[ by Howard Haykin ]

FINRA seeks comments on TRACE issues, re: dissemination of information on TRACE-eligible securities transactions  ["Trade Reporting and Compliance Engine"]. 

• First, should FINRA maintain or modify current TRACE dissemination caps, under which the actual size (volume) of a transaction over a certain par value is not displayed in disseminated real-time TRACE transaction data?

• Second, should Rule 144A transactions in TRACE-eligible securities be disseminated;  if so, what should be the scope, and in what manner should dissemination  be provided?

• Deadline for Comments:  10/10/12 - via e-mail or snail mail.

Dissemination Caps: Background & Discussion. When TRACE was initially implemented in July 2002, FINRA established dissemination protocols that included certain caps.  Price, time of execution, size and other trade data were provided.  "Size" is the total par value of the trade, subject to the limits of the applicable dissemination cap.

• For investment grade TRACE-eligible securities and agency debt securities, the current dissemination cap is $5 million, and a transaction in excess of $5 million is disseminated as "$5MM+."
• For non-investment grade TRACE-eligible securities, the current dissemination cap is $1 million, and a transaction in excess of $1 million is disseminated as “$1MM+.”

FINRA will begin disseminating data on TBA transactions, starting 11/5/12 - involving agency pass-through mortgage-backed securities.

• For TBA transactions eligible "for good delivery," the dissemination cap is $25 million, and a transaction in excess of $25 million will be disseminated as "$25MM+."
• For TBA transactions "not for good delivery," the dissemination cap is $10 million, and a transaction in excess of $10 million will be disseminated as "$10MM+."6

When considering whether to continue using Caps, and in what manner, FINRA recognizes that most firms have comprehensive pols and procedures for TRACE compliance, and regularly use TRACE data for pricing purposes, as well as for internal supervisory purposes.  Along those lines, FINRA believes that firms may prefer to see, and might benefit by getting, actual trade size rather than "notated cap figures."   To illustrate its point, FINRA displays tables [pages 4-5 of RegNote 12-39] illustrating the impact of dissemination caps if set at alternative levels.

Dissemination Considerations for Rule 144A Transactions. Securities Act Rule 144A is a safe harbor exemption from the registration requirements of Securities Act Section 5 for certain offers and sales of qualifying securities by certain persons other than the issuer of the securities.  The exemption applies to the re-sale of securities to qualified institutional buyers (QIBs).  Rule 144A transactions have never been subject to TRACE reporting requirements.

Unlike transactions in publicly traded bonds, Rule 144A transactions are not subject to dissemination because of the private nature of the transactions.  However, this approach results in limited or no price transparency in the market in Rule144A TRACE-eligible securities. Without any disseminated data, it may be difficult for market participants to assess the quality of the executions of their orders and for firms to determine if they have complied with their best execution obligations. In addition, the lack of disseminated data in Rule 144A transactions may have an adverse impact on the accurate valuation of positions in such securities.  

FINRA offers illustrations of how Rule 144A transactions might be displayed - see pages 6-7 of RegNote 12-39.

Request for Comment. In addition to general comments submitted by interested persons, FINRA asks that responders consider providing comments on the following specific issues: 

Dissemination Caps for Investment Grade and Non-Investment Grade Debt Securities:

1.   What would be the impact of raising the dissemination caps for:
a.   investment grade TRACE-eligible securities transactions to $10 million, $15 million, $20 million or higher; and
b.   non-investment grade TRACE-eligible securities transactions to $5 million, $10 million, $20 million or higher?

2.   Should  FINRA set a dissemination cap applicable solely to agency debt securities in light of the larger size of many transactions in such securities?
a.   If so, should it be set at $25 million, $50 million, $100 million or higher?

3.   Should there continue to be different dissemination caps for investment grade and non-investment grade debt securities?

4.   Should the dissemination caps for investment grade and non-investment grade debt securities be eliminated entirely?

5.   Would the information available as a result of higher dissemination caps allow broker- dealers and institutional investors to better value positions?

6.   Could alternative ways of determining dissemination caps—for example, by dollar value12 of transaction rather than par value—provide meaningful trade volume exposure while still limiting the transaction sizes displayed through the caps?

Dissemination Caps for TBA Transactions

1.   Should there be a dissemination cap for TBA transactions?
a.   If yes, are the levels appropriate or should higher or lower caps be considered?

Rule 144A Transactions

1.   Should Rule 144A transactions—private re-sales of securities to QIBs—be subject to dissemination?
2.   If yes, should Rule 144A transactions  be subject to dissemination in the same manner as other disseminated transactions in TRACE-eligible securities?
a.   If yes, should they be disseminated subject to a dissemination cap?
b.   If yes, what is the appropriate size (volume) at which to set the dissemination cap?
c.   If yes, should FINRA distinguish between investment grade and non-investment grade securities, and set a higher dissemination cap for Rule 144A transactions in investment grade securities and a lower dissemination cap for Rule 144A transactions in non-investment grade securities?

3.   Would dissemination of Rule 144A transaction information impact investment decisions and price negotiations, and, if yes, how?

4.   If information on Rule 144A TRACE-eligible securities transactions should be disseminated, should the transaction information be disseminated publicly without limitation or on a more limited basis?

For further details, go to:   [FINRA RegNote 12-39, September 2012].