I. Introduction

On November 2, 2023, 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 (1) amend FINRA Rules 6710 and 6750 to provide for end-of-day dissemination of data for individual transactions in U.S. Treasury Securities that are On-the-Run Nominal Coupons reported to FINRA's Trade Reporting and Compliance Engine (“TRACE”) with specified dissemination caps for large trades, and (2) amend FINRA Rule 7730 to include U.S. Treasury Securities within the existing fee structure for end-of-day and historic TRACE data. The proposed rule change was published for comment in the Federal Register on November 9, 2023.^[3] The Commission received comments in response to the proposal.^[4] FINRA responded to the comments on December 14, 2023.^[5] On December 19, 2023, the Commission extended until February 7, 2024, the time period within which to approve the proposed rule change, disapprove the proposed rule change, or institute proceedings to determine whether to disapprove the proposed rule change.^[6] This order approves the proposed rule change.

II. Description of the Proposed Rule Change

Since 2016, FINRA has undertaken a series of initiatives in consultation with the U.S. Department of the Treasury (“Treasury Department”) to increase transaction reporting and transparency in the market for U.S. Treasury Securities.^[7] On July 10, 2017, FINRA members began reporting information on transactions in U.S. Treasury Securities to TRACE.^[8] On March 10, 2020, FINRA began to publicly disseminate aggregate data on U.S. Treasury Securities trading volume on a weekly basis.^[9] In February 2023, FINRA increased the cadence of the aggregated volume data it publishes for U.S. Treasury Securities to daily, and enhanced the content of the aggregate data.^[10] Information reported to TRACE regarding individual transactions in U.S. Treasury Securities is currently used for regulatory and other official sector purposes, but not disseminated publicly.^[11] In November 2022, the Treasury Department proposed a policy of publicly releasing secondary market transaction data for On-the-Run Nominal coupons,^[12] with end-of-day ( printed page 9884) dissemination and with appropriate cap sizes.^[13]

Dissemination of Transaction-Level Information

Under the proposed rule change, FINRA would begin disseminating individual transaction information for On-the-Run Nominal Coupon U.S. Treasury Securities on an end-of-day basis. The disseminated transaction information would be anonymized, i.e., it would not include the market participant identifier (“MPID”) or other information that could be used to identify parties to the trade. However, consistent with other TRACE products, the disseminated transaction information would include counterparty type ( i.e., dealer, customer, affiliate, or alternative trading system (“ATS”)), a flag to indicate whether the trade was executed on an ATS, and other trade modifiers and indicators.

To implement such dissemination, FINRA proposed to amend Rule 6750(c)(5) (to be redesignated as Rule 6750(d)(5)) to provide that FINRA would not disseminate information on a transaction in a TRACE-Eligible Security that is a U.S. Treasury Security “other than an On-the-Run Nominal Coupon.” FINRA also proposed to add a new paragraph (c) to Rule 6750 providing that FINRA would disseminate information on individual transactions in On-the-Run Nominal Coupons on an end-of-day basis.^[14] To further clarify the scope of transactions subject to individual dissemination under amended Rule 6750, FINRA proposed to add as new paragraph (ll) of Rule 6710 (Definitions) a definition of “On-the-Run Nominal Coupon,” defined as the most recently auctioned U.S. Treasury Security that is a Treasury note or bond paying fixed rate nominal coupons starting after the close of the TRACE system on the day of its Auction through the close of the TRACE system on the day of the Auction of a new issue for the next U.S. Treasury Security of the same maturity. The definition would specify that On-the-Run Nominal Coupons do not include Treasury bills, STRIPS, Treasury Inflation-Protected Securities, floating rate notes, or any U.S. Treasury Security that is a Treasury note or bond paying a fixed rate nominal coupon that is not the most recently issued U.S. Treasury Security of a given maturity ( i.e., off-the-run nominal coupons).^[15]

Dissemination Protocols

To mitigate concerns about information leakage for large trades, FINRA proposed to implement transaction size caps above which the exact size of the transaction would not be disseminated. In consultation with the Treasury Department, FINRA proposed to apply the following transaction size dissemination caps based on the maturity of the On-the-Run Nominal Coupon at issuance: ^[16]

• Two Years: $250 million;
• Three Years: $250 million;
• Five Years: $250 million;
• Seven Years: $150 million;
• 10 Years: $150 million;
• 20 Years: $50 million; and
• 30 Years: $50 million.

Thus, for example, a $200 million transaction in a 10-year On-the-Run Nominal Coupon would be disseminated with a trade size of “150MM+” rather than the actual dollar amount of the trade.^[17] In consultation with the Treasury Department and based on ongoing analysis of the data, FINRA may in the future adjust the dissemination caps to maintain an appropriate balance between the benefits of transparency and the threat of information leakage. Any proposed changes to the dissemination caps would be filed with the Commission pursuant to Section 19(b)(1) of the Act.

