Comment Period Expires: February 22, 2021
In consultation with the U.S. Department of the Treasury (Treasury Department), FINRA is soliciting comment on potential enhancements to the information reported to FINRA’s TRACE facility regarding transactions in U.S. Treasury securities. Specifically, FINRA is seeking comment on potential changes to TRACE reporting for U.S. Treasury securities that would require: (1) more granular execution timestamps; (2) a shortened trade reporting timeframe; (3) new indicators to identify non-alternative trading system (ATS) trading venues and method of execution, the trading unit within a firm executing a trade, and the method used to clear and settle a transaction; (4) new modifiers to identify additional multi-leg transactions and whether a transaction is priced at the current market; (5) standardized price reporting; and (6) separate reporting of per-transaction ATS fees. FINRA also is soliciting views on whether these proposed changes should apply to all TRACE-eligible securities uniformly, if applicable.
Questions regarding this Notice should be directed to:
https://twitter.com/kmcpartland/status/1346812882726608897
FINRA encourages all interested parties to comment on this request for comment. Comments must be received by February 22, 2021.
Comments must be submitted through one of the following methods:
To help FINRA process comments more efficiently, persons should use only one method to comment.
Important Notes: Comments received in response to Regulatory Notices will be made available to the public on the FINRA website. In general, comments will be posted as they are received.1
Before becoming effective, any proposed rule change must be filed with the Securities and Exchange Commission (SEC) pursuant to Section 19(b) of the Securities Exchange Act of 1934 (SEA).2
On July 10, 2017, FINRA members began reporting information on transactions in U.S. Treasury securities to TRACE.3 These reporting requirements apply only to FINRA members. However, FINRA notes that the Board of Governors of the Federal Reserve System (Federal Reserve) has announced that it plans to collect data on secondary market transactions in U.S. Treasury securities from banks and will enter into negotiations with FINRA to potentially act as the Federal Reserve’s collection agent for the data.4 To the extent that the Federal Reserve requires banks to report these transactions to TRACE, any expanded data collection described in this Notice, subject to filing with and approval by the SEC, potentially also would apply to banks.
Information in TRACE regarding transactions in U.S. Treasury securities is for regulatory and other official sector purposes and is not disseminated publicly.5 FINRA makes the data available to the official sector to assist them with monitoring and analysis of the U.S. Treasury securities markets.6 Since the implementation of the reporting requirements, FINRA, together with the official sector, has continued to study the data members report and assess the quality of the data, and has taken steps to enhance the data. For example, FINRA recently began requiring that large ATSs identify non-member subscribers when reporting transactions in U.S. Treasury securities to TRACE to enhance the data available to FINRA and the official sector.7 The Treasury Department has recommended that FINRA consider additional changes to U.S. Treasury securities reporting to provide more insight into trading in the U.S. Treasury securities markets.8 FINRA is issuing this Notice to solicit comment on these potential changes to help inform FINRA’s and the official sector’s continuing analysis of the data and whether changes to the TRACE reporting rules for U.S. Treasury securities may be appropriate.
FINRA is considering revisions to the current execution timestamp requirements for U.S. Treasury securities to improve the accuracy of the information reported to TRACE. Currently, Rule 6730 requires members to report the Time of Execution9 for a transaction executed electronically to the finest increment of time captured in the member’s system (e.g., millisecond, microsecond), but at a minimum, in increments of seconds.10 However, if a member uses multiple systems to facilitate trade reporting and those systems differ in granularity (e.g., System A captures time to the millisecond, while System B only captures time to the second), then the member currently may use the finest increment that is common across all systems (i.e., in this example, to the second), and is not required to update its systems to trade report to the finer increment captured by System A.11
FINRA is considering revising the existing rule to require that members report transactions executed electronically in U.S. Treasury securities to TRACE in the finest increment of time captured by the firm’s execution system, but at a minimum, in increments of a second. Therefore, for example, if the firm’s execution system captures time in milliseconds but its system for reporting U.S. Treasury securities transactions only reports time in seconds, the firm would be required to update its reporting system so that it reports Time of Execution in milliseconds. Similarly, where a firm executes transactions in U.S. Treasury securities through an external system, FINRA is considering requiring that firms report such transactions to TRACE consistent with the Time of Execution communicated by the execution venue. Therefore, for example, if a firm executes a transaction on an ATS and receives an execution message from the ATS providing an execution time in microseconds, the firm also would report its leg of the ATS transaction with an execution time in microseconds. FINRA believes this change would result in FINRA receiving more accurate and consistent information across reporters with respect to the Time of Execution of the transaction.
