[ by Howard Haykin ] Proposed rule change to amend TRACE reporting rules relating to transfers of TRACE-Eligible Securities to Create or Redeem Instruments such as an ETF a proposed rule change to amend FINRA Rule 6730(e) to expressly exclude from the Trade Reporting and Compliance Engine ("TRACE") trade reporting requirements transfers of TRACE Eligible Securities for the sole purpose of creating or redeeming instruments such as exchange-traded funds ("ETFs"). The proposed rule change has been approved by senior management of FINRA pursuant to delegated authority.  No other action by FINRA is necessary for the filing of the proposed rule change.  FINRA has filed the proposed rule change for immediate effectiveness.  The implementation date will be 30 days after the date of the filing. (a) Purpose Under the Rule 6700 Series (the TRACE rules), members are required to report transactions in debt securities that are TRACE-Eligible Securities as defined in Rule 6710(a) to FINRA unless they fall within an express exception listed in Rule 6730(e).  Certain transactions and transfers are not reported to FINRA (e.g., trades executed and reported through an exchange and transfers made pursuant to an asset purchase agreement that has been approved by a bankruptcy court).  Members must have policies and procedures and internal controls in place to determine whether a transaction qualifies for an exception under the TRACE rules. FINRA proposes to amend Rule 6730(e) to provide that transfers of TRACE-Eligible Securities for the sole purpose of creating or redeeming an instrument that evidences ownership or otherwise tracks the underlying securities transferred, such as an ETF, shall be excluded expressly from the TRACE reporting requirements.  The proposed amendment to Rule 6730(e) is similar to an exclusion for such transfers in equity securities incorporated in FINRA equity trade reporting rules in 2011.2  For example, a member broker-dealer that is an "authorized participant" of an ETF on behalf of a customer transfers TRACE-Eligible Securities to an ETF and in return receives ETF creation units.  Under the proposed rule change, the transfers of the TRACE-Eligible Securities from the broker-dealer to the ETF would not be reported to TRACE.3  (Similarly, the transfer of the ETF creation units to the broker-dealer would not be reported.) In contrast, FINRA notes that purchases and sales of TRACE-Eligible Securities that are to be transferred for the purposes of creating or redeeming instruments such as ETFs (or a creation unit thereof) and subsequent purchases and sales of the ETF or a similar instrument in the secondary market are not subject to an exclusion.  Such purchases and sales involving TRACE-Eligible Securities must be reported to FINRA in accordance with the Rule 6700 Series.  Additionally, purchases and sales of the underlying TRACE-Eligible Securities in order to track the performance of an instrument such as an ETF, without actually creating the instrument, are reportable events and must be reported to TRACE.  As noted in Item 2 of this filing, FINRA has filed the proposed rule change for immediate effectiveness.  The implementation date will be 30 days after the date of the filing. For further details, go to:  [FINRA Rule Filing 12-34, 7/11/12].