81_FR_62396 81 FR 62222 - Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Order Granting Approval of Proposed Rule Change To Create an Academic Corporate Bond TRACE Data Product

81 FR 62222 - Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Order Granting Approval of Proposed Rule Change To Create an Academic Corporate Bond TRACE Data Product

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 81, Issue 174 (September 8, 2016)

Page Range62222-62225
FR Document2016-21642

Federal Register, Volume 81 Issue 174 (Thursday, September 8, 2016) 
[Federal Register Volume 81, Number 174 (Thursday, September 8, 2016)]
[Notices]
[Pages 62222-62225]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2016-21642]


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SECURITIES AND EXCHANGE COMMISSION

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


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

September 2, 2016.

I. Introduction

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

[[Page 62223]]

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

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

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

[[Page 62224]]

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

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

IV. Conclusion

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


[[Page 62225]]


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

62222 Federal Register / Vol. 81, No. 174 / Thursday, September 8, 2016 / Notices Please direct your written comment to bids, best offers, and quotation sizes for Exchange Commission, c/o Remi Pavlik- Pamela Dyson, Director/Chief subject securities.3 Simon, 100 F Street NE., Washington, Information Officer, Securities and It is anticipated that twenty DC 20549, or by sending an email to: Exchange Commission, c/o Remi Pavlik- respondents, consisting of nineteen PRA_Mailbox@sec.gov. Simon, 100 F Street NE., Washington, national securities exchanges and one DC 20549 or send an email to: PRA_ national securities association, will Dated: September 2, 2016. Mailbox@sec.gov. collectively respond approximately Brent J. Fields, 2,184,303,485,488 times per year Secretary. Dated: September 1, 2016. pursuant to Rule 602(a) at 18.22 [FR Doc. 2016–21640 Filed 9–7–16; 8:45 am] Robert W. Errett, microseconds per response, resulting in BILLING CODE 8011–01–P Deputy Secretary. a total annual burden of approximately [FR Doc. 2016–21520 Filed 9–7–16; 8:45 am] 11,640 hours. It is anticipated that no BILLING CODE 8011–01–P respondents will have a reporting SECURITIES AND EXCHANGE burden pursuant to Rule 602(b).4 COMMISSION Thus, the aggregate third-party SECURITIES AND EXCHANGE disclosure burden under Rule 602 is11, [Release No. 34–78759; File No. SR–FINRA– COMMISSION 640 hours annually which is comprised 2016–024] of 11,640 hours relating to Rule 602(a) Proposed Collection; Comment and 0 hours relating to Rule 602(b). Self-Regulatory Organizations; Request Written comments are invited on: (a) Financial Industry Regulatory Whether the proposed collections of Authority, Inc.; Order Granting Upon Written Request, Copies Available information are necessary for the proper Approval of Proposed Rule Change To From: Securities and Exchange performance of the functions of the Create an Academic Corporate Bond Commission, Office of FOIA Services, Commission, including whether the TRACE Data Product 100 F Street NE., Washington, DC information will have practical utility; 20549–2736. September 2, 2016. (b) the accuracy of the Commission’s Extension: estimate of the burden of the proposed I. Introduction Rule 602; SEC File No. 270–404; OMB collections of information; (c) ways to enhance the quality, utility, and clarity On June 28, 2016, the Financial Control No. 3235–0461. of the information to be collected; and Industry Regulatory Authority, Inc. Notice is hereby given that pursuant (d) ways to minimize the burden of (‘‘FINRA’’) filed with the Securities and to the Paperwork Reduction Act of 1995 collections of information on those who Exchange Commission (‘‘Commission’’), (‘‘PRA’’) (44 U.S.C. 3501 et seq.), the are to respond, including through the pursuant to Section 19(b)(1) of the Securities and Exchange Commission use of automated collection techniques Securities