Rule 6730 sets forth how trades executed during different time periods throughout the day are to be reported to TRACE. Specifically, for transactions executed on a business day from 12:00:00 a.m. to 5:00:00 p.m., firms must report the trade the same day during TRACE system hours.12 For transactions executed on a business day after 5:00:00 p.m. but before the TRACE system closes, firms must report the trade no later than the next business day (T+1) during TRACE system hours (and, if reported on T+1, designated “as/of” with the date of execution). Finally, for transactions executed on a business day at or after 6:30:00 p.m. through 11:59:59 p.m., or on a Saturday, Sunday, a federal or religious holiday, or other day on which the TRACE system is not open at any time during that day, firms must report the trade on T+1 during TRACE system hours (and designate the trade “as/of” and include the date of execution).
FINRA is considering reducing the trade reporting timeframe for U.S. Treasury securities to facilitate more timely availability to regulators of intraday pricing and liquidity information on U.S. Treasury securities. FINRA is considering amending the current rules to provide that:
FINRA is considering changes to require members to report information regarding the identity of any non-ATS electronic trading platform through which a transaction in a U.S. Treasury security occurs as well as the method of execution (i.e., voice or electronic) of a transaction in a U.S. Treasury security. Currently, Rule 6720(c) requires that member ATSs (as that term is defined in Rule 300 of SEC Regulation ATS) obtain a separate MPID for purposes of TRACE reporting. This separate MPID requirement applies to any member ATS that trades TRACE-eligible securities if it meets Regulation ATS’s definition of “alternative trading system,” irrespective of whether the member ATS is required to comply with Regulation ATS.13 By requiring that a separate MPID be used for ATS activity, FINRA is better able to specifically identify which transactions occur on or through an ATS. An ATS’s separate MPID must be used: (1) when the ATS submits trade reports to TRACE; and (2) where an ATS is exempt from TRACE reporting pursuant to Rule 6732 (Exemption from Trade Reporting Obligation for Certain Transactions on an Alternative Trading System) and the member counterparties to the exempt trade on the ATS must enter the ATS’s separate MPID on the TRACE report for those transactions.
However, there is significant activity in U.S. Treasury securities through other, non-ATS fixed income electronic trading platforms that are not specifically identified in the TRACE audit trail. To capture additional information about the trading that occurs through these platforms, FINRA is considering requiring members, when reporting transactions in U.S. Treasury securities to TRACE, to populate a separate field to identify the non-ATS platform on or through which it transacted. This additional information would allow FINRA to identify a broader range of electronic trading platforms through which transactions in U.S. Treasury securities may originate and occur. For purposes of the proposal, a “non-ATS trading platform” would include any electronic system that does not meet the definition of an ATS under SEC Regulation ATS, through which multiple parties facilitate orders, request-for-quotes (RFQs), or negotiate the terms of a trade in a U.S. Treasury security. These platforms currently do not have a separate MPID and are not otherwise identifiable in TRACE reports. Under the proposal, members would be required to identify the non-ATS trading platform for those transactions that originated or occurred through the platform. To provide consistent identification of these platforms across TRACE reports, FINRA would provide to reporters a list of non-ATS trading platform identifiers for use in populating the new field. If a member trades in a U.S. Treasury security through a platform not yet included in the TRACE list, the member would be required to notify FINRA so that the platform can be added to the list of identifiers.
Importantly, the SEC recently published for comment proposed amendments to Regulation ATS that would eliminate the existing exemption from compliance with Regulation ATS for an ATS that trades only government securities, including U.S. Treasury securities.14 As part of that release, the SEC also issued a concept release seeking feedback on the regulatory framework for electronic platforms that trade corporate debt and municipal securities in response to recommendations from the SEC’s Fixed Income Market Structure Advisory Committee (FIMSAC) to review this area.15 FINRA recognizes that the feedback and ultimate outcome of the SEC’s proposed amendments and concept release will impact and inform any proposal FINRA may advance in this area, for example, to help better and more consistently identify the types of electronic systems and platforms that trade fixed income securities.
