Regulatory Notice 16-39: Trade Reporting and Compliance Engine (TRACE)

In 2001, the Securities and Exchange Commission approved the Trade Reporting and Compliance Engine (TRACE), a rule that requires all member firms to report secondary market transactions in eligible over-the-counter fixed income securities to FINRA. Unlike equities, over-the-counter securities trades are private transactions between counterparties and were not previously publicly reported. This lack of reporting provided very little to no price execution transparency to the marketplace. 

Over the years, there have been many reporting requirement changes and amendments to the original 2001 rule. The latest change, effective July 10, 2017, will require FINRA member firms to report transactions executed in Treasury securities to TRACE as defined in Regulatory Notice 16-39.

The amendment proposal extends the definition of “TRACE-Eligible Securities” to include products that meet the definition of a “US Treasury Security.”  This definition will only include securities that are marketable (e.g. treasury bills, notes, bonds, separated tradable principal and interest components [STRIPS], and treasury inflation protected securities [TIPS]). The rule excludes all savings bonds, which have been removed from the definition of “US Treasury Securities”.

FINRA Rule 6730 allows for the use of two new modifiers, when applicable, to be reported on transactions in Treasuries: “B” on a trade report if the transaction being reported is part of a series of transactions where at least one of the transactions involves a futures contract (e.g., a “basis” trade), and “S” on a trade report if the transaction being reported is part of a series of transactions and may not be priced based on the current market (e.g., a fixed price transaction in an “on-the-run” security as part of a transaction in an “off-the-run” security). Although these new modifiers will both be available in TRACE for reporting transactions in Treasuries beginning on July 10, 2017, they are not required to be used at that time. FINRA has filed a rule change to require firms to report the “B” and “S” modifiers on applicable transactions in Treasuries beginning Monday, February 5, 2018. Starting on that date, transactions that meet the defined criteria for these types of transactions must include these modifiers. FINRA has already updated the FIX and CTCI specifications for Treasuries to include these modifiers.

See more at: Regulatory Notice 16-39

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