Exchange Act of 1934 (‘‘Commission’’) is soliciting comments or other forms of information (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 a on the existing collection of information technology. Consideration will be given proposed rule change to amend FINRA provided for in Rule 602 of Regulation to comments and suggestions submitted Rule 7730 to create a new data product NMS (17 CFR 240.602), under the in writing within 60 days of this consisting of data on historic Securities Exchange Act of 1934 (15 publication. transactions in corporate bonds reported U.S.C. 78a et seq.). The Commission An agency may not conduct or to the Trade Reporting and Compliance plans to submit this existing collection sponsor, and a person is not required to Engine (‘‘TRACE’’) that would be of information to the Office of respond to, a collection of information available to institutions of higher Management and Budget (‘‘OMB’’) for under the PRA unless it displays a learning (the ‘‘Academic Corporate extension and approval. currently valid OMB control number. Bond TRACE Data product’’). The Please direct your written comments to: proposed rule change was published for Rule 602 of Regulation NMS, comment in the Federal Register on July Dissemination of Quotations in NMS Pamela C. Dyson, Director/Chief Information Officer, Securities and 7, 2016.3 The Commission received securities, contains two related three comments in response to the collections. The first collection of proposal.4 On August 9, 2016, FINRA 3 Under Rule 602(b)(5), electronic information is found in Rule 602(a).1 extended to September 2, 2016, the time communications networks (‘‘ECNs’’) have the This third-party disclosure requirement option of reporting to an exchange or association for period within which the Commission obligates each national securities public dissemination, on behalf of customers that shall approve the proposed rule change, exchange and national securities are OTC market makers or exchange market makers, disapprove the proposed rule change, or association to make available to the best-priced orders and the full size for such orders entered by market makers on the ECN, to institute proceedings to determine quotation vendors for dissemination to satisfy such market makers’ reporting obligation whether the proposed rule change the public the best bid, best offer, and under Rule 602(b). Since this reporting requirement aggregate quotation size for each is an alternative method of meeting the market 1 15 makers’ reporting obligation, and because it is U.S.C. 78s(b)(1). ‘‘subject security,’’ as defined under the 2 17 CFR 240.19b–4. directed to nine or fewer persons (ECNs), this Rule. The second collection of collection of information is not subject to OMB 3 See Securities Exchange Act Release No. 78219 information is found in Rule 602(b).2 review under the Paperwork Reduction Act (July 1, 2016), 81 FR 44359 (‘‘Notice’’). This disclosure requirement obligates (‘‘PRA’’). 4 See letters to Brent J. Fields, Secretary, 4 For the reporting obligation under Rule 602(b), Commission, from Sean Davy, Managing Director, any exchange member and over-the- mstockstill on DSK3G9T082PROD with NOTICES the respondents are exchange members and OTC Capital Markets Division and Leslie M. Norwood, counter (‘‘OTC’’) market maker that is a market makers. The Commission believes that Managing Director and Associate General Counsel, ‘‘responsible broker or dealer,’’ as communication of quotations through an Municipal Securities Division, SIFMA, dated July defined under the Rule, to communicate exchange’s electronic trading system effectively 27, 2016 (‘‘SIFMA Letter’’); Mike Nicholas, Chief to an exchange or association its best means that exchange members currently have no Executive Officer, BDA, dated July 28, 2016 (‘‘BDA reporting burden under Rule 602(b) for these Letter’’); and Kumar Venkataraman, Ph.D., James M. quotations. The Commission also believes that there Collins Chair in Finance, Edwin L. Cox School of 1 17 CFR 242.602(a). are presently no OTC market makers that quote Business, Southern Methodist University, dated 2 17 CFR 242.602(b). other than on an exchange. August 9, 2016 (‘‘Venkataraman Letter’’). VerDate Sep<11>2014 19:34 Sep 07, 2016 Jkt 238001 PO 00000 Frm 00151 Fmt 4703 Sfmt 4703 E:\FR\FM\08SEN1.SGM 08SEN1