In addition to identifying the platform in TRACE reports, FINRA also is considering changes to require for all transactions in U.S. Treasury securities (whether or not an electronic component to the transaction exists), that members indicate whether the transaction was executed via voice or electronically.
FINRA is considering adding a new trading desk or unit identifier field for U.S. Treasury securities reporting to identify the specific desk or unit within a member firm executing the transaction. Member counterparties currently are identified in TRACE by the MPID submitted in the transaction report. Some firms trade U.S. Treasury securities from multiple desks or units. For those firms with multiple desks or units, each independent desk or unit within a firm may execute trades using a separate MPID or they may share the same MPID for the entire firm―either approach is permissible under the TRACE rules.
FINRA is considering changes to the trade reporting requirements that would require more granular information regarding the desk or unit executing a U.S. Treasury security trade. Specifically, FINRA would require members to assign and enter an additional identifier for each desk or unit at the firm that executes transactions in U.S. Treasury securities. Firms would provide FINRA with a list of all desks/units within the firm that may trade a U.S. Treasury security, along with the firm-generated identifier for each (within the alpha or numeric parameters specified by FINRA). Members also would be required to keep FINRA informed of any change to the member’s desk or unit identification assignments by providing FINRA with the updated assignments by the next business day following the implementation of such change. FINRA would not require that each trading desk or unit have a separate MPID, nor would firms be required to modify their existing organization in any way. Allowing each firm to specify the relevant desks and units and assign identifiers provides firms with flexibility and, therefore, accounts for varying structures across different member firms.16
FINRA is considering requiring members to append a new indicator that would identify whether a transaction in a U.S. Treasury security will be cleared centrally or bilaterally.17 Rule 6730 does not currently require members to specify in TRACE whether a transaction in a U.S. Treasury security will be centrally or bilaterally cleared. In addition, FINRA rules do not mandate that members centrally clear transactions in U.S. Treasury securities.18
The method by which a transaction is cleared and settled―specifically whether the parties to the transaction use a central clearing counterparty―affects the degree and type of risk the parties bear (e.g., counterparty financial exposure). FINRA understands that the proportion of trades in U.S. Treasury securities that are cleared centrally through FICC19 has changed over time along with changes in the composition of the participants in the interdealer U.S. Treasury securities cash market.20 Specifically, these changes include the growth of electronic trading platforms and the entrance of new market participants that are not broker-dealer FICC members.21 Although recent efforts have been made to expand the scope of transactions that are centrally cleared through FICC,22 market developments in recent years have prompted calls for greater study of the clearing practices and counterparty risk in this market.23 To support this objective, FINRA is proposing adding a new clearing arrangement indicator that members would be required to report that would identify whether a trade in a U.S. Treasury security will be cleared bilaterally or centrally.
FINRA is considering whether additional modifiers to identify specific categories of multi-leg transactions involving a U.S Treasury security are appropriate, as well as an additional modifier to indicate whether the U.S. Treasury security transaction is priced at or off market. Currently, members are required, among other things, to identify a transaction in a U.S. Treasury security that is: (a) part of a series of transactions where at least one of the transactions involves a futures contract with the .B modifier; and (b) part of a series of transactions where one or more legs may not be priced based on the current market with the .S modifier. FINRA believes that the scope of usage of the .B modifier is relatively narrow and consistent; however, the .S modifier is used for a wide range of multi-leg transactions, including those that have different implications on how the price of the reported trade should relate to the current market price. FINRA is considering adding modifiers to further distinguish various strategies, as well as to provide information as to whether the transaction in the U.S. Treasury security is priced at the current market. As stated below in the Preliminary Economic Impact Analysis and Request for Comments section, FINRA welcomes feedback on the appropriate types and groupings of strategies involving U.S. Treasury securities, and initially is considering proposing modifiers to identify:
Finally, FINRA is considering, for each strategy (including for trades identified using the existing .B modifier25 and the new catch-all category), that members further specify whether the U.S. Treasury securities transaction is executed at a price that is at or off the current market. The new strategy modifiers would replace the current use of the .S modifier, which is used to identify a transaction that is part of a series of transactions and may not be priced based on the current market.
