[ by Howard Haykin ] FINRA proposes to amend its Rule 6700 Series governing the Trade Reporting and Compliance Engine ("TRACE"), in order to revise reporting and dissemination protocols for TRACE-Eligible Securities that are:

• Agency Pass-Through Mortgage-Backed Securities traded in Specified Pool Transactions ("MBS Specified Pool transactions"); and,
• Asset-Backed Securities backed by loans guaranteed as to principal and interest by the Small Business Administration ("SBA-Backed ABS") and traded either in Specified Pool Transactions or "to be announced" (TBA).

Background Information. On 4/18/12, the SEC approved TBA Amendments to provide for the dissemination of MBS TBA transactions, subject to dissemination caps, and concomitant reductions in the reporting periods for such transactions, which will become effective 11/5/12. FINRA now proposes to expand transparency further in the market for Asset-Backed Securities in the proposed rule change, which provides for the dissemination of MBS Specified Pool and SBA-Backed ABS transactions, subject to dissemination caps, and concomitant reductions in the reporting periods for such transactions. As such, FINRA would amend Rule 6730 to reduce, in 2 stages, the time frames for reporting MBS Specified Pool and SBA-Backed ABS transactions.  FINRA also would make minor clarifying amendments to Rule 6730(a)(3)(D) and (E) to specify that the reporting requirements set forth therein apply solely to MBS TBA transactions. In connection with such changes, FINRA proposes to amend certain definitions in Rule 6710: (i) "Agency Pass-Through Mortgage-Backed Security"; (ii) "To Be Announced ("TBA");"  and,  (iii) "Specified Pool Transaction."  FINRA also would add a new defined term, “SBA-Backed ABS.” Finally FINRA proposes to amend Rule 6750 to provide for the dissemination of MBS Specified Pool and SBA-Backed ABS transactions, and proposes to establish, as part of TRACE dissemination protocols, the specific data elements of the transactions that will be disseminated as well as a $10 million dissemination cap for such transactions.

MBS Specified Pool Transactions. Generally, Agency Pass-Through Mortgage-Backed Securities are traded either TBA or in Specified Pool Transactions as defined in Rule 6710(u) and (x), respectively.  In MBS Specified Pool transactions, on trade date, the seller agrees to deliver to the buyer a specific Agency Pass-Through Mortgage-Backed Security identifiable by a unique ID #, representing a specific pool of mortgage loans.  In an MBS TBA transaction, the mortgage pools to be delivered are described - e.g., by program, interest rate, type of residential mortgage, maturity - but are not specifically identified, and will not be identified until shortly before settlement.

While the majority of Agency Pass-Through Mortgage-Backed Securities are traded TBA, the daily volume of MBS Specified Pool transactions represents significant economic activity in mortgage-related securities, and FINRA believes that additional transparency in such securities is appropriate. The reported transaction data shows that MBS Specified Pool transaction pricing is strongly correlated to (and in general is priced at a premium over) the pricing of similar mortgage pools traded in the substantially larger MBS TBA market.

Moreover, the 2 market sectors exhibit similar trading characteristics, and the same programs dominate both markets - e.g., approximately 98% of the total volume in MBS Specified Pool transactions, and approximately 95% of the total volume in MBS TBA transactions, occur in securities backed by single-family mortgage loans.5  Accordingly, the TRACE data sets are complimentary and the dissemination of the additional pricing information for MBS Specified Pool transactions will further improve transparency in the Agency Pass-Through Mortgage-Backed Securities market.

SBA-Backed ABS Transactions. SBA-Backed ABSs are Asset-Backed Securities created from pooling loans made to small business by banks and other financial institutions in conformity with the program requirements of the Small Business Administration (“SBA”). Loans that meet the SBA’s requirements are guaranteed by SBA as to the timely payment of principal and interest, and pools are then created to issue SBA-Backed Asset-Backed Securities.

SBA-Backed ABS also are traded TBA and in Specified Pool Transactions.6 Like Agency Pass-Through Mortgage-Backed Securities discussed above, such TBA trading may occur because market participants may anticipate with some certainty the creation of loan pools and are aware of the pool characteristics, and the extent to which such loan pools are fungible with previously-settled SBA-Backed ABS. FINRA proposes that both types of SBA-Backed ABS transactions be subject to dissemination.

For further details, go to:  [FINRA Rule Filing12-42, 8/29/12].