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Regulatory Notice 21-02

FINRA Modifies TRACE Dissemination Protocols for Specified Pool Transactions

Effective Date: May 17, 2021

Summary

FINRA has modified its Trade Reporting and Compliance Engine (TRACE) dissemination protocols applicable to agency pass-through mortgage-backed securities and Small Business Administration (SBA)-backed asset-backed securities traded in specified pool transactions.1 The amendment will become effective on May 17, 2021.

Questions regarding this Notice should be directed to:

  • Alié Diagne, Director, Transparency Services, at (212) 858-4092 or by email; or
  • for legal or interpretive questions, Racquel Russell, Associate General Counsel, Office of General Counsel, at (202) 728-8363 or by email.

Background and Discussion

FINRA has modified its TRACE dissemination protocols applicable to specified pool transactions to improve their utility.2 FINRA disseminates a Reference Data Identifier (RDID) instead of an individual CUSIP for specified pool transactions. The RDID represents approximated values for underlying data elements, such as the original loan-to-value (LTV) ratio, original maturity and coupon, widely used to project cash flows and prepayment rates. As a result, one or more CUSIPs are grouped or linked to each RDID.3 Under this framework, when a member reports a specified pool transaction to TRACE, FINRA disseminates the corresponding RDID and members obtain the underlying data elements that correspond to each RDID through the TRACE system.4  

Beginning on May 17, 2021, FINRA is modifying the convention for rounding one underlying data element, the original LTV ratio, for purposes of the groupings that are represented by the RDIDs disseminated through TRACE for specified pool transactions. Currently, LTV is rounded down to the nearest 25, meaning, for example, that an LTV of 72 percent is shown as 50 percent. Effective May 17, 2021, LTV ratios will be segmented into eight categories between zero and 121+, and FINRA will show the LTV as the upper limit of the applicable category, as follows:

  • for an LTV up to 20 percent, the LTV will be shown as 20 percent (e.g., an LTV of 12 percent will be shown as 20 percent);
  • for an LTV between 21 percent and 40 percent, the LTV will be shown as 40 percent (e.g., an LTV of 21 percent will be shown as 40 percent);
  • for an LTV between 41 percent and 60 percent, the LTV will be shown as 60 percent (e.g., an LTV of 60 percent will be shown as 60 percent);
  • for an LTV between 61 percent and 80 percent, the LTV will be shown as 80 percent (e.g., an LTV of 70 percent will be shown as 80 percent);
  • for an LTV between 81 percent and 93 percent, the LTV will be shown as 93 percent (e.g., an LTV of 90 percent will be shown as 93 percent);
  • for an LTV between 94 percent and 100 percent, the LTV will be shown as 100 percent (e.g., an LTV of 100 percent will be shown as 100 percent);
  • for an LTV between 101 percent and 120 percent, the LTV will be shown as 120 percent (e.g., an LTV of 105 percent will be shown as 120 percent); and
  • for an LTV of 121 percent or greater, the LTV will be shown as 121+ (e.g., an LTV of 125 percent will be shown as 121+).

FINRA believes that this approach will increase the granularity and usefulness of disseminated information on specified pool transactions.5 This change does not alter members’ trade reporting obligations and will not necessitate any technological changes by firms. For additional information about dissemination of specified pool transactions, contact TRACE Data Services at (888) 507-3665.

Endnotes


  1. The Securities and Exchange Commission has approved these changes. See Securities Exchange Act Release No. 90646 (December 11, 2020), 85 FR 82002 (December 17, 2020) (Order Approving File No. SR-FINRA-2020-034).
  2. A “Specified Pool Transaction” is defined as a transaction in an agency pass-through mortgage-backed security (“agency pass-through MBS”) or an SBA-backed asset-backed security (“SBA-backed ABS”) requiring the delivery at settlement of a pool or pools that is identified by a unique pool identification number at the time of execution. See FINRA Rule 6710(x). FINRA Rule 6710(v) generally defines an “Agency Pass-Through Mortgage-Backed Security” as a type of securitized product issued in conformity with a program of an agency or a government-sponsored enterprise (GSE) for which the timely payment of principal and interest is guaranteed by the agency or GSE, representing ownership interest in a pool (or pools) of mortgage loans structured to “pass through” the principal and interest payments to the holders of the security on a pro rata basis. FINRA Rule 6710(bb) defines an “SBA-Backed ABS” as a securitized product issued in conformity with a program of the SBA, for which the timely payment of principal and interest is guaranteed by the SBA, representing ownership interest in a pool (or pools) of loans or debentures and structured to “pass through” the principal and interest payments made by the borrowers in such loans or debentures to the holders of the security on a pro rata basis.
  3. FINRA determined to disseminate an RDID in lieu of a CUSIP due to concerns regarding information leakage. As stated in FINRA’s 2012 proposal, FINRA believed that disseminating a RDID instead of a CUSIP significantly limits the ability to “reverse engineer” transaction data to determine trading strategies and identities, while providing valuable information about the mortgages/loans that are in specified pool transactions. See Securities Exchange Act Release No. 67798 (September 7, 2012), 77 FR 56686,56691 (September 13, 2012) (Notice of Filing of SR-FINRA-2012-042). FINRA commenced dissemination of specified pool transactions in 2013. See Regulatory Notice 12-56 (December 2012).
  4. Specifically, FINRA uses the following ten data elements to form the RDID cohorts that describe the underlying security traded in a specified pool transaction: (1) Issuer; (2) Product Type; (3) Amortization Type; (4) Coupon; (5) Original Maturity; (6) Weighted Average Coupon; (7) Weighted Average Maturity; (8) Weighted Average Loan Age; (9) Current Average Loan Size; and (10) LTV ratio. See also Attachment A.
  5. As stated in the proposed rule change, FINRA believes that the revised LTV rounding convention will provide more meaningful information to market participants by grouping securities with more similar characteristics, and that the new groupings should improve how disseminated TRACE data reflects the role of LTV ratios in MBS valuations.
     
    • “For example, separating pools with LTV ratios at or below 80 from those with LTV ratios of 81 or higher delineates the pools with mortgages that may require mortgage insurance from those that may not require mortgage insurance. Similarly, the revised rounding methodology for LTV ratios of 81 or more are more consistent with the way mortgage originators view loan characteristics and the way that the market determines pricing.”
       

    See Securities Exchange Act Release No. 90264 (October 23, 2020), 85 FR 68607, 68608 (October 29, 2020) (Notice of Filing of File No. SR-FINRA-2020-034).