Members are required to report the price of a transaction or the elements necessary to calculate the price. Certain U.S. Treasury securities are traded and quoted using different price conventions, including Treasury bills (which use a discount rate) and floating rate notes (FRNs) (which use a discount margin). FINRA has issued guidance to members that, in such cases, members may report the price of a transaction as either the discount rate or discount margin, but members are still permitted to report the dollar price.26
Where members are permitted to choose to report price in either dollars or another measure, it is more likely that validation mismatches would occur. Unmatched trades in the audit trail may reduce the clarity of the available data.27 As a result, FINRA is considering changes to require further standardization of the measure used to report price in these types of U.S. Treasury securities.28 As stated below in the Preliminary Economic Impact Analysis and Request for Comments section, FINRA welcomes feedback on the appropriate approach to standardizing price for Treasury bills and FRNs—for example, FINRA is considering whether it is appropriate to require that firms report the discount rate for transactions in Treasury bills and the discount margin for transactions in FRNs, rather than also being permitted to report the dollar price in these instances.
FINRA Rules 6730(c) and (d)(1) set forth member obligations for reporting the price of a transaction in a TRACE-eligible security. Members must report the price of a transaction, including any mark-up or mark-down the member charges (for principal transactions), but excluding any commission the member charges (for agency transactions), which must be reported separately from the reported price. Currently, members trading on an ATS also may include in the price reported to TRACE certain per-transaction fees that the ATS may assess for a transaction. FINRA understands that ATSs may assess fees to subscribers in a variety of ways―e.g., an ATS may bill subscribers on a monthly basis or may charge a per-transaction fee. Further, per-transaction fee arrangements may differ among subscribers, resulting in different fees being assessed to each counterparty to a trade. These varying fee arrangements can result in differences in the prices the counterparties to a transaction report to TRACE (i.e., where one member pays ATS fees on a monthly basis while the other pays a per-transaction fee, or where both members pay a different per-transaction fee with respect to the transaction).
FINRA is considering requiring that members report per-transaction ATS fees separately from the price when reporting transactions in U.S. Treasury securities to TRACE. Therefore, under the proposal, instead of reflecting any per-transaction fee in the price, members would report the price (exclusive of such fees) and include these fees in a new, separate, per-transaction, ATS fee field.
As discussed above, FINRA is considering potential enhancements to improve the quality of the information reported to TRACE for transactions in U.S. Treasury securities. These potential enhancements likely would result in direct and indirect costs for firms that trade U.S. Treasury securities by requiring firms to implement changes to their processes and systems for reporting U.S. Treasury securities transactions to TRACE.29 In addition to the specific questions noted below, FINRA requests comment on all aspects of this Notice, including the costs and burdens associated with these potential enhancements. FINRA requests that commenters provide empirical data or other factual support for their comments wherever possible.
As discussed above, FINRA is considering requiring members to report electronically executed transactions in U.S. Treasury securities to the same degree of granularity as that captured by the execution system (internal or external) used to execute the transaction. In the first half of 2019, 267 unique MPIDs reported transactions in U.S. Treasury securities executed on or through an ATS to TRACE.30 Of the 267 MPIDs, 225 MPIDs reported transactions in seconds only and six MPIDs reported in milliseconds or finer only. The remaining 36 MPIDs reported transactions in both seconds and milliseconds or finer. There were approximately 32.5 million ATS transactions reported in the sample period across all 267 MPIDs. The majority of these transactions (74.8 percent) were reported in milliseconds or finer.
FINRA is contemplating changes to reduce the timeframe for reporting transactions in U.S. Treasury securities to TRACE to within 60 minutes of execution. FINRA analyzed member trade reporting behaviors for U.S. Treasury securities transactions in the first half of 2019 and observed that firms reported approximately 95 percent of transactions within 60 minutes of the Time of Execution.32 In the sample period, of the 864 MPIDs that reported transactions in U.S. Treasury securities within the same day, 417 MPIDs always reported transactions within 60 minutes and six MPIDs always reported transactions more than 60 minutes after the execution. The remaining 441 MPIDs reported transactions both within 60 minutes and after 60 minutes of execution, of which more than 95 percent were reported within 60 minutes of execution.33
FINRA also observed during the sample period that, of the transactions that were executed after 5:30 p.m. and reported the next day, approximately 93 percent of these transactions were reported within 60 minutes after the TRACE system opened (by 96 MPIDs). Of the 96 MPIDs, 39 always reported within 60 minutes, accounting for approximately 5 percent of overall dollar trading volume reported the next day. Of the 96 MPIDs, 44 reported both within and after 60 minutes after the TRACE system opened the next day, accounting for 94.9 percent of overall dollar trading volume reported the next day, of which 92.8 percent of the dollar trading volume was reported within 60 minutes.
