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In 1998, the Securities and Exchange Commission (SEC) began reviewing the debt markets in the U.S., with a particular emphasis on price transparency. The SEC then requested that NASD take three steps to enhance the transparency and the integrity of the corporate debt market. The SEC asked NASD to: 1) adopt rules to report all transactions in U.S. corporate bonds to NASD and develop systems to receive and distribute transaction prices on an immediate basis; 2) create a database of transactions in corporate bonds to enable NASD and other regulators to take a proactive role in supervising the corporate debt market; and 3) create a surveillance program to better detect misconduct and foster investor confidence in the corporate debt market.
On January 23, 2001, the SEC approved proposed rules requiring NASD members to report over-the-counter (OTC) secondary market transactions in eligible fixed income securities to NASD and subject certain transaction reports to dissemination. The Trade Reporting and Compliance Engine (TRACESM) is the NASD-developed vehicle that facilitates this mandatory reporting. The rules, referred to as the "TRACE Rules," are contained in the new Rule 6200 Series, and took effect on July 1, 2002. The new rules and system replaced the old Rule 6200 Series governing the Fixed Income Pricing System (FIPS), a mandated regulatory reporting system for high yield corporate debt that provided limited transparency and operated under The Nasdaq Stock Market, Inc. from April 1994 until July 2002. All debt securities in the FIPS universe were rolled into the TRACE universe on implementation date.
As of TRACE system open, NASD began disseminating price and other transaction information on certain debt securities transactions immediately upon receipt. Initially, transaction information was disseminated on 500 corporate debt securities, including 50 representative high yield bonds, with additional groups of bonds being added over time. This incremental phase-in approach allows NASD to study the impact of increased price disclosure upon market liquidity.
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