Another Proposed Rule Change Related to TRACE

FINRA is proposing to expand the Trade Reporting and Compliance Engine (‘‘TRACE’’) reporting rules to include most secondary market transactions in marketable U.S. Treasury securities.  The market in U.S. Treasury securities—or ‘‘Treasuries’’ —is the deepest and most liquid government securities market in the world.

Treasuries are traded by broker-dealers as well as commercial bank dealers and principal trading firms (‘‘PTFs’’) that are not registered as broker-dealers with the SEC or members of FINRA.

On October 15, 2014, the market for Treasuries experienced an unusually high level of volatility and a rapid round-trip in prices.  In response to the unexplained volatility, an existing interagency working group (‘‘IAWG’’) led by the U.S. Department of the Treasury analyzed both the conditions that contributed to the events of October 15 and the structure of the U.S. Treasury market more generally.

A detailed joint staff report (‘‘JSR’’), was issued on July 13, 2015, that included a set of preliminary findings on the October 15 volatility, described the current state of the U.S. Treasury market, and proposed a series of four ‘‘next steps’’ in understanding the evolution of the U.S. Treasury market.

Included among these ‘‘next steps’’ was an assessment of the data available to regulators and to the public regarding the cash market for Treasuries.  As described below, the proposed rule change would require all FINRA members involved in transactions in U.S. Treasury Securities, as defined in the TRACE rules, to report most transactions in those securities to TRACE.

The TRACE reporting rules apply to ‘‘Reportable TRACE Transactions,’’ as defined in Rule 6710(c), involving ‘‘TRACE-Eligible Securities,’’ as defined in Rule 6710(a).  Any ‘‘U.S. Treasury Security,’’ as defined in Rule 6710(p), is currently excluded from the definition of TRACE-Eligible Security; consequently, no trading activity by FINRA members in U.S. Treasury Securities is required to be reported to TRACE.  Rule 6710(p) defines ‘‘U.S. Treasury Security’’ as ‘‘a security issued by the U.S. Department of the Treasury to fund the operations of the federal government or to retire such outstanding securities.’’

FINRA is proposing to amend the TRACE rules to require the reporting of transactions in all Treasuries with the exception of savings bonds.  To effectuate this requirement, the proposed rule change amends the definition of ‘‘TRACE-Eligible Security’’ to include U.S. Treasury Securities and amends the definition of ‘‘U.S. Treasury Security’’ to exclude savings bonds.  The term ‘‘U.S. Treasury Securities’’ will therefore include all marketable Treasuries, including Treasury bills, notes, and bonds, as well as separate principal and interest components of a U.S. Treasury Security that have been separated pursuant to the Separate Trading of Registered Interest and Principal of Securities (STRIPS) program operated by the Treasury Dept.

Because Money Market Instruments are excluded from the definition of TRACE-Eligible Security, the proposed rule change also amends the definition of ‘‘Money Market Instrument’’ to exclude U.S. Treasury Securities, including U.S. Treasury bills, which have maturities of one year or less, and therefore any U.S. Treasury Security, including U.S. Treasury bills, would be TRACE reportable under the proposed rule change.

In general, any transaction in a TRACE-Eligible Security is a ‘‘Reportable TRACE Transaction’’ unless the transaction is subject to an exemption.  Consequently, unless specifically exempted, the proposed rule change would define all transactions in U.S. Treasury Securities as ‘‘Reportable TRACE Transactions,’’ and therefore subject to TRACE reporting requirements.

The proposed rule change would require Reportable TRACE Transactions in U.S. Treasury Securities generally to be reported on the same day as the transaction on an end-of-day basis.  Because FINRA is not currently proposing to disseminate any trade-level information to the public regarding transactions in U.S. Treasury Securities, the proposed rule change generally imposes a same-day reporting requirement as opposed to a more immediate requirement, such as 15 minutes.

If the SEC approves the proposed rule change, FINRA will announce the operative date of the proposed rule change in a Regulatory Notice to be published no later than 90 days following SEC approval.