United States: FINRA Introduces Two Fixed Income Initiatives

The Financial Industry Regulatory Authority, Inc. (FINRA) introduced two new initiatives related to the fixed income markets. FINRA proposed to establish a central depository for the public dissemination of new issue corporate bond reference data and to publish aggregated transaction information on U.S. Treasury Securities. The Securities and Exchange Commission (SEC) approved both proposals in December 2019. FINRA plans to begin publishing aggregated transaction data for U.S. Treasury Securities on March 10, 2020. The SEC, however, subsequently stayed the approval of the corporate bond depository until further notice.

FINRA's New Issue Reference Data Service for Corporate Bonds

On March 27, 2019, FINRA filed with the SEC a proposed rule change to establish a new issue reference data service for corporate bonds.¹ FINRA's proposal was in line with the SEC's Fixed Income Market Structure Advisory Committee's (FIMSAC) recommendation that the SEC, in conjunction with FINRA, establish a reference data service for corporate bonds which would contain specified data elements on corporate bond new issues that are eligible for FINRA's Trade Reporting and Compliance Engine (TRACE).²

FINRA proposed to amend FINRA Rule 6760 to require that underwriters subject to Rule 6760 report to FINRA a number of data elements for new issues in Corporate Debt Securities.³ Specifically, Proposed Rule 6760(b)(2) would require that, in addition to the information required by Rule 6760(b)(1), for a new issue in a Corporate Debt Security, excluding bonds issued by religious organizations or for religious purposes, the following information must be reported, if applicable: (1) the International Securities Identification Number (ISIN), (2) the currency, (3) the issue date, (4) the first settle date, (5) the interest accrual date, (6) the day count description, (7) the coupon frequency, (8) the first coupon payment date, (9) a Regulation S indicator, (10) the security type, (11) the bond type, (12) the first coupon period type, (13) a convertible indicator, (14) a call indicator, (15) the first call date, (16) a put indicator, (17) the first put date, (18) the minimum increment, (19) the minimum piece/denomination, (20) the issuance amount, (21) the first call price, (22) the first put price, (23) the coupon type, (24) rating (TRACE Grade), (25) a perpetual maturity indicator, (26) a Payment-In-Kind (PIK) indicator, (27) first conversion date, (28) first conversion ratio, (29) spread, (30) reference rate, (31) floor, and (32) underlying entity ticker. Underwriters would be required to report all data fields for Corporate Debt Securities prior to the first transaction in the security.

FINRA proposed to disseminate this collected reference data upon receipt, and provide subscribers with access to the data for a fee.⁴ FINRA intended to implement the service after it submitted and received approval for fees related to the new issue reference data service. The proposal received 28 comment letters as well as a response to commenters from FINRA.⁵

On December 4, 2019, the SEC, pursuant to delegated authority, approved FINRA's proposal.⁶ In support of its approval order, the SEC stated that, contrary to certain comments it received, it believed that FINRA had provided sufficient justification under the Exchange Act for its proposal, and that there was evidence of market structure problems that require regulatory intervention. The SEC agreed with FINRA that a gap currently exists in the market of newly issued corporate bond reference data, namely, the lack of broadly available and accessible new issue reference data on the first day of secondary market trading, and that this gap can impede efficiency and competition in the current marketplace. The SEC concluded that FINRA's proposal was reasonably designed to address this regulatory gap in the current market to the benefit of the marketplace. Furthermore, in response to commenters raising concerns regarding increased burdens on underwriters due to the new reporting requirements, and on small underwriters in particular, the SEC stated that such burdens would be limited. Commenters also raised concerns that the proposal would diminish competition among private sector reference data providers by displacing existing for-profit competition with a regulator-provided service. In response, the SEC stated that the limited set of data proposed to be reported and disseminated to allow for the identification, valuation and settlement of new issue corporate bonds would not supplant the demand for a more comprehensive reference database with enhanced data sets that contain additional fields not reported to or disseminated by FINRA. Finally, commenters objected to FINRA's postponement of the filing of the proposed fees for the new service, warning that separating the fee proposal into a subsequent filing would allow FINRA to avoid regulatory and public scrutiny of the proposed fees. The SEC disagreed with this concern, noting that FINRA cannot charge fees for the proposed data service until the SEC receives a proposed rule change that complies with the Exchange Act and SEC rules concerning proposed fee changes.

