SEC Approves Rules To Require Fixed Income Transaction Reporting And Dissemination
Fixed Income Transaction Reporting And Dissemination
Effective Date: 180 Days After Publication Of TRACE Technical Specifications
Fixed Income Securities
On January 23, 2001, the Securities and Exchange Commission (SEC) approved proposed rules that will require National Association of Securities Dealers, Inc. (NASD® or Association) members to report secondary market transactions in eligible fixed income securities to the NASD and subject certain transaction reports to dissemination. 1 The rules, referred to as the "TRACE rules," will be set forth in the new Rule 6200 Series and provide the following:
The TRACE rules will become effective 180 days following the NASD's publication of the TRACE technical specifications for members. On or near that time, the NASD will announce the specific date of effectiveness of the TRACE rules in an NASD Notice to Members. When the TRACE rules take effect, the FIPS rules, which are set forth in the current Rule 6200 Series, will be rescinded. The TRACE rules are provided in Attachment A.
Questions regarding this Notice may be directed to Justin Tubiolo, Vice President, Fixed Income Department, NASD, at 212-858-4419, or by e-mail at [email protected], or Sharon K. Zackula, Assistant General Counsel, Office of General Counsel, NASD Regulation, Inc., at (202) 728-8985, or by e-mail at [email protected].
The SEC approved SR-NASD-99-65, the TRACE rules, after more than two years of industry and NASD discussion and review. The NASD received and considered many comments, and, in response to comments, made significant changes to the original proposal. With the implementation of the TRACE rules, secondary market transactions in broad categories of registered and unregistered debt instruments will become subject to reporting for the first time. In addition, price and other transaction information in two types of debt instruments will be publicly disseminated for the first time. In order for the industry to prepare for such changes, the NASD has delayed the effective date and implementation of the TRACE rules to allow for technological changes to be made throughout the industry. The scope of the regulatory changes and the schedule for implementation are described in greater detail below.
The TRACE rules have three main components: (1) identifying those fixed income securities transactions that are required to be reported; (2) detailing the reporting requirements; and (3) identifying those fixed income securities transactions that are subject to dissemination.
If a fixed income security is a "TRACE-eligible security," generally transactions in such securities to which a member is a party must be reported to the NASD.3 Most corporate debt securities fall within the definition of "TRACE-eligible security." Specifically, "TRACEeligible security" means all United States dollar denominated debt securities that are depositoryeligible securities; Investment Grade and Non-Investment Grade (as defined in TRACE Rule 6210(h) and (i), respectively); issued by United States and/or foreign private corporations; and: (1) registered with the SEC; or (2) issued pursuant to Section 4(2) under the Securities Act and purchased or sold pursuant to Rule 144A.4 Specifically excluded from the term "TRACE-eligible security" are mortgage- or asset-backed securities, collateralized mortgage obligations, and money market instruments.5 The term "TRACEeligible security" also does not include municipal securities; thus, the TRACE rules do not apply to municipal securities, which are currently subject to reporting under the rules of the Municipal Securities Rulemaking Board. The TRACE rules do apply to those Non-Investment Grade (as defined in the TRACE rules)6 securities that are currently designated as "FIPS securities" or "FIPS 50 securities."7 In addition, securities that are sold in private placements under Section 4(2) of the Securities Act, are eligible for resale under Rule 144A, and are DTC eligible, including certain PORTAL debt securities, are "TRACEeligible securities."
A transaction in a TRACE-eligible security must be reported to the NASD within one hour of the time of execution by an NASD member.8 When two members are the parties to the transaction, both the member representing the sell side and the member representing the buy side must report the transaction. 9 When a member is a party to a transaction involving a member and a non-member, including a customer, the member must submit the transaction report.10 Each transaction report must include: (1) CUSIP number or NASD symbol; (2) number of bonds; (3) price or the elements necessary to calculate the price, which are contract amount and accrued interest; (4) a symbol indicating whether the transaction is a buy, sell, or cross; (5) date of trade execution (as/of trades only); (6) contra-party identifier; (7) capacity - principal or agent; (8) time of trade execution; (9) reporting side executing broker as "give-up" (if any); (10) contra side Introducing Broker in case of "give-up" (if any); (11) stated commission; (12) such trade modifiers as required by the TRACE rules or the TRACE users guide; and (13) yield as required by Rule 10b-10 of the Securities Exchange Act of 1934.11
Members will be able to choose from among several different mechanisms in order to meet their reporting obligations. First, members may report directly through a Computer-to-Computer-Interface (CTCI). Second, members may report through a Web-based application that the NASD will provide. Third, vendors and service bureaus may provide a reporting service for their clients. Finally, the NASD and the National Securities Clearing Corporation (NSCC) have agreed that members may forward transaction reports to NSCC, which will forward them to the NASD.
The TRACE rules provide that the Association will disseminate transaction information relating to transactions in two types of securities: (1) a TRACE-eligible security having an initial issuance size of $1 billion or greater that is Investment Grade at the time of receipt of the transaction report (except those securities that are issued pursuant to Section 4(2) of the Securities Act and purchased or sold pursuant to Rule 144A); and (2) a TRACE-eligible security that is designated a "FIPS 50 security" immediately prior to the rescission of the FIPS rules.12
Not all of the information that is reported will be disseminated. For each transaction, the NASD will disseminate, or supply to vendors to disseminate, the following information: (a) NASD symbol for the fixed income security; (b) CUSIP; (c) date and time of trade execution; (d) price; (e) yield; and (f) quantity of bonds, subject to the following limitations.13 For a TRACE-eligible security having an initial issuance size of $1 billion or greater that is Investment Grade as referenced above, the actual quantity of the transaction (the total par value of the bonds purchased or sold) will be disseminated if the total par value of the reported transaction is $5 million or less; if the reported amount is greater than $5 million, a large volume trade dissemination cap identifier of "5MM+" will be disseminated instead of the actual quantity. For a TRACE-eligible security that is designated as a "FIPS 50 security" as referenced above, the actual quantity of the transaction will be disseminated if the total par value of the reported transaction is $1 million or less; if the reported amount is greater than $1 million, a large volume trade dissemination cap identifier of "1MM+" will be disseminated instead of the actual quantity.