Dissemination Fees

FINRA also proposed to expand the existing fee framework for the TRACE End-of-Day Transaction File ^[18] and the Historic TRACE Data ^[19] to include data products providing information on individual transactions in On-the-Run Nominal Coupons. Generally, Historic TRACE Data includes the same information as provided in the End-of-Day TRACE Transaction File, except that the Historic TRACE Data does not include dissemination caps for large transactions. Historic Treasury Data would also be subject to a minimum six-month delay, as is the case for the existing Historic Corporate Bond and Historic Agency Data sets.^[20] FINRA proposed that the End-of-Day TRACE Transaction File and Historic Data include a new set of data for U.S. Treasury Securities with the same fees that exist for other sets of TRACE-Eligible Securities.^[21]

III. Summary of Comments and FINRA's Response

The Commission received comments on the proposed rule change ^[22] and a ( printed page 9885) response letter from FINRA.^[23] Several commenters support the proposal and advocate further expansion of the reporting framework to include transactions in different classes of securities and shortened reporting timeframes.^[24] Of these commenters, one advocates setting concrete parameters for evaluating the effects of the proposal and a timeline for expanding reporting obligations.^[25] Three of these commenters underscore the positive influence of market transparency on fairness, efficiency, and pricing.^[26]

Some commenters state that the scope of securities subject to transaction-level dissemination in the proposal should not have been limited to On-the-Run Nominal Coupons.^[27] One commenter suggests transaction-level dissemination be expanded to include transactions in every security in the U.S. Treasury Security market,^[28] while two others suggest initially subjecting to dissemination transactions in first, second, and third old off-the-run U.S. Treasury Securities.^[29] Two of these commenters further suggest (1) shortening the reporting timeframe to at most 15 minutes to harmonize Treasury market data with data in other TRACE-eligible securities; ^[30] and (2) calculating transaction size caps based on a percentage of notional volume to ensure market participants have a timely view of a sufficient portion of transaction and pricing data.^[31] One of these commenters also requests information regarding the percentage of notional volume that would be capped under FINRA's proposed thresholds.^[32] Notwithstanding its suggestions, this commenter describes FINRA's proposal as a “welcome first step.” ^[33]

In response to suggestions that FINRA expand the scope of U.S. Treasury Securities subject to reporting and shorten reporting timeframes, FINRA states that future proposals would be based on careful analysis and subject to proposed rule changes filed with the Commission pursuant to Section 19(b)(1) of the Act.^[34] FINRA also produces data showing the percentage of notional transaction volume that would have been capped under the proposed thresholds during the period from September 1, 2022, to February 28, 2023, for different duration U.S. Treasury Securities.^[35]

While two commenters support the proposal's stated objective to increase transparency in the market for U.S. Treasury Securities, they raise concerns that transaction-level transparency, if mandated without careful calibration, could cause information leakage, discourage transactions, and hurt market liquidity, especially in any potential future expansions of the proposal.^[36] One of these commenters states that FINRA should collect and analyze at least 12 months of data under the proposed regime before expanding the scope of reporting obligations in any way.^[37]

Both of these commenters refer to the importance of disclosure limitations as a means of reducing information leakage.^[38] Both commenters support aspects of the proposal that limit transaction-level dissemination to transactions in On-the-Run Nominal Coupons,^[39] cap disclosed transactions at set thresholds,^[40] and delay dissemination to the end of each day.^[41] One of these commenters, despite supporting dissemination caps in principle, states that FINRA has not made clear the methodology and metrics used to determine cap levels.^[42] The commenter requests FINRA explain how it determined the caps and provide data supporting the thresholds it proposed.^[43]

FINRA replies in its letter that it set dissemination caps based on careful analysis and in consultation with the Treasury Department.^[44] FINRA also lists some of the factors relevant in setting dissemination caps, which include public feedback provided to the Treasury Department by primary dealers,^[45] the impact of interest rates on U.S. Treasury Securities trades across maturities (“dollar duration” or “DV01”), and a market liquidity analysis for U.S. Treasury Securities of different maturities.^[46]

Specifically, FINRA explains that it considered the notional cap sizes suggested by primary dealers' feedback to the Treasury Department and translated these values to DV01.^[47] When translated to DV01, the median suggested transaction caps ranged between $70,000 and $190,000.^[48] FINRA, in consultation with the Treasury Department, opted to consider as a baseline caps that approximately equated to $100,000 DV01, though it also considered the percentage of traded market volume that would be disseminated (versus reported) across each maturity and the estimated amount of time it would take to liquidate a position at the size of the cap. In addition, FINRA states that the ( printed page 9886) proposed caps were calibrated to the maturity, liquidity, and trading concentration of the underlying security to preserve the anonymity of market participants trading large transactions.^[49] FINRA explains that it ultimately sought to balance the benefits of providing similar levels of transparency across maturities with the risk that dissemination of the largest transactions could permit market participants to reverse engineer the identities, positions, and trading strategies of others.^[50]

IV. Discussion and Commission Findings

After carefully reviewing the proposal and comment letters received, 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.^[51] In particular, the Commission finds that the proposed rule change is consistent with Section 15A(b)(6) of the Act,^[52] which requires, among other things, that FINRA 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.