On December 12, 2019, however, the SEC stayed the delegated approval of the service until the SEC determines otherwise.⁷ On December 18, 2019, Bloomberg, L.P., filed with the SEC a Petition for Review of the approval of FINRA's new issue reference data services for corporate bonds.⁸ In its petition, Bloomberg argued that FINRA's proposal was an attempt to replace bond reference data that competitive private vendors currently offer in the marketplace with a regulatory utility.

FINRA's Publication or Distribution of Aggregated Transaction Information and Statistics on U.S. Treasury Securities

On December 20, 2019, the SEC approved FINRA's proposal to publish aggregated transaction information and statistics on U.S. Treasury Securities.⁹ With this approval, FINRA will expand the securities for which it publicly disseminates transaction information to include certain TRACE-Eligible Securities¹⁰ that are U.S. Treasury Securities.¹¹ Starting March 10, 2020, the new aggregated TRACE data will be published on FINRA's website.¹²

As described in its rule filing, FINRA amended Supplementary Material .01 to FINRA Rule 6750 to provide that FINRA may publish or distribute weekly aggregated transaction information and statistics on non-disseminated TRACE-Eligible Securities that are U.S. Treasury Securities. The aggregated U.S. Treasury Securities data would not be published or distributed by individual security,¹³ nor would it identify individual market participants or transactions. FINRA will provide the aggregated data on U.S. Treasury Securities at no charge, unless FINRA first establishes a fee for such data by submitting an appropriate rule filing to the SEC.

In its approval order, the SEC noted that there is no comprehensive source of aggregated volume data that reflects all major segments of the market for U.S. Treasury Securities. Accordingly, the SEC stated that the proposal would benefit investors and market participants by facilitating greater transparency in the U.S. Treasury Security market by making publicly available aggregate trading volume for transactions in U.S. Treasury Securities that are reported to TRACE. The SEC further noted that FINRA's proposal is reasonably designed to preserve the confidentiality of individual market participants and transactions, and would not impose any new cost on FINRA members, because any aggregate statistics that are published or distributed by FINRA pursuant to this rule change would be derived from information that members are already required to report to TRACE. The Treasury Department indicated it was supportive of FINRA's proposal.

On February 10, 2020, FINRA announced that it would commence making Weekly Aggregated Reports of the U.S. Treasury Security data available on its website (www.finra.org) beginning March 10, 2020.¹⁴ The first report will contain information for the February 29 through March 7 period. The reports will illustrate trading volume in U.S. Treasury Securities reported to TRACE for the prior week. The information will be aggregated by security subtype: Bills, Floating Rate Notes (FRN), Nominal Coupons, and Treasury Inflation-Protected Securities (TIPS). The data will be further grouped into "ATS and Interdealer," "Dealer-to-Customer" and "Total" categories. For Nominal Coupons and TIPS, the report will also show remaining maturity and on-the-run/off-the-run groupings.¹⁵

Next Steps

The implementation of FINRA's transparency proposal for U.S. Treasury Securities and its proposal to create a new reference data service for corporate bonds are both in an area of increasing interest to the securities regulators. For example, FINRA also has sought comment on a proposal to expand the alternative trading system (ATS) volume data that it publishes on its website to include information on transactions in corporate bonds and agency debt securities that occur within an ATS and are reported to TRACE.¹⁶ In addition, the SEC has recently renewed the charter for FIMSAC for another year to permit further exploration of issues in the fixed income markets.¹⁷

Footnotes

1. The SEC published notice of filing of the proposed rule change in the Federal Register on April 8, 2019. Securities Exchange Act Rel. No. 85488 (April 2, 2019), 84 Fed. Reg. 13977 (April 8, 2019) ("Reference Data Service Notice"). On May 22, 2019, the SEC designated a longer period within which to approve the proposed rule change, disapprove the proposed rule change, or institute proceedings to determine whether the proposed rule change should be disapproved. Securities Exchange Act Rel. No. 85911 (May 22, 2019), 83 Fed. Reg. 24839 (May 29, 2019). On July 1, 2019, the SEC instituted proceedings under Section 19(b)(2)(B) of the Securities Exchange Act of 1934 ("Exchange Act") to determine whether to approve or disapprove the proposed rule change. Securities Exchange Act Rel. No. 86256 (July 1, 2019), 84 Fed. Reg. 32506 (July 8, 2019). On October 3, 2019, FINRA filed partial Amendment No. 2 to the proposed rule change. Amendment No. 2 is available at: https://www.sec.gov/comments/sr-finra-2019-008/srfinra2019008-6252424-192827.pdf. On October 4, 2019, the SEC published notice of Amendment No. 2 to the proposed rule change and designated a longer period for SEC action on the proceedings to determine whether to approve or disapprove the proposed rule change. Securities Exchange Act Rel. No. 87232 (Oct. 4, 2019), 84 Fed. Reg. 54712 (October 10, 2019).