Federal Register / Vol. 81, No. 174 / Thursday, September 8, 2016 / Notices 62223 should be disapproved.5 FINRA Transactions.11 FINRA noted that the address market data fees for the responded to the comments on August existing Historic TRACE Data product Academic Corporate Bond TRACE Data 23, 2016.6 This order grants approval of also does not include List or Fixed product before the effective date of this the proposed rule change. Offering Price Transactions or proposal.16 Takedown Transactions. Under the II. Description of the Proposed Rule III. Summary of Comments and proposal, a transaction included in the Change FINRA’s Response Academic Corporate Bond TRACE Data FINRA has proposed to make product would be aged at least 36 The Commission received three available to institutions of higher months before being incorporated into comments on the proposed rule learning a new Academic Corporate the dataset. Each such transaction change 17 and a response letter from Bond TRACE Data product that would would not include any MPIDs, but FINRA.18 Two commenters generally contain transaction-level data on would instead include a masked dealer supported the proposal. One of these historic transactions in corporate bonds identifier.12 commenters, an academic researcher, and would include masked counterparty The Academic Corporate Bond stated that, ‘‘[t]o study the impact of information. Currently, FINRA makes TRACE Data product would be available banking regulation on bond dealers, it is publicly available real-time data in only to institutions of higher necessary to obtain information on the TRACE-eligible securities and a Historic education.13 Any institution of higher identity of dealers associated with each TRACE Data product that provides education subscribing to the product transaction. The Historic TRACE data transaction-level data, on an 18-month would be required to agree: (1) Not to product does not contain this delayed basis, without any counterparty attempt to reverse-engineer the identity information.’’ 19 The commenter pointed information.7 of any market participant; (2) not to to the masked dealer identifier In the Notice, FINRA stated that redistribute the data; (3) to disclose each information in the new proposed academic researchers cannot use the intended use of the data (including a product as a significant advantage over existing Historic TRACE Data product to description of each study being the Historic TRACE Data product, and track the behavior of an individual performed and the names of each stated that he ‘‘expect[s] that FINRA’s dealer or group of dealers due to the individual who will have access to the new Academic data initiative will lead lack of any counterparty information. data for the study); (4) to ensure that any to an explosion in academic research on FINRA stated that this proposal data presented in work product be corporate bonds and provide new responds to requests from academics for sufficiently aggregated to prevent insights on the functioning of the bond FINRA to make available an enhanced reverse engineering of any dealer or market.’’ 20 data product that includes counterparty transaction; and (5) to return or destroy A second commenter, while generally identification.8 FINRA has represented the data if the agreement is supportive of the proposal, expressed that establishing a new TRACE data terminated.14 the view that FINRA could make product with masked counterparty FINRA stated that it would announce modifications to provide additional identifiers could allow academic the effective date of the proposed rule protections against the potential for researchers to track activity in a variety change in a Regulatory Notice to be reverse engineering the data without of ways, including by individual dealer published no later than 90 days impeding its goals of promoting or by groups of dealers, and could following Commission approval, and