Immediately upon receipt of transaction reports between 8:00 a.m. and 6:30 p.m., Eastern Time, the Association will disseminate the transaction information.14 (Reports received earlier or later than the times set forth above are also subject to dissemination as set forth in greater detail in TRACE Rule 6250(c) and (d).)
The Association expects that more fixed income securities transactions will become subject to dissemination in the future. In order to expand the classes and types of fixed income securities that would become subject to dissemination, the Association will work with the Bond Transaction Reporting Committee (BTRC), a special committee of the NASD that will be formed to analyze the effect that the dissemination of price and other information in certain TRACE-eligible securities transactions has upon the liquidity of those markets. Based in part on those results, the Association will determine a schedule for the dissemination of additional TRACE-eligible bonds.
Announcement Of Technical Specifications
The NASD will publish the technical specifications that members will need in order to make the technical changes required for members to comply with the TRACE rules. Publication will be on the NASD Regulation Web Site at www.nasdr.com. In addition, the technical specifications may be made available through other media.
The Association is not yet able to announce a specific date of effectiveness for the TRACE rules. Instead, the TRACE rules will take effect 180 days after the NASD provides the TRACE technical specifications to its members. The specific date of effectiveness will be announced in an NASD Notice to Members when the date is determined. When such rules become effective, both the reporting and the dissemination provisions will be in effect.
FIPS Rules Rescission
When the TRACE rules take effect, the FIPS rules, which are currently set forth in the Rule 6200 Series, will be rescinded. There are 50 securities, called the "FIPS 50 securities" for which certain price information is available currently. When the FIPS rules are rescinded, as noted above, transaction information in those FIPS 50 securities will be subject to dissemination under the new TRACE rules. As a result, pricing information for the FIPS 50 securities will continue to be available following the implementation of TRACE. The pricing and other information will be transactionspecific data that is updated continuously and, therefore, will be better data than the information that is available currently.15
1See Securities Exchange Act Release No. 43873 (January 23, 2001); 66 Fed. Reg. 8131 (January 29, 2001) (File No. SR-NASD-99-65). On March 6, 2001, the SEC approved amendments to the Rule 5300 Series regarding the PORTAL Market (the PORTAL rules) to require members to submit trade reports of secondary market transactions in PORTAL-designated equity securities through the Automated Confirmation Transaction Service (ACT) and certain PORTAL-designated debt securities in accordance with the TRACE rules. See NASD Notice to Members 01-19.
2 The FIPS rules are set forth in the current Rule 6200 Series.
3See TRACE Rule 6230. Paragraph (e) of the rule sets forth limited exceptions to the general reporting requirement.
4 TRACE Rule 6210(a).
6 TRACE Rule 6210(i).
7 The FIPS 50 securities will be published in a future NASD Notice to Members. However, a member will not be subject to two types of reporting requirements because the member's obligations under the FIPS rules will cease when the TRACE rules become effective.
8 TRACE Rule 6230(a). Although the current reporting period is one hour, the NASD expects to propose to the SEC that the reporting period be reduced to 15 minutes (or an even shorter period). The NASD expects this to occur as the NSCC moves toward using a real-time messaging approach, and away from its current "multi-batch" reporting, as part of the industry's T + 1 initiative.
9 TRACE Rule 6230(b)(1). As originally adopted, TRACE Rule 6230(b)(1) required only the member representing the sell side of the transaction to submit the transaction report. However, the SEC recently approved the Association's request for an amendment to TRACE Rule 6230(b)(1) that requires both members to report a transaction, which is known as "dual trade reporting." See SR-NASD-01-04, approved in Securities Exchange Act Release No. 44039 (March 5, 2001).
10 TRACE Rule 6230(b)(2).
12 TRACE Rule 6250(a).
13 For each security, the highest price of the day, the lowest price of the day, and the last sale price of the day also will be "flagged" or "marked" with indicators for dissemination, when applicable. Certain modifiers also may be part of the information disseminated.
14 TRACE Rule 6250(a).
15 TRACE Rule 6250(a)(2). For a "FIPS 50 security," the NASD currently disseminates only the following information, which is updated only once an hour: (1) the highest and lowest price of the prior hour and the aggregate volume for the prior hour; and (2) the highest price and lowest price of the day and the aggregate daily volume. FIPS Rule 6250(b).
Text of Rule Changes.
Note: New language is underlined; deletions are in brackets.
[6200. FIXED INCOME PRICING SYSTEM (FIPS)]
Note: The current Rule 6200 Series relating to FIPS will be deleted in its entirety and replaced with the rule text set forth below.
6200. TRADE REPORTING AND COMPARISON ENTRY SERVICE (TRACE)
6220. Participation in TRACE
6230. Transaction Reporting
6240. Termination of TRACE Service
6250. Dissemination of Corporate Bond Trade Information
6260. Lead Underwriter Information Obligation