FINRA is proposing to amend the FINRA Rule 6700 Series and the Trade Reporting and Compliance Engine (‘‘TRACE’’) dissemination protocols to provide for dissemination of transactions in an additional type of Securitized Products—specifically, collateralized mortgage obligations (‘‘CMOs’’).
In addition, FINRA is proposing a corresponding change to Rule 6730 to reduce the reporting period for CMOs from end-of-day to 60 minutes, and also to amend Rule 6730 to simplify the reporting requirements for transactions inCMOs executed prior to issuance.
Specifically, FINRA is proposing to amend the Rule 6700 Series to: (1) Provide for the dissemination of transactions in CMOs; (2) reduce the reporting timeframe for CMOs from end-of-day to 60 minutes; and (3) simplify the reporting requirements for pre-issuance CMO transactions.
FINRA requires members to report transactions in any security that meets the definition of ‘‘TRACE-Eligible Security’’ to TRACE. Most transactions must be reported to TRACE within 15 minutes of the time of execution. Securitized Products were the last major group of fixed income securities to become subject to TRACE reporting.
Initially, FINRA received reports of transactions in these products for regulatory audit trail purposes only and did not disseminate transaction data. FINRA used the transaction reports it received to study the liquidity and trading characteristics of various types of Securitized Products. Based on its study, FINRA then started a phased approach to disseminating transaction information for certain Securitized Products.
For the first phase, FINRA began disseminating transactions in Agency Pass-Through Mortgage-Backed Securities traded To Be Announced (‘‘TBA’’) (‘‘MBS TBA’’ transactions), which are the most liquid types of Securitized Products. Next, FINRA began disseminating transactions in Agency Pass-Through Mortgage-Backed Securities and SBA-Backed ABS traded in Specified Pool Transactions.
Then, FINRA began to disseminate information on transactions in TRACE-Eligible Securities effected as Rule 144A transactions, provided that such transactions were in securities that would be subject to dissemination if effected in non-Rule 144A transactions.
And most recently, FINRA began to disseminate transactions in Asset-Backed Securities. Today, the remaining types of Securitized Products not yet subject to dissemination are CMOs, commercial mortgage-backed securities (‘‘CMBSs’’), and collateralized debt obligations (‘‘CDOs’’). CMOs are the largest and most actively traded of these remaining Securitized Products types. In addition, CMOs typically have relatively smaller transaction sizes than those for CMBSs and CDOs.
FINRA is proposing to expand the dissemination of Securitized Products to include CMOs. Under the proposal, a CMO transaction will be subject either to dissemination immediately upon receipt of the TRACE transaction report, or to aggregate, periodic dissemination, depending on the size of the transaction and the number of transactions in the CMO security during a given period. Specifically, transactions in CMOs, including transactions effected pursuant to Securities Act Rule 144A, will be subject to aggregate, periodic dissemination on a weekly and monthly basis where the transaction value is $1 million or more (calculated based upon original principal balance) and where there have been five or more transactions of $1 million or more in the reporting period reported by at least two different market participant identifiers (‘‘MPIDs’’). For the smaller-size transactions—i.e., transactions valued under $1 million (calculated based upon original principal balance)—FINRA will disseminate trade-by-trade information immediately upon receipt by TRACE.
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.