2. See FIMSAC Recommendation for the SEC to Establish a New Issue Reference Data Service for Corporate Bonds (October 29, 2018) (available at https://www.sec.gov/spotlight/fixed-income-advisory-committee/fimsac-corporate-bond-new-issue-reference-data-recommendation.pdf). FIMSAC was founded to provide the SEC with diverse perspectives on the structure and operations of the U.S. fixed income markets as well as advice and recommendations on matters related to fixed income market structure.

3. FINRA proposed to move the definition of "Corporate Debt Security," which is currently located in FINRA Rule 2232 (Customer Confirmations), into the TRACE Rule Series (specifically Rule 6710 (Definitions)) and to make corresponding technical edits to FINRA Rule 2232.

4. FINRA originally proposed to make the corporate bond new issue reference data available to any person or organization for a fee of $250 per month for internal purposes only, and for a fee of $6,000 per month where the data is retransmitted or repackaged for delivery and dissemination to any outside person or organization. See Reference Data Service Notice at 13979. FINRA withdrew these proposed fees in Amendment No. 2.

5. Comments are available at https://www.sec.gov/comments/sr-finra-2019-008/srfinra2019008.htm.

6. Securities Exchange Act Rel. No. 87656 (Dec. 4, 2019), 84 Fed. Reg. 67491 (Dec. 10, 2019).

7. Letter from J. Matthew DeLesDernier, Assistant Secretary, SEC, to Stephanie Dumont, Senior Vice President and Director of Capital Markets Policy, FINRA re: Order Granting Approval of a Proposed Rule Change, as Modified by Amendment No. 2, to Establish a Corporate Bond New Issue Reference Data Service, Securities Exchange Act of 1934, Release No. 87656 (December 4, 2019) (Dec. 12, 2019) (available at https://www.sec.gov/rules/sro/finra/2019/34-87656-acknowledgement-letter.pdf).

8. In the Matter of the Application of Bloomberg, L.P. (Dec. 18, 2019) (available at https://www.sec.gov/rules/sro/finra/2019/34-87656-petition-for-review.pdf).

9. Securities Exchange Act Rel. No. 87837 (Dec. 20, 2019), 84 Fed. Reg. 71986 (Dec. 30, 2019).

10. FINRA Rule 6710(a) defines a "TRACE-Eligible Security" as a debt security that is U.S. dollar-denominated and is: (1) issued by a U.S. or foreign private issuer, and, if a "restricted security" as defined in Securities Act of 1933 Rule 144(a)(3), sold pursuant to Securities Act of 1933 Rule 144A; (2) issued or guaranteed by an Agency, as defined in FINRA Rule 6710(k) or a Government-Sponsored Enterprise as defined in FINRA Rule 6710(n); or (3) a U.S. Treasury Security, as defined in FINRA Rule 6710(p). "TRACE-Eligible Security" does not include a debt security that is issued by a foreign sovereign or a Money Market Instrument, as defined in FINRA Rule 6710(o).

11. "U.S. Treasury Security" means a security, other than a savings bond, issued by the U.S. Department of the Treasury (Treasury Department) to fund the operations of the federal government or to retire such outstanding securities. The term also includes separate principal and interest components of a U.S. Treasury Security that have been separated pursuant to the Separate Trading of Registered Interest and Principal of Securities (STRIPS) program operated by the Treasury Department. See FINRA Rule 6710(p).

12. FINRA to Publish Weekly Aggregated Reports and Statistics for U.S. Treasury Securities, FINRA Announcement (Feb. 10, 2020) (available at https://www.finra.org/filing-reporting/trace/finra-publish-weekly-aggregated-reports-and-statistics-us-treasury) ("FINRA Announcement").

13. FINRA noted one exception to this requirement: FINRA may provide aggregated data that includes on-the-run U.S. Treasury Securities that may have had only one on-the-run security during the aggregated period.

14. FINRA Announcement.

15. Id. See also Securities Exchange Act Rel. No. 87540 (Nov. 14, 2019), 84 Fed. Reg. 64147 (Nov. 20, 2019).

16. FINRA Regulatory Notice 19-22 (Sept. 23, 2019).

17. See FIMSAC Charter (Nov. 13, 2019) (available at https://www.sec.gov/spotlight/fixed-income-advisory-committee/fimsac-charter-nov-2019.pdf).

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