academic access and research.21 This facilitate the ability of academic that the effective date would be no later commenter stated that the potential researchers to study the impact of than 270 days following publication of impact of reverse engineering could various events on measures such as that Regulatory Notice.15 In addition, include deciphering a dealer’s trading intermediation costs, dealer FINRA stated that it plans to file a strategies and revealing confidential participation, and liquidity.9 separate proposed rule change to business information relating to specific The proposal would amend FINRA client transactions.22 Rule 7730 to create a new Academic sale transaction sold on the first day of trading of A third commenter opposed the Corporate Bond TRACE Data product a security, excluding a Securitized Product as proposal, arguing that it would expose consisting of historic transaction-level defined in FINRA Rule 6710(m) other than an dealers and their customers to data on all transactions in corporate Asset-Backed Security as defined in FINRA Rule unnecessary risks.23 The commenter 6710(cc): (i) By a sole underwriter, syndicate bonds reported to TRACE, including manager, syndicate member, or selling group stated, for example, that ‘‘[i]t is very Rule 144A transactions in corporate member at the published or stated list or fixed likely that, as a consequence of this bonds but not including transactions offering price; or (ii) in the case of a primary market proposal, private and non-educational that are List or Fixed Offering Price sale transaction effected pursuant to Securities Act entities will end up possessing full trade Rule 144A, by an initial purchaser, syndicate Transactions 10 or Takedown manager, syndicate member, or selling group history including dealer names for every member at the published or stated fixed offering trade released.’’ 24 5 See letter to Katherine England, Assistant price. The two industry commenters offered Director, Division of Trading and Markets, 11 FINRA Rule 6710(r) defines ‘‘Takedown differing views on aspects of the Commission, from Racquel L. Russell, Associate Transaction’’ as a primary market sale transaction General Counsel, Regulatory Policy and Oversight, proposal that FINRA designed to reduce sold on the first day of trading of a security, FINRA, dated August 9, 2016. excluding a Securitized Product other than an the risk of reverse engineering specific 6 See letter to Brent J. Fields, Secretary, Asset-Backed Security: (i) By a sole underwriter or dealer identities. The second Commission, from Racquel L. Russell, Associate syndicate manager to a syndicate or selling group commenter thought that limiting the General Counsel, Regulatory Policy and Oversight, member at a discount from the published or stated FINRA, dated August 23, 2016 (‘‘FINRA Response list or fixed offering price; or (ii) in the case of a 16 See id. at 44359, n.7. mstockstill on DSK3G9T082PROD with NOTICES Letter’’). primary market sale transaction effected pursuant to 17 See 7 See FINRA Rule 7730(f)(4). See also Securities Securities Act Rule 144A, by an initial purchaser supra note 4. 18 See supra note 6. Exchange Act Release No. 61012 (November 16, or syndicate manager to a syndicate or selling group 19 Venkataraman Letter at 2. 2009), 74 FR 61189 (November 23, 2009) (Order member at a discount from the published or stated fixed offering price. 20 Id. at 3. Approving File No. SR–FINRA–2007–006). 8 See Notice, 81 FR at 44359. 12 See proposed FINRA Rule 7730(g)(5). 21 See SIFMA Letter at 2. 9 See id. 13 See proposed FINRA Rule 7730(e). 22 See id. at 3. 10 FINRA Rule 6710(q) defines ‘‘List or Fixed 14 See Notice, 81 FR at 44359–60. 23 See BDA Letter at 1. Offering Price Transaction’’ as a primary market 15 See id. at 44360. 24 Id. at 2. VerDate Sep<11>2014 19:34 Sep 07, 2016 Jkt 238001 PO 00000 Frm 00152 Fmt 4703 Sfmt 4703 E:\FR\FM\08SEN1.SGM 08SEN1

