On July 25, the Securities and Exchange Commission (SEC) published a proposed rule (Proposal) relating to the reporting of US Treasury securities to the Financial Industry Regulatory Authority (FINRA) Trade Reporting and Compliance Engine (TRACE).

The public comment period is open until August 15. Market participants have this time to reflect and respond to the first major regulatory policy initiative related to US Treasury securities since the US Treasury Department issued its request for information in January 2016 (Treasury RFI).

The Proposal is limited solely to TRACE reporting obligations for FINRA members. It does not contemplate non-FINRA member reporting obligations, nor does it implement any sort of public trade dissemination function. For that reason, TRACE reporting will take place on an “end of day” basis, rather than a more compressed time frame.

FINRA proposes to amend the definition of “TRACE-Eligible Securities” to include products that meet the definition of a “US Treasury Security.” To ensure that savings bonds are not subject to the new reporting framework, those products would be removed from the definition of “US Treasury Security.” As FINRA explains, “[t]he term ‘U.S. Treasury Securities’ will therefore include all marketable Treasuries, including Treasury bills, notes, and bonds, as well as 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 Dept.”

The Proposal would require FINRA member reporting to TRACE. This means, for trades where both counterparties are FINRA members, two-sided reporting would take place. This is inconsistent with many of the comments made in response to the Treasury RFI. And, for electronic trades, FINRA members must “report the time of execution to the finest increment of time captured in the member’s system (e.g., milliseconds or microseconds) but, at a minimum, in increments of seconds.” The Proposal would also require the disclosure of any mark-up or mark-down for principal trades and the total dollar amount of any commission for agency trades.

Finally, the Proposal introduces two new conditional modifiers that must be incorporated when relevant:

First, the proposed rule change would require that members append a ‘‘.B’’ modifier to a trade report if the transaction being reported is part of a series of transactions where at least one of the transactions involves a futures contract (e.g., a ‘‘basis’’ trade). Second, the proposed rule change would require that members append an ‘‘.S’’ modifier to a trade report if the transaction being reported is part of a series of transactions where at least one of the transactions is executed at a predetermined fixed price or would otherwise result in the transaction being executed away from the current market (e.g., a fixed price transaction in an ‘‘on the-run’’ security as part of a transaction in an ‘‘off-the-run’’ security).

FINRA recognizes the time and resources needed to properly implement the Proposal. For that reason, it will “work to publish technical specifications as soon as possible after SEC approval of the proposed rule change.” Furthermore, FINRA “plans to phase in the modifiers to simplify the immediate implementation of the proposed rule change and provide firms additional time to make the necessary changes to implement the new modifiers.”

Market participants have less than three weeks to submit comments. Upon SEC approval, FINRA has no more than 90 days to publish a Regulatory Notice of a proposed rule change and the rule must become effective in no more than 365 days.