,
procedures where the data is used, 2016, NYSE MKT LLC (the ‘‘Exchange’’
accessed, processed, stored or All submissions should refer to File
or ‘‘NYSE MKT’’) filed with the
transmitted to ensure that the data Number SR–FINRA–2016–024. This file
Securities and Exchange Commission
remains secure from unauthorized number should be included on the
(the ‘‘Commission’’) the proposed rule
access. subject line if email is used. To help the
change as described in Items I, II, and
Commission process and review your
III. Date of Effectiveness of the III below, which Items have been
comments more efficiently, please use prepared by NYSE MKT. The
Proposed Rule Change and Timing for only one method. The Commission will
Commission Action Commission is publishing this notice to
post all comments on the Commission’s solicit comments on the proposed rule
Within 45 days of the date of Internet Web site (http://www.sec.gov/ change from interested persons.
publication of this notice in the Federal rules/sro.shtml). Copies of the
submission, all subsequent I. Self-Regulatory Organization’s
Register or within such longer period (i)
amendments, all written statements Statement of the Terms of Substance of
as the Commission may designate up to
with respect to the proposed rule the Proposed Rule Change
90 days of such date if it finds such
longer period to be appropriate and change that are filed with the The Exchange proposes to amend
publishes its reasons for so finding or Commission, and all written Rules 340, 341 and 359 to harmonize
(ii) as to which the self-regulatory communications relating to the the requirement of when a member or
organization consents, the Commission proposed rule change between the member organization or an ATP Holder
will: Commission and any person, other than must file an Uniform Termination
(A) By order approve or disapprove those that may be withheld from the Notice for Securities Industry
such proposed rule change, or public in accordance with the Registration (‘‘Form U–5’’) with the
provisions of 5 U.S.C. 552, will be rules of other exchanges and FINRA.
17 See Wharton letter.
available for Web site viewing and The proposed rule change is available
18 Wharton provides in its letter examples of printing in the Commission’s Public on the Exchange’s Web site at
vendor data that has been available with masked Reference Room, 100 F Street NE., www.nyse.com, at the principal office of
broker IDs. Specifically, Wharton states that Washington, DC 20549 on official the Exchange, and at the Commission’s
‘‘Thomson-Reuters IBES analyst forecast and business days between the hours of Public Reference Room.
recommendations database is a good example as it
has been providing masked IDs for both brokerage 10:00 a.m. and 3:00 p.m. Copies of such II. Self-Regulatory Organization’s
houses as well as individual analysts since the early filing also will be available for Statement of the Purpose of, and
80’s. Another example is Ancerno (Abel-Noser) inspection and copying at the principal
high-frequency database of institutional trades Statutory Basis for, the Proposed Rule
which academic researchers have used mainly for
office of FINRA. All comments received Change
the reason that it contains a masked institution ID will be posted without change; the
(e.g., Arif, Rephael and Lee, 2015; Choi and Sias, Commission does not edit personal In its filing with the Commission, the
srobinson on DSK5SPTVN1PROD with NOTICES
2012).’’ See Wharton letter. identifying information from self-regulatory organization included
19 See supra note 6.
submissions. You should submit only statements concerning the purpose of,
20 CCI raises issues regarding the security of
information that you wish to make and basis for, the proposed rule change
customer information. FINRA notes that the
Academic TRACE Data would consist of security- available publicly. All submissions 21 17
focused transaction information, not customer CFR 200.30–3(a)(12).
should refer to File Number SR–FINRA– 1 15 U.S.C.78s(b)(1).
information. CCI also raises other issues that are not
germane to the instant proposal and that, therefore,
2016–024, and should be submitted on 2 15 U.S.C. 78a.
are not addressed herein. or before July 28, 2016. 3 17 CFR 240.19b–4.
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Document Created: 2018-02-08 07:54:14
Document Modified: 2018-02-08 07:54:14
| Category | Regulatory Information | |
| Collection | Federal Register | |
| sudoc Class | AE 2.7: GS 4.107: AE 2.106: | |
| Publisher | Office of the Federal Register, National Archives and Records Administration | |
| Section | Notices | |
| FR Citation | 81 FR 44359 |
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