62224 Federal Register / Vol. 81, No. 174 / Thursday, September 8, 2016 / Notices scope of the data product to transactions although the proposed user agreements believes it is appropriate to restrict the in corporate bonds, including Rule are designed to prevent redistribution of availability of Academic Corporate 144A transactions but excluding the data, federal and state Freedom of Bond TRACE Data to institutions of information on List or Fixed Offering Information Act (‘‘FOIA’’) laws could higher education at this time.’’ 38 Price Transactions or Takedown defeat such intention if the transaction Transactions, would mitigate the risk of data is held by a public university and IV. Discussion and Commission reverse engineering.25 The second classified as a public record.31 This Findings commenter also acknowledged that the commenter also raised concerns about After careful review, the Commission proposal’s aging period of 36 months data security, suggesting that the data (expanded from 24 months in an earlier could be subject to hacking or data theft finds that the proposed rule change is iteration) would help reduce the risk of during transmission or when held by an consistent with the requirements of the reverse engineering, but thought that an institution of higher education.32 Act and the rules and regulations aging period of no less than 48 months In its response to these comments, thereunder applicable to a national would be more appropriate.26 The third FINRA stated that it ‘‘continues to securities association.39 In particular, commenter supported the exclusion of believe that the instant proposal strikes the Commission finds that the proposed List or Fixed Offering Price Transactions the appropriate balance between rule change is consistent with Section from the scope of the proposal and addressing risks regarding potential 15A(b)(6) of the Act,40 which requires, acknowledged that expanding the aging reverse engineering with facilitating the among other things, that FINRA’s rules period and masking dealer identities ability of academic researchers to study be designed to prevent fraudulent and would make reverse engineering more the market for corporate bonds.’’ 33 manipulative acts and practices, to difficult, but expressed the view that FINRA explained that it made promote just and equitable principles of these measures were not sufficient to significant changes to an earlier trade, and, in general, to protect reduce the risk of reverse engineering to iteration of the proposal, including investors and the public interest. an acceptable level.27 limiting the scope of the proposed data product to corporate bonds. In FINRA’s The Commission believes that In addition, the two industry commenters suggested that FINRA make view, transaction data on corporate establishing the Academic Corporate the transaction data available according bonds does not present a high risk of Bond TRACE Data product in the to groupings of comparable dealers, accurate reverse engineering because manner described in the proposal is instead of on an individual dealer level, generally these bonds are traded by a reasonable and consistent with the Act. arguing that masked dealer identifiers greater number of dealers.34 FINRA also The Commission does not believe that might not effectively protect their noted that it raised the minimum age of the commenters have raised any issue identities.28 The academic commenter, included transactions from 24 months to that would preclude approval of the who supported the proposal without 36 months. FINRA expressed its belief proposal at this time. The proposal modification, objected to this suggestion that the ‘‘totality of the measures’’ appears reasonably designed to of the other commenters and argued that included in this proposal adequately minimize the possibility that the providing the data by pre-set groupings address the commenters’ concerns.35 product might reveal the identities or could stifle academic research. This FINRA also stated that the user trading strategies of particular market commenter explained that individual agreements will include provisions participants. FINRA has limited the dealer-level data would allow academic geared towards data security and scope of the data product to include researchers to maintain needed designed to limit the risk of public only transactions in corporate bonds, flexibility to construct samples of disclosure due to federal or state FOIA will mask counterparty identities, is dealers in a manner best suited to their requests. FINRA noted that it will requiring transaction data to be aged 36 specific research question.29 utilize its existing processes to oversee months prior to inclusion, and will The two industry commenters also user agreements. FINRA further require subscribers to execute a user offered suggestions regarding explained that it will monitor use of the agreement imposing restrictions on use strengthening and enforcing the Academic Corporate Bond TRACE Data of the data. The required user proposed user agreements. The second product and may consider amending or agreements appear reasonably designed commenter urged FINRA to develop discontinuing the product if it finds that academics are reverse engineering the to limit information leakage while ‘‘robust operational frameworks around providing institutions of higher the execution and ongoing oversight of data.36 Finally, although one commenter education a potentially important new user agreements . . . [in order to] tool to analyze concerns about bond further mitigate concerns of reverse suggested expanding the user group for Academic Corporate Bond TRACE Data market liquidity. engineering and information leakage.’’ 30 The third commenter stated that, to other non-profit organizations IV. Conclusion engaged in research activities,37 FINRA 25 See SIFMA Letter at 2. responded that ‘‘in light of the It is therefore ordered, pursuant to 26 See id. sensitivities’’ surrounding making Section 19(b)(2) of the Act,41 that the 27 See BDA Letter at 1–2. transaction-level data available, even proposed rule change (SR–FINRA– 28 See SIFMA Letter at 3 (suggesting that FINRA with masked dealer identifiers, ‘‘FINRA 2016–024) be, and hereby is, approved. aggregate dealers by the peer group criteria used in FINRA report cards); BDA Letter at 2–3 (suggesting 31 See BDA Letter at 2. 38 FINRA Response Letter at 3. FINRA noted that that FINRA aggregate dealers by size). mstockstill on DSK3G9T082PROD with NOTICES 32 See id. 29 See Venkataraman Letter at 3. For example, the non-academic institutions may still subscribe to 33 FINRA Response Letter at 2. commenter noted that academic researchers may Historic TRACE Data, which includes transaction- 34 See id. FINRA also noted that any reverse level data without dealer-level information. See id. wish to aggregate dealers into groups based on whether or not they are active market makers with engineering of market participant identities would 39 In approving this proposed rule change, the high market share, whether they specialize in high be in direct contravention of explicit prohibitions Commission has considered the proposed rule’s yield bonds or investment grade bonds, or whether in the user agreements. See id. impact on efficiency, competition, and capital 35 See id. formation. See 15 U.S.C. 78c(f). they increase liquidity provision or withdraw participation when volatility is high. See id. 36 See id. at 2–3 and n. 4. 40 15 U.S.C. 78o–3(b)(6). 30 SIFMA Letter at 4. 37 See SIFMA Letter at 4–5. 41 15 U.S.C. 78s(b)(2). VerDate Sep<11>2014 19:34 Sep 07, 2016 Jkt 238001 PO 00000 Frm 00153 Fmt 4703 Sfmt 4703 E:\FR\FM\08SEN1.SGM 08SEN1

