LawFlash

FINRA Seeks to Expand Reporting Requirements for Transactions in TRACE-Eligible Securities

June 14, 2022

The Financial Industry Regulatory Authority recently filed two rule proposals—SR-FINRA-2022-011 and SR-FINRA-2022-013—with the US Securities and Exchange Commission and issued Regulatory Notice 22-12 in an effort to expand the TRACE reporting requirements for FINRA member firms in TRACE-eligible securities.

In addition, SR-FINRA-2022-013 has potential future implications for non-member depository banks (Covered Depository Institutions), which, pursuant to authorization by the Board of Governors of the Federal Reserve System, will begin reporting transactions in US Treasury securities to TRACE[1] effective September 1, 2022.

In connection with Chair Gensler’s statement earlier this year that FINRA’s TRACE and the Municipal Securities Rulemaking Board’s (MSRB) Real-time Transaction Reporting System could benefit from post-trade transparency enhancements, it is likely that FINRA and the MSRB will be active in this area. Firms, therefore, should continue to closely monitor the trade reporting requirements for fixed income securities to adequately prepare for any necessary system changes that are required.

FINRA’S PROPOSED RULE CHANGES FOR US TREASURY SECURITIES

FINRA has proposed two rule changes for US Treasury securities pursuant to SR-FINRA-2022-013. First, and subject to an exception for limited trading volume, FINRA would require members to “report electronically executed transactions in U.S. Treasury Securities to TRACE in the finest increment captured by the system that executed the transaction . . . .” Currently, firms are permitted to use a reporting system to report the execution time, which may be less precise than the time captured by the execution system. The proposed rule would require firms to update their reporting systems, as necessary, to capture the same execution time detail as the execution system.

Second, the proposal would require that firms report transactions in US Treasury securities as soon as practicable and within 60 minutes of the execution time or the TRACE system opening for certain trades executed on a day that the TRACE system is not open, as applicable.[2]

Effective September 1, 2022, as noted above, Covered Depository Institutions are required to report to TRACE transactions in US Treasury securities. To aid in that process, which may be new to many Covered Depository Institutions, FINRA’s website provides centralized information about TRACE reporting considerations, including FAQs and interpretative questions. Covered Depository Institutions may wish to begin considering the potential operational changes that may be needed in the future should the Commission approve the execution time proposals contained in SR-FINRA-2022-13.

FINRA’S PROPOSED RULE CHANGES FOR US DOLLAR-DENOMINATED FOREIGN SOVEREIGN DEBT SECURITIES

FINRA currently requires firms to report trades to TRACE in US-dollar-denominated debt of foreign private issuers. Under SR-FINRA-2022-11, firms would be required to report trades in US-dollar-denominated foreign sovereign debt securities, which would be defined as a “debt security issued or guaranteed by the government of a foreign country, any political subdivision of a foreign country (e.g., state, provincial, or municipal governments), or a supranational entity.” According to FINRA, the latter would include the International Bank for Reconstruction & Development (i.e., the World Bank), among other multi-national organizations. FINRA explained that the transactions would be reported for regulatory purposes only, and that as a general matter, same-day reporting would be required.

PORTFOLIO TRADE MODIFIERS FOR CORPORATE BOND TRANSACTIONS WILL BE REQUIRED

Pursuant to Regulatory Notice 22-12, and effective May 15, 2023, firms are required to use a portfolio trade modifier when reporting trades in corporate bonds that are: “(i) executed between only two parties; (ii) involving a basket of corporate bonds of at least 10 unique issues; and (iii) for a single agreed price for the entire basket . . . .” Notice 22-12 provides additional guidance in the form of FAQs about what constitutes a “basket” and a “single agreed price.” For example, the notice states that a basket of 12 different corporate bonds, including three bonds from the same issuer, would qualify for the modifier. On the other hand, if there were 12 corporate bonds and five agency bonds, the modifier would only be appended for the corporate bond trades. Notice 22-12 also explains that if there were 12 corporate bond transactions at the time of execution, and two were subsequently cancelled, a firm would not be required to submit a trade correction to remove the portfolio trade modifier.

Additional guidance is provided in Notice 22-12, and firms should remain vigilant for additional rule change proposals in this area.

CONTACTS

If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

Boston
David C. Boch
Timothy P. Burke
Thomas J. Hennessey
Jason S. Pinney
T. Peter R. Pound

New York
Ben A. Indek
Ariel Gursky

Philadelphia
G. Jeffrey Boujoukos
Kelly L. Gibson

San Francisco
Susan D. Resley

Washington, DC
Margaret “Peggy” R. Blake
Russell M. Fecteau
Ivan P. Harris



[1] The Trade Reporting and Compliance Engine (TRACE) is the FINRA-created means for mandatory reporting in certain over-the-counter debt securities.

[2] FINRA makes available through its website aggregate data on the trading volume of US Treasury securities reported to TRACE, but information on individual transactions in such securities is not publicly available.