In approving the original TRACE rules, the Commission stated that price transparency plays a fundamental role in promoting fairness and efficiency of U.S. capital markets.^[53] To further the goal of increasing price transparency in the debt markets in general and the U.S. Treasury Securities market in particular, it is reasonable and consistent with the Act for FINRA to extend post-trade price transparency to transactions in U.S. Treasury Securities in the manner set forth in the proposal. Since 2017, FINRA has collected post-trade transaction information for U.S. Treasury Securities through TRACE.^[54] In 2020, FINRA commenced public dissemination of aggregate data on U.S. Treasury Securities trading volume on a weekly basis.^[55] In 2023, FINRA shortened the publication time of aggregate data on U.S. Treasury Securities from a weekly to a daily basis and increased the information publicly disseminated to include, among other things, pricing information for certain U.S. Treasury Securities.^[56] FINRA's current proposal will further increase price transparency by making individual transaction data available with an end-of-day dissemination and with appropriate cap sizes and on a historical basis for U.S. Treasury Securities that are On-the-Run Nominal Coupons.

The proposal is reasonably designed to preserve the confidentiality of individual market participants and transactions. While commenters described concerns that transaction-level transparency could cause information leakage, discouraging transactions and impairing market liquidity, the proposal is reasonably designed to mitigate these concerns by incorporating transaction size dissemination caps, delaying dissemination until the end of each day, and limiting the scope to On-the-Run Nominal Coupons. This scope limitation is a reasonable first step, instead of including every security in the U.S. Treasury Security market, or specifically transactions in first, second, and third old off-the-run U.S. Treasury Securities, as some commenters suggested.^[57] FINRA has affirmed that any changes in the level of transparency it provides, including changes to the dissemination cap sizes or scope of transactions included, would be based on careful analysis and filed with the Commission as proposed rule changes pursuant to Section 19(b)(1) of the Act.^[58] In response to commenters, FINRA addressed the request for additional information regarding FINRA's methodology for setting the transaction size dissemination caps ^[59] and the request for data detailing the portion of notional value that may exceed the transaction size dissemination caps.^[60] The proposal strikes an appropriate balance between fulfilling the goal of increased transparency and mitigating risks that could impair liquidity in the market for U.S. Treasury Securities. While some commenters suggested using a notional amount calculation method for the dissemination caps,^[61] the proposal makes a reasonable choice of method of calculating dissemination caps by calibrating them to the maturity, liquidity, and trading concentration of the underlying securities to preserve the anonymity of market participants trading large transactions.

Lastly, the proposed dissemination fees are consistent with the Act. The TRACE U.S. Treasury Security end-of-day and historic data sets are comparable, in terms of granularity and timeliness, to existing data sets for other TRACE-eligible securities. Thus, charging the same fee level for TRACE end-of-day and historic data products that include U.S. Treasury Securities data as is currently charged for TRACE end-of-day and historic data products that include data about securities other than U.S. Treasury Securities, while maintaining the current fee levels for those data products, is reasonable. Section 15A(b)(5) of the Act requires, among other things, that FINRA rules provide for the equitable allocation of reasonable dues, fees, and other charges among members and issuers and other persons using any facility or system which the association operates or controls. The rules that establish the current TRACE end-of-day and historic data products have been approved by the Commission, and the fees that FINRA proposes to charge for information on individual transactions in U.S. Treasury Securities are identical to those that currently apply for end-of-day and historic data products for other types of TRACE-eligible securities,^[62] which have been in effect for some time.^[63]

Pursuant to Section 19(b)(5) of the Act,^[64] the Commission consulted with and considered the views of the Treasury Department in determining to approve the proposed rule change. The Treasury Department indicated its support for the proposal.^[65] Pursuant to ( printed page 9887) Section 19(b)(6) of the Act,^[66] the Commission has considered the sufficiency and appropriateness of existing laws and rules applicable to government securities brokers, government securities dealers, and their associated persons in approving the proposal. The proposal will benefit investors and market participants by promoting greater transparency into the U.S. Treasury Securities market while also maintaining the confidentiality of individual market participants and transactions.

IV. Conclusion

It is therefore ordered, pursuant to Section 19(b)(2) of the Act,^[67] that the proposed rule change (SR-FINRA-2023-015) be, and hereby is, approved.