Federal Register / Vol. 81, No. 174 / Thursday, September 8, 2016 / Notices 62225 For the Commission, by the Division of II. Self-Regulatory Organization’s section 6(b)(5) of the Act 9 in that it is Trading and Markets, pursuant to delegated Statement of the Purpose of, and designed to promote just and equitable authority.42 Statutory Basis for, the Proposed Rule principles of trade, to foster cooperation Brent J. Fields, Change and coordination with persons engaged Secretary. in facilitating transactions in securities, [FR Doc. 2016–21642 Filed 9–7–16; 8:45 am] In its filing with the Commission, the to remove impediments to and perfect Exchange included statements the mechanism of a free and open BILLING CODE 8011–01–P concerning the purpose of and basis for market and a national market system the proposed rule change and discussed and, in general, to protect investors and SECURITIES AND EXCHANGE any comments it received on the the public interest. The Exchange COMMISSION proposed rule change. The text of these believes delaying the implementation of statements may be examined at the ORF will provide market participants [Release No. 34–78746; File No. SR– places specified in Item IV below. The BatsBZX–2016–52] additional time to assess the impact of Exchange has prepared summaries, set the ORF on their transactions and order Self-Regulatory Organizations; Bats forth in sections A, B, and C below, of execution scenarios, and that BZX Exchange, Inc.; Notice of Filing the most significant parts of such implementation of the fee on February and Immediate Effectiveness of a statements. 1, 2017 will benefit investors and the Proposed Rule Change To Delay the A. Self-Regulatory Organization’s public interest.10 Implementation of Amendments to the Statement of the Purpose of, and the Options Regulatory Fee B. Self-Regulatory Organization’s Statutory Basis for, the Proposed Rule Statement on Burden on Competition September 1, 2016. Change The Exchange does not believe that Pursuant to section 19(b)(1) of the 1. Purpose the proposed rule change will impose Securities Exchange Act of 1934 (the any burden on competition not ‘‘Act’’),1 and Rule 19b–4 thereunder,2 The Exchange recently submitted a proposed rule change to modify the fee necessary or appropriate in furtherance notice is hereby given that on August of the purposes of the Act. The ORF is 22, 2016, Bats BZX Exchange, Inc. (the schedule applicable to the Exchange’s options platform (‘‘BZX Options’’) to not intended to have any impact on ‘‘Exchange’’ or ‘‘BZX’’) filed with the competition. Rather, it is designed to Securities and Exchange Commission decrease ORF from $0.0010 per contract side to $0.0008 per contract.6 The enable the Exchange to recover a (‘‘Commission’’) the proposed rule material portion of the Exchange’s cost change as described in Items I, II and III Exchange also proposed to expand the application of the per-contract ORF to related to its regulatory activities. below, which Items have been prepared Therefore, the Exchange does not by the Exchange. The Exchange has each Member and non-Member for all options transactions cleared by OCC in believe delaying the implantation of designated the proposed rule change as ORF till February 1, 2017 will have any one establishing or changing a member the ‘‘customer’’ range, regardless of the exchange on which the transaction impact on competition. due, fee, or other charge imposed by the Exchange under section 19(b)(3)(A)(ii) occurs. In order to provide market C. Self-Regulatory Organization’s of the Act 3 and Rule 19b–4(f)(2) participants additional time to assess Statement on Comments on the thereunder,4 which renders the the impact of these changes to ORF on Proposed Rule Change Received From proposed rule change effective upon their transactions and order execution Members, Participants, or Others filing with the Commission. The scenarios, the Exchange is delaying the The Exchange has not solicited, and Commission is publishing this notice to implementation date of the fee until does not intend to solicit, comments on solicit comments on the proposed rule February 1, 2017.7 this proposed rule change. The change from interested persons. 