Some member firms who trade in U.S. Treasury securities also trade in other types of TRACE-eligible securities that already require reporting in a shorter timeframe. For example, transactions in corporate bonds and Agency debt securities generally are required to be reported to FINRA within 15 minutes of the Time of Execution pursuant to FINRA Rule 6730. In the sample period, of the 874 MPIDs that reported transactions in U.S. Treasury securities, 772 MPIDs also reported transactions in corporate bonds and Agency debt securities. While these transactions may occur on separate trading desks, to the extent that firms are able to leverage existing technology within the firm, the costs associated with the proposed reporting timeframe changes for U.S. Treasury securities could potentially be reduced.
As discussed above, FINRA is considering requiring that members specify the method of execution for a trade in a U.S. Treasury security―i.e., whether the trade was executed via voice or electronically.
As discussed above, FINRA currently can identify transactions in U.S. Treasury securities that occur on or through an ATS, regardless of whether the ATS is required to comply with Regulation ATS or if the ATS is itself exempt from TRACE reporting under FINRA rules. To identify a broader range of electronic trading platforms through which transactions in U.S. Treasury securities may originate and occur, FINRA is considering requiring members to append a unique identifier for each non-ATS trading platform used for transactions in U.S. Treasury Securities. A “non-ATS trading platform” required to be identified under the proposal would include any electronic system that is not an “alternative trading system,” as that term is defined in Rule 300 of SEC Regulation ATS, through which multiple parties facilitate orders, RFQs, or negotiate the terms of a trade in a U.S. Treasury security.
FINRA is considering changes to require members to assign and use a unique identifier for each desk or unit at the firm that executes transactions in a U.S. Treasury security.
FINRA is considering requiring that members specify whether a trade in a U.S. Treasury security will be centrally or bilaterally cleared. FINRA understands that, to the extent that the clearing method is not captured or stored in current systems, firms may incur costs associated with developing systems and protocols to capture, store and report a clearing arrangement indicator.
As discussed above, FINRA is considering adding modifiers to further distinguish various strategies and to indicate whether a transaction in a U.S. Treasury security is priced at the current market. Firms potentially could incur costs associated with identifying these transactions and appending the appropriate modifier.
FINRA requests comment on which strategies involving a transaction in a U.S. Treasury security should be identified in TRACE reporting, and how such strategies should be grouped. Specifically, FINRA is considering adding modifiers to identify the following types of strategies, grouped as follows:
FINRA is also considering, for each strategy category, that members further specify whether the U.S. Treasury securities transaction is executed at a price that is at or off of the current market. Firms potentially could incur costs associated with indicating whether prices are at or off market.
FINRA is considering changes to require firms to standardize the method used for reporting the price of transactions in U.S. Treasury securities. To the extent that standardization of price reporting requires developing or updating TRACE reporting systems, firms could incur costs associated with the proposed requirement. Where a firm’s systems already have the ability to report price either in dollar price, discount rate or margin, systems changes to standardize reporting should be less significant.
In reviewing transactions for different types of U.S. Treasury securities, FINRA found that, in the first half 2019, of the 701 MPIDs that reported Treasury bill transactions, 105 MPIDs reported transactions in discount rates only, 496 MPIDs reported transactions in dollar price only, and 100 MPIDs reported transactions in both discount rates and dollar price. Over the same period, of the 115 MPIDs that reported transactions in FRNs, 34 MPIDs reported in discount margin only, 58 MPIDs reported in dollar price only, and 23 MPIDs reported in both discount margin and dollar price. For all other U.S. Treasury security types, 679 MPIDs reported dollar prices only and 90 MPIDs reported in both discount rate and dollar price. Therefore, it appears that firms currently report primarily in dollar price.
As discussed above, FINRA is considering requiring members to exclude per-transaction ATS fees from the price reported to TRACE, and to instead require that members report these fees separately.