[ by Howard Haykin ]

FINRA proposes to revise TRACE reporting obligations for Asset-Backed Security Transactions.  As proposed, FINRA would amend FINRA Rule 6730(d)(2) so as to require members to submit report to Trade Reporting and Compliance Engine (TRACE) the Factor used to determine the size (volume) of each transaction in an Asset-Backed Security, subject to the following conditions:  (i) this will not apply to ABS's that are trade "To Be Announced" or TBA;  (ii) this will apply only in those limited instances when members effect such transactions as agent and charge a commission.

Purpose of Amendment.   Asset-Backed Securities (“ABS's”) typically are traded on a principal basis.  In those limited instances when they're traded on an agency basis and a commission is charged - except for “TBA transactions” - FINRA proposes to require members to report the Factor as discussed below.

Currently, under FINRA Rule 6730(c)(2) and Rule 6730(d)(2),  a firm is required to report the size of TRACE-Eligible Securities, including certain ABS's, by reporting the total par or principal value of the debt securities traded. However, in an ABS transaction, where the security is backed by mortgages or other assets that amortize over the life of the security - i.e., an “amortizing ABS” -  instead of reporting the total par or principal value, a member must report 2 items from which the size is calculable

1. the original face value of the ABS, which is the size at issuance; and
2. the Factor - but only if the Factor used to execute the transaction is not the most current Factor that is publicly available at the time of execution of such transaction - i.e., a “non-conforming Factor”.

A Factor is the decimal value that represents the proportion of:

1. the principal (or face) value of the pool of assets underlying an amortizing ABS remaining at the time of the execution of a transaction - typically referred to as “remaining principal balance” or “RPB” - to
2. the original face value of the ABS.

Such Factors are published monthly by federal agencies or government-sponsored enterprises ("GSE") for ABS that are issued or guaranteed by them.  Factors for other ABS generally are consolidated by certain commercial vendors that obtain them from servicers. 

FINRA proposes to amend FINRA Rule 6730(d)(2) to require ... a member to report the Factor to TRACE for every transaction in an ABS (except TBA transactions) in the limited instances when the member effects that transaction as agent and charges a commission.  The amendment is proposed to prepare for the dissemination of Specified Pool Transactions, and transactions in additional ABS market segments, if such transactions subsequently are disseminated under Rule 6750 in the future.  The proposed rule change is necessary to ensure the accuracy of the disseminated price of an ABS transaction, which, if traded on an agency basis and subject to a commission charge, is calculated using the Factor, the price and other information reported by a member that is a party to the transaction.

Though very few ABS transactions are executed ...  in an agency capacity with a commission charged, when done so the TRACE system must calculate the disseminated price (or all-in price) based on the reported price, which is reported as a percentage of the RPB (e.g., 97), and add the proportionate amount of commission.  However, the commission is reported as the total gross dollar amount -e.g., $3,000.  To account for the commission impact on the total price paid or received by the customer, the TRACE system calculates the amount of commission in relation to RPB, which takes the Factor into account.

FINRA also proposes to reorganize, ... with technical amendments, the current requirements to report size in FINRA Rule 6730(d)(2). First, the requirement to report size for transactions in securities other than ABS would be set forth in proposed Rule 6730(d)(2)(A) and would continue to require members to report the total par value or principal value of the security. Second, proposed FINRA Rule 6730(d)(2)(B)(i), (ii) and (iii) would restate current requirements regarding reporting size of other transactions in ABS as follows: in (B)(i), for a TBA transaction, a member would be required to report the original face value of the security; in (B)(ii), for a transaction in an amortizing ABS, other than a TBA transaction, a member would be required to report the original face value of the security and, if a member used a Factor to execute the transaction that was not the most current Factor publicly available at the Time of Execution, to report the Factor used, except if executed in an agency capacity and subject to the requirements of proposed FINRA Rule 6730(d)(2)(B)(iv) as described above; and in (B)(iii), for a transaction in a non-amortizing ABS, a member would be required to report the original face value of the security, except if executed in an agency capacity and subject to the requirements of proposed FINRA Rule 6730(d)(2)(B)(iv) as described above.

FINRA will announce the effective date of the proposed rule change in a RegNote to be published no later than 60 days following Commission approval.  The effective date will be no later than 270 days following publication of the RegNotie announcing Commission approval.

For further details, go to:   [ FINRA Rule Filing 12-52, 11/29/12 ].