2. Statutory Basis Exchange has not received any written I. Self-Regulatory Organization’s comments from members or other The Exchange believes that the interested parties. Statement of the Terms of Substance of proposed rule change is consistent with the Proposed Rule Change the requirements of the Act and the III. Date of Effectiveness of the The Exchange filed a proposal to rules and regulations thereunder that Proposed Rule Change and Timing for delay implementation of recently are applicable to a national securities Commission Action enacted amendments to the fee schedule exchange, and, in particular, with the The foregoing rule change has become applicable to Members 5 and non- requirements of section 6 of the Act.8 effective pursuant to section 19(b)(3)(A) Members of the Exchange pursuant to The Exchange also believes that its of the Act 11 and paragraph (f) of Rule BZX Rules 15.1(a) and (c) regarding its proposal furthers the objectives of 19b–4 thereunder.12 At any time within Options Regulatory Fee (‘‘ORF’’). 60 days of the filing of the proposed rule The text of the proposed rule change 6 See Securities Exchange Release No. 78453 change, the Commission summarily may is available at the Exchange’s Web site (August 1, 2016), 81 FR 51954 (August 5, 2016) (SR–BatsBZX–2016–42). temporarily suspend such rule change if at www.batstrading.com, at the 7 The Exchange notes that its fee schedule states principal office of the Exchange, and at that it may only increase or decrease the ORF semi- 9 15 U.S.C. 78f(b)(5). the Commission’s Public Reference annually, and any such fee change will be effective 10 The Exchange notes that other exchanges have Room. on the first business day of February or August. See delayed the implementation of fees that were the Exchange’s fee schedule available at http:// previously published by the Commission. See mstockstill on DSK3G9T082PROD with NOTICES 42 17 batstrading.com/support/fee_schedule/bzx/ (dated Securities Exchange Act Release Nos. 72605 (July CFR 200.30–3(a)(12). 14, 2014), 79 FR 42066 (July 18, 2014) (SR–Phlx– 1 15 August 1, 2016). The Exchange initially filed the U.S.C. 78s(b)(1). proposed fee change on August 11, 2016 (SR– 2014–44); 67068 (May 29, 2012), 77 FR 33256 (June 2 17 CFR 240.19b–4. BatsBZX–2016–49). On August 19, 2016, the 5, 2012) (SR–Nasdaq–2012–064); 66287 (February 1, 3 15 U.S.C. 78s(b)(3)(A)(ii). 2012), 77 FR 6161 (February 7, 2012) (SR–FINRA– Exchange withdrew SR–BatsBZX–2016–49 and 4 17 CFR 240.19b–4(f)(2). submitted SR–BatsBZX–2016–51. On August 22, 2012–008); and 57183 (January 22, 2008), 73 FR 5 A Member is defined as ‘‘any registered broker 2016, the Exchange withdrew SR–BatsBZX–2016– 5249 (January 29, 2008) (SR–Nasdaq–2008–007). 51 and submitted this filing. 11 15 U.S.C. 78s(b)(3)(A). or dealer that has been admitted to membership in the Exchange.’’ See Exchange Rule 1.5(n). 8 15 U.S.C. 78f. 12 17 CFR 240.19b–4(f). VerDate Sep<11>2014 19:34 Sep 07, 2016 Jkt 238001 PO 00000 Frm 00154 Fmt 4703 Sfmt 4703 E:\FR\FM\08SEN1.SGM 08SEN1


Document Created: 2018-02-09 13:12:48
Document Modified: 2018-02-09 13:12